Cornerstone Building Brands, Inc. (CNR) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Cornerstone Building Brands 1Q '21 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Ms. Tina Beskid, Cornerstone Building Brands Vice President, Finance and Investor Relations. Please go ahead.
Tina Beskid: Thank you. Good morning, and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer; and Jeff Lee, Executive Vice President and Chief Financial Officer.
Jim Metcalf: Thanks, Tina. Good morning, and thank you for joining us. We're excited about 2021 and our solid first quarter start. I'm proud of the outstanding job our team has done to successfully manage through a dynamic market environment and capitalize on strong market conditions. Our commitment to execution and value creation for all stakeholders resulted in record net sales in EBITDA growth. Demand for residential products was strong during the first quarter. Overall company net sales increased approximately $145 million or 13% over a healthy prior year, as a result of volume growth and price. Volumes were 9% higher despite three fewer ship days and the weather impacts in the south. Volumes from Windows and Siding segments were 16% better than the first quarter in 2020. Also, on a comparable ship day basis, residential volumes were favorable by more than 20%. Steel prices are at a record high, which we believe is partially influencing our demand within the commercial segment. As we discussed during the last call, the rate of incoming orders has accelerated as customers try to get ahead of further steel increases, pulling some demand forward. As a result, volumes were slightly favorable to prior year on a comparable ship days basis.
Jeff Lee: Thanks, Jim and good morning. Our relentless drive for exceptional results led to another quarter of record earnings, and year-over-year margin expansion. We continue to deliver strong financial performance by leveraging our national scale and expansive product offering, which highlights the strength of our business model. Starting on Slide 7, net sales were approximately $1,267 million 13% higher than pro forma prior year, reflecting continued strength within the residential end markets and improved pricing in response to rising commodity and other manufacturing costs. There were three fewer ship days in the fiscal first quarter of 2021 compared with 2020. Adjusting for the difference in days net sales were 18% higher than the prior year. We generated $139 million of adjusted EBITDA, $41 million more than the pro forma first quarter 2020 driven by $29 million from higher volumes. Adjusted EBITDA margin was 11%, an increase of 230 basis points from pro forma prior year. This improvement reflects our success in effectively managing through a dynamic raw material environment while staying disciplined on executing our strategy towards profitable growth.
Operator: First question comes from Lee Jagoda. Please go ahead.
Lee Jagoda: So I guess, Jim, clearly, if I look at all every raw material out there, it seems like over the last 12 months, they're higher. But specifically things like lumber are one of the outliers. I guess, the good news for you guys is you don't use a ton of lumber? But that being said, is there any way to quantify looking at your various product categories both non-res and res, how much more competitive you guys have become as a result of lumber, maybe increasing faster than steel or aluminum or resin?
Jim Metcalf: Thank you, Lee. We think what we really like about our product portfolio particularly on the residential side, when you look at vinyl window is a perfect fit for what's happening in the residential market as you have the flight to the suburbs. The entry level homes, the first time homebuyers, they're looking at costs, and our windows really fit well for that portfolio as well as our vinyl siding, you have the sustainability standpoint as well. So we think, as you can see with the increased volumes we're having particularly on our residential side, it is a perfect fit for what's happening in the macroeconomics of residential. And we're pretty excited about over the next year or so. We think it puts us in a competitive position over other products. And then you go on the non-residential side, you look at lumber versus steel it's a different type of construction. Steel, there is less waste on the job, it's engineered. It is a product that we think is more sustainable for the environment. So, we think that's very important for on the non-residential side, particularly from a durability. So, we think we're positioned both residentially and commercially with steel on the commercial side versus lumber, as well as our vinyl portfolio both windows and siding.
Lee Jagoda: Yes, that sounds great. And then just one more from mentioned, can you give us an update on the most recently announced price increases by segment, and then the timing of any additional known price increases you plan to put through? And I guess lastly, how far away from sort of an equilibrium do you think we are in terms of how much more you need to catch up in each of the various product categories over the next six, nine months?
