Cornerstone Building Brands, Inc. (CNR) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Cornerstone Building Brands Third Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advise that today’s conference is being recorded. I would now like to hand the conference over to Tina Beskid, Vice President of Finance and Investor Relations. Thank you. Please go ahead.
Tina Beskid: Thank you. Good morning. And thank you for your interest in Cornerstone Building Brands. Our prepared remarks include comments from Jim Metcalf, Executive Chairman; Rose Lee, President and Chief Executive Officer; and Jeff Lee, Executive Vice President and Chief Financial Officer and were recorded in advance of the call. Unfortunately, Rose is not feeling well and he is not with us this morning, so Jim and Jeff will take your questions at the end of the prepared remarks. Please be reminded that comments regarding the company’s results and projections may include forward-looking statements that are subject to risks and uncertainties. These risks are described in detail in the company’s SEC filings, earnings release and our investor presentation. The company’s actual results may differ materially from the anticipated performance or results expressed or implied by these forward-looking statements. Throughout this presentation, management may also refer to pro forma financial results. Such pro forma results give effect to the completed acquisitions and divestitures as if such transaction were consummated prior to the period presented. Finally, management will refer to certain non-GAAP financial measures. You will find a reconciliation of these non-GAAP financial measures and other related information in the earnings release and investor presentation located in the Investors section of our website. Please note, we will be referencing our investor presentation throughout today’s call. Today’s call is copyrighted by Cornerstone Building Brands. We prohibit any use, recording or transmission of any portion of the call without our expressed advanced written consent. With that, I would like to turn the call over to Jim.
Jim Metcalf: Thank you, Tina. Good morning and thank you for joining us. Before we review our results for the quarter, I’d like to welcome Rose Lee to our call. Rose joined us as President and Chief Executive Officer and has an impressive broad based career with extensive experience in building materials. Her deep knowledge of the industry and proven leadership make her the right person to execute our long-term strategy. Rose and I are aligned on our strategy to deliver long-term profitable growth and value creation for our stakeholders. As Executive Chairman, I look forward to working with Rose, our leadership team and the Board in our continuing commitment to driving returns for our shareholders. Now let’s turn to the third quarter results on slide three. The third quarter was another strong quarter for Cornerstone Building Brands, as we navigated the headwinds from rising commodity costs, freight challenges and labor disruptions. In response to this dynamic inflationary environment, our team’s discipline price actions drove record sales for the second consecutive quarter. Pro forma net sales grew approximately 20% over the prior year and were up 15% compared to a strong 2019. These results represent our third consecutive quarter of year-over-year double-digit net sales growth. Third quarter pro forma adjusted EBITDA of $182 million, increased 4% and 8% over 2020 and 2019, respectively. Raw material and labor shortages persist, driving up the cost to serve our customers and living in shipments. We are navigating these challenges and remain focus on our service value proposition, solidifying our customers’ position as a partner of choice. In the quarter, we completed the divestitures of the insulated metal panels and roll-up door businesses, as well as the acquisition of Cascade Windows. These strategic actions resulted in a more focused business portfolio, strengthen our residential market position, improved our financial flexibility and fueled value creation. As a result, we reduced our net debt leverage ratio to 3.7 times, approximately 1.25 turn better than the third quarter of last year. We remain disciplined on balancing our capital deployment and advancement towards our delivering goal of 2 times to 2.5 times. As I wrap up my comments, I want to thank the Cornerstone Building Brands team for many different backgrounds and experiences serving our customers every day. It continues to be a privilege to serve this company and its shareholders and I’m grateful to have the opportunity to work with such talented people. I’m so proud of the tremendous accomplishments we are making as a company. Now, I’d like to turn the call over to Rose.
Rose Lee: Thank you, Jim. Good morning, everyone. I’m very happy to join Cornerstone Building Brands, a company with deep customer relationships, strong brands and operating scale. We are a company focused on partnering with our customers and creating value for our stakeholders. Jim, on behalf of our 20,000 colleagues, I want to thank you for your leadership over the past three years and I look forward to working with you in your role as Executive Chairman. Since joining the company two months ago, I have learned a great deal from visiting our site, talking to our colleagues, customers and shareholders. Turning to slide four, I would like to share with you my first views of our aspirations, our core strengths and levers for value creation. We will work diligently every day towards becoming a premier exterior building solutions company in North America in the eyes of our customers, employees and all stakeholders. We have three core capabilities we will continue to strengthen as we pursue our aspiration. First, our multi-materials scale advantage manufacturing footprint enables us to service our customers efficiently and cost effectively. Second, our in-depth channel partnerships enable us to meet the needs of our end customers through their preferred channel. Third, each of our brands deliver a differentiated value proposition, which is matched to the very needs and preferences of our diversified customer segments. These three core capabilities are foundational to our competitive strengths, which enable resiliency in our business, provides meaningful differentiation for our competitors and are integral to our continued growth and success. In order to maximize our core capabilities and create profitable growth, we will pull on three key value levers. First, we are implementing a comprehensive approach to increasing efficiencies and driving year-over-year sustainable improvements at our manufacturing sites. The Cornerstone production system is anchored by proven lean concepts, that derive standard manufacturing processes across our sites with safety is paramount, learning is encouraged and supported, and continuous improvement and successes of our employees. Next is our expansive innovation engine. This value creation lever refers to revenue opportunities for new products, applications, business models and partnerships. Our innovation will include digital technologies and tools that will strengthen our connection to our value chain partners and end customers. We will look to partner with companies who have novel solutions, technologies and complementary capabilities. We will use agile methods to speed up innovation and time to market for our new solutions that is to act sale fast and learn. Finally, our ongoing portfolio optimization work will enable us to look for opportunities to accelerate our growth and innovation by bringing new businesses that are logical bolt-ons into the Cornerstone Building Brands family. In addition, we will continuously examine their portfolio as markets and our capabilities evolve and divest those business for which we are