Jim Metcalf: Yes, let me just break it in residential and commercial mode. On the residential side, as you know, we have a pretty strong backlog as we're talking about. So the price increases that we have announced and put into the system will start flowing through even more in the second quarter, we haven't fully realized all of our price appreciation on the residential side both windows and siding that had been announced in the market. On the commercial side, it's really as you know the commercial business really well, it depends. The building's cycle is much longer. In fact, we announced a 15% increase just this week on the building segment with the long lead times won't be impacting the financials until the second half of the year, because of the long lead times of buildings, components we have introduced, numerous price increases and as you know, that's a shorter lead time in weeks versus months. So we have a price increases in the components arena as we speak.
Operator: Next question comes from Julio Romero with Sidoti. Please go ahead.
Julio Romero: So I wanted to start out on your Commercial segment certainly on the operating profit line, better performance than I expected. Can you just remind us last year what you did there in the Commercial segment in terms of delayering, footprint rationalization et cetera. And from your expected cost take outs this year, how much of that amount is focused on commercial?
Jim Metcalf: Yes, thank you very much, great, great question. As we talked over the last couple quarters, we not only delayered the organization, but we had a tremendous focus on manufacturing efficiencies. We're really proud of the team on the commercial side of the efficiencies of manufacturing, but also we’re very proactive on staying ahead of the pricing. As I just mentioned on the last question that Lee had. So, we really set up the commercial business for this year. As we mentioned there is some, we believe there is some pull forward in the commercial business. But we feel with what we're seeing with the architectural index and some of the infrastructure spending that the government's talking about. We feel pretty good about the second half of the commercial business. We're really focused on price over inflation as we said, there is going to be some slight compression in the second quarter. But we think that the back half of the year with some of these price increases that we announced are – we'll really helped the margins of the commercial business.
Jeff Lee: And Julio, just to give you a little bit of break down by segment, so a lot of our focus on cost outs inside of our Windows segment. And there is a lot of opportunities, a lot of automation that we put in place, and will continue to realize those benefits in 2021. And the investments that we're making will continue into 2022 as well for Windows. Specifically for commercial business, there is about 30% of our cost savings will be derived from our commercial business. And most of that will be inside of the cost of goods sold line item for the business. But a lot of great initiatives, right, there's a lot of projects that are out there that make us more efficient, make it safer for our employees. And we’ll also take some of the labor out on jobs that traditionally people don't want or we have a lot of, we work in and material areas that are associated with those. So a lot of good projects there and they're all in place. And in many cases, the equipment has been ordered. And so we feel good about that cost out initiative.
Julio Romero: And just to be clear that 30% of the cost takeouts focused on commercial that would be for this year?
Jim Metcalf: That is correct. Yes, we've got the cost out guide of about $75 million to $80 million worth of cost out and about 30% of that's going to come from our commercial business.
Julio Romero: And I guess the $7 million unfavorable impact in the quarter in commercial. Jeff, I think I heard you say in the prepared remarks, you expect price cost neutral for that segment for the full-year. And based on Jim's commentary, I guess, you expect continued headwinds next quarter, but maybe some makeup in the back half of the year. Is that fair?
Jeff Lee: Yes, that's correct. As we go forward with our price announcements, what took place really inside of the first quarter was a sharper curve than we anticipated. And our price announcements that got out there still just continue to rise and rise. And so with that, we had a little bit of pressure as we go into Q1 and Q2. But we've managed through this in the past. If you go back and look at 2018 for example, we saw a sharp rise about 25% inflation inside the back half of 2018 and it came down in the first half of 2019. Through that cycle, we were able to get margin enhancement and get price over inflation. But in sharp inflationary type of environment, it's difficult to kind of catch that inflation as fast as it’s rising. So we feel good about that. We think that in the third and fourth quarters in particular, depending on what steel does. If we see steel turn and go back the other direction, then that's typically when we start to get the benefits, the other direction is steel continues to linger on, then we've done the right things and made the right actions in place to kind of get that offset, but we won't necessarily see a benefit from that until steel turns the other direction.
Julio Romero: Okay. And if I could just sneak one more in here just on your recent acquisition of Prime Windows, you talked about expanding West Coast presence and focus on structures of the 15 stories. So, just thinking about that if you could talk about how it kind of complements the portfolio as a whole. And if kind of those high rise up to 15-story type windows would be kind of margin accretive to the overall segment? Thank you.
Jim Metcalf: Thank you, we're really excited about having Prime Windows join us and just kind of stepping back as we look at acquisitions, as we've talked in the past, they need to be strategic and accretive. And we're really looking at Prime Windows as both of those. What it did, it filled a geographic void that we had. So that was awesome in the Colorado and Washington area. Its end-to-end used markets, is very dealer focused, which is a higher margin business for the windows business. And also gave us a little bit of additional capacity which we do need as well as talent. So, we're really excited about having that. And that 15 stories is something that, we haven't had the product offering to do that. So we're going to learn from that. There could be some other opportunities for us, but we think that the Prime Windows really it’s important component of our growth strategy. Really our whole M&A strategy is really to lead the consolidation and key product categories and really in fragmented markets. And we think we have some additional opportunities as we look at the market. So really, what it what it does is it fills a geographic void. It puts us in a market that we have not been in. And it's accretive to the overall not only portfolio of the window business, but accretive to the company.
Operator: Next question comes from Kurt Yinger with D.A. Davidson.
Kurt Yinger: I just wanted to start with kind of competitive dynamics on the residential side and one of your larger peers in windows, talked about taking share with the ability to cut down lead times. But if I look at your growth, it would suggest, you're doing the same. So I was hoping you could talk about where your lead times stand in windows today. And whether you feel like you've been a shared gainer against smaller competitors across your footprint and what you might attribute that to?
Jim Metcalf: Kurt, that's a great question. And we're really focused on really knocking down our backlog and reducing our lead times. Our lead times on windows are probably two to three times longer than normal times. We're very focused, as we said, of putting in additional capacity with the Sacramento, California as we mentioned, with additional capacity in Sacramento on the growth. Our automation projects that we put in place last year really helped us with the increase in the first quarter. Typically, when we put in automation of our 1500 Series line, it will increase capacity anywhere from 10% to 30%. So we're really excited about growing our business. We want to work our backlog down, we are not where we should be on lead times. But we feel that we are growing our share with strategic customers because of our lead times in relation to the rest of the industry. So we're working as we said, from a labor standpoint, this is not a machine time issue. We have the appropriate machine capacity there, it really gets down to labor and we're very focused on bringing in additional labor. But more importantly, is bringing in additional automation projects so we can continue to grow our business and outperform the market.
Jeff Lee: And Kurt maybe just to add on to that a little bit as well. As we think about our residential business, and I don't know which competitor you're referring to. But as we think about our residential business, our volumes in the first quarter grew 16% on a year-over-year basis. And we feel good about that, right. Like Jim said, the capacity that we put in place, the efforts that we put in labor inside of our businesses inside the second half of 2020 enabled us to really get that type of performance of 16% volumes inside the first quarter. So, we think we've got great momentum there. And we feel like we're going to continue to put emphasis around some of the things that inhibit us from continuing to get more of that. And as you look at the guide, for second quarter, we've guided our residential businesses to be up in around that 20% range. And so it's showing momentum that we have, and we feel that we're doing well, when we look at our market presence.
Kurt Yinger: And maybe kind of sticking with that point and just putting a little more color on it. I mean, if we think about the automation project, but also the challenges on the labor side, the windows compare, the year-over-year basis gets easier in Q2? Do you think you can, I guess sequentially improve windows revenue as the year progresses, if demands there or do you feel like, as we get into the back half you're still going to be pretty tight on what you can do in terms of continuing to grow that?
Jim Metcalf: Yes, Kurt let me let me start that question. So again, as we as we look at specifically our windows segment. We were up 15% in volume inside the first quarter. We didn't necessarily breakout our guide by segment, but we are up. And as I look at the second quarter, its north of 20% that we're expecting right now inside of our window segment. So we do expect that we're going to have momentum inside that business. We've been gaining momentum since the July timeframe of 2020. As we're adding different people into our workforce, we're learning to become more efficient. And in some cases, we're paying for extra dollars from overtime, et cetera to make sure that we get those shipments out. So we do feel good about it, we think that the first quarter results demonstrate our ability to get the revenue up. And we continue to see that increasing into the second quarter with our guide that we put in place.
Kurt Yinger: And then on the siding side, I mean you've talked about how you feel you're one of the only vinyl players that's really investing back into the business. I mean how would, you kind of characterize your performance here in Q1 versus the rest of the market. And what are you kind of most focused on in terms of potentially growing your share of the vinyl pie going forward?
Jim Metcalf: We're really excited about our siding business. As you can see, the results are extremely strong. And we had a record year last year and continue to have record performance. But it's not only investing in the plants. We're continuing to invest in our siding plants as well and extruders. But it's also having the good better best portfolio of the luxury vinyl siding, side of our business. We’re really happy with the production. The manufacturing team, it's a continuous process, manufacturing its very different than windows. And we've lined scheduling, we have longer runs. So we've been able to ship more and have service our lead times are longer than anticipated. I mean, we're having some we have a strong demand as we talked about, but we feel that we are the service provider in the industry. It's not where we want to be, but we feel that we are servicing our customers in a manner with not only getting when they need it, and how much they need it. But more importantly, is providing a different product portfolios’ for them. So as Jeff mentioned in our prepared comments, we're investing in new product development, we have some test markets going on right now. And we feel that not only investing back in the plants, but investing in marketing, customer portals, e-commerce, and really from a marketing standpoint, it isn't just you know how the product looks. But it's also what we provide to our customers to we want to be the easiest siding business to do business with.
Jeff Lee: And Kurt, just a couple of numbers around that as well and you could see inside of Slide 8 as we looked at our Siding segments, specifically 19% growth came from volume. And we felt good about our ability to get that volume out and momentum inside that business as well as we added capacity from a labor perspective to make sure that we met the demand inside of Q1. And as we look at the EBITDA one of the things that's really impressive with that business is the volume leverage that we're getting there. 260 basis point margin expansion gross profit margins were actually down slightly, with some of the pressures on price and the inflation inside that business in particular, and some of the inefficiencies to take care of our customers with overtime, et cetera. But we're able to take out some of the SG&A costs as well to really mitigate some of that. So we did see that volume leverage, combined with some of the cost out initiatives drove favorable performance for our Siding segment.
Kurt Yinger: Okay, that's really helpful. And just my last one on the Commercial segment, could you just talk about, which end market segments you're really seeing improved momentum. And then, as you talk about, the view that customers are trying to get ahead of steel price increases, what would you need to see to grow more comfortable that this pickup in demand you're seeing is really kind of sustainable versus more transitory and price related?
Jim Metcalf: Really the end use markets that we're seeing are, I think we've talked about it in the last couple calls are warehouse and data centers. We're starting to see a little bit of retail coming back, but those are really the key areas, the big mega warehouses that are supplying a lot of Amazon's type of thing. And we're also - we also look at the fallout rate of orders, so to make sure that, are these real orders. So, we track - the order fallout rate, particularly on the longer lead time. The components’ business is much easier to track because that is lead times of one to three weeks, where buildings is really the trickier one to really identify, what is a pull forward and what is true demand. We also look at complexity of jobs that come in, are they higher complexity jobs or lower complexity jobs and do they require engineering. What we're seeing now is a lot of orders that are coming in, the customers don't want a lot of engineering, they just want to produce it and get the order in, which tells me they're trying to beat the increase. So we there's a three or four metrics we look to see, how much is true demand versus pulled forward. And right now there's some pull forward, but we’re looking at the leading indicators coming back to the architectural index. We truly believe historically that the light commercial five stories or below does follow residential by that 18 or 24 months. And really, that is one of the keys we look at. So you're looking at where residential really started to get strong. We're looking at the back half of this year into 2022. With that lag effect of light commercial going to the suburbs following the residential construction.
Operator: Next question comes from Matthew Bouley with Barclays.
Matthew Bouley: Thanks for taking the questions. Back to the price cost side. Are you seeing that inflation and the shortages in PVC and aluminum and steel et cetera? Are they outright continuing to worsen today, such that future price increases may still be necessary? So we're not kind of in the same boat with gross margin pressures in the second half or does appear that these issues have kind of you know, stabilized, at high levels and pricing just needs to catch up? Thank you.
Jim Metcalf: I think it’s really tail of two stories here. First on the PVC resin that had a big impact with those storms that we mentioned, that really impacted the Texas, the Southeast market with a lot of our suppliers. So, we feel that is working its way out. So we believe that's probably a second quarter issue that will be going away. And don't see that going, from a shortage standpoint into the back half of the year. The one thing that is a really strategic advantage that Cornerstone has is our scale. And we talk about our procurement, we have subject matter experts in PVC, resin, aluminum, steel that are very close to our suppliers. With our large scale, we get treated extremely well. On steel, we follow the index as Jeff said, it really we're looking at steel costs will continue to go to increase. But we're very, we look at that leading indicators there and stay ahead of our costs with our price strategy. So, we feel that steel is going to be continued to be - continue to escalate as we go through the year. We think from a shortage standpoint that the PVC resin is something that is more short-term.
Matthew Bouley: Got it, okay very helpful color and, thanks for going across all the product categories there. And then back on the metal buildings side, just in light of the steel inflation I mean, that is interesting commentary that, the inflation is actually pulling ahead some volume from your perspective? Can you tell from your customers, if there is any areas or products within the commercial business where that inflation is actually causing customers, on the other hand hold back, awaiting, normalization and prices or perhaps, finding other substitutes from their perspective? Thank you.
Jim Metcalf: We saw a little bit of that in the fourth quarter, but right now, the big question our customers have is, do you have the product and can you supply it? The price has become secondary in our conversations. And they're really right now, particularly on the building side are really planning for the third and fourth quarter. So they're laying in their orders now, we're starting engineering now. So we haven't had discussions with alternative raw materials, particularly with the earlier question on everyone knows where lumber prices are. So that has not been an issue and we feel that right now there could be some pull forward. So we are cautiously optimistic, but we're in a better spot on the commercial business, and we've been in probably a year or so. And then with leading indicators of the architectural index and what I just mentioned about following the residential, we think the back half of the year should be a fairly solid market for the metal buildings business. Again, the components business, that's a fast turning business, we are extremely busy there. We are prices ahead of inflation on our components business. And we have not had any pushback from our customers about alternative sources from our components business as well.
Matthew Bouley: Makes sense. That's great color. And then the last one, just back on the Prime Windows acquisition. Any color you can give on the multiple pre, posts synergies, et cetera. And the higher level question is just how do you think about the balance of continuing to do M&A versus delivering? Thank you.
Jeff Lee: Now, let me take that question. So Prime is, as Jim mentioned very strategic for us geographically and also from the capabilities that we pick up with that business. From a revenue perspective, we mentioned it's about $61 million, $60 million roughly inside of revenue for 2020. And we think that as a company, we really look for acquisitions that are margin accretive. And as we look at this business, that's the case here as well. And so without specifically getting into the details around purchase price or the multiples that are there, we bought a business that is a margin accretive to Cornerstone as we get the synergies in place. And we continue to attack that with our scale and size and platform that we have within Cornerstone. And we've proven that with some of the other acquisitions that we put in place with silver line, et cetera. We think we can take that business to make it a very attractive business for us with our efficiencies that we put in place. So again, it is margin accretive. And the revenue that we mentioned was about $16 million. And there'll be more details coming out, this is a subsequent event since the Q1 timeframe. And so as we get into Q2, we will be providing more details around the cash flow statement, et cetera for this acquisition.
Jim Metcalf: And just to reiterate on our capital allocation, first, we want to reinvest in automation and back in the plants, we've talked about that as how important automation is, and really taking care of our customers and getting that additional capacity out. Second is what we - Jeff just talked about its M&A but its organic growth too. It's investing in new products, we're talking about invest in the siding business, that luxury vinyl siding and really the good better best scenario of having organic growth. But third and really important, we have not given up our focus on delivering the balance sheet. Our target continues to be 2 and 2.5 times, we've made nice progress, as we indicated in the call here. We aren't where we should be yet. But we said three quarters to a turn is our target each year. And so really those are the three key areas of our capital allocation that we have talked about, we will continue to be focused on. And as we've done in the past, we plan to deliver what we say.
Jeff Lee: Matt, just want to follow up to Jim as well on that one. If you look at Slide 10 in our leverage ratio projections, and at the time we put this together, we obviously knew about the Prime acquisition, but we finished the first quarter at 4.6 times. And our guide out there has this right now at a range between 3.9 times and 4.1 times. So we'll continue to take down that leverage ratio. We've been successful with that from 6.3, I think it was at the first quarter of 2019 right after the ESW acquisition down to 5.3 in 2019, 4.9 times, and projected right now to be to that 3.9 to 4.1. So making great progress against that and feel good about our ability to meet that commitment that we've made.
Operator: Next question comes from Kurt Yinger with D.A. Davidson.
Kurt Yinger: Thanks for taking the call, follow-up here. Just on the commercial front, I mean, it looked like metal coil coating and metal building products were actually fairly strong with IMP quite a bit weaker. Is there anything to call out there in terms of the divergence or why the recovery would be - maybe different among those product lines?
Jim Metcalf: Yes, that's a great question, as you know we have the - commercial business has the buildings business components business and the IMP and coil coating. If you go back a year ago, from an architectural standpoint, a lot of those jobs were stopped. And right now we're starting to see some growth, our backlog on IMP is very, very strong. And really, that was the business that was impacted the most with COVID-19. You look at the front we have a phone supply issue. That's one of the areas in the quarter, we talked about some of the supply issues that we had with the storm, and that impacted the IMP business in the quarter, but that's temporary that'll be going away. So it's a great product, it takes out a lot of labor, it's a higher end product. And we think with some of the architectural information that we set on leading indicators that we're very optimistic about the growth of that business. The coil coating business, where it's a great business, they've done a nice job in this tough environment, they've had multiple price increases, sometimes in some cases, weekly price increases, and that business is extremely important part of our portfolio.
Kurt Yinger: And then just a two partner on debt and interest expense. As we look ahead and think about as using cash to repay debt, will the priority be there chipping away at the term loan, and then second on interest realizing there may be some costs flowing through that line in the second quarter with the note redemption? How would you ever think about run rate interest expense in the back half of the year?
Jeff Lee: Yes, good question. So as we look at pay down of debt, we'll look at debt as the time comes around for that determine whether it's best to pay down the term loan, or the six and a quarter notes, there are six and an eighth notes that are out there today. And we'll make that decision, at the time when it's strategic to make sure that we're focused on long-term and short-term and expectations that are out there. Specifically on the interest expense, you're right, we did have about $26 million redemption premium that we paid to pay off the $645 million, 8% senior notes. And that does go away. So that's going to be a Q2 expense that's in there. And then as we move into the year, we've guided right now about $200 million worth of interest expense for the full-year. As we move into 2021, we would expect - excuse me, 2022 we would expect that to improve it again, as we don't have that that redemption payment that's sitting inside of the second quarter. And it's right now about $175 million - $170 million, $175 million worth of interest expense I anticipate for 2022.
Operator: And at this time, I will turn the call over to Ms. Beskid for closing remarks.
Tina Beskid: Thanks again for joining our call this morning. We are very excited about our outlook. I look forward to connecting with you after the call if you have additional questions. Have a great day. This concludes our call.
Operator: This concludes today's conference call. You may now disconnect.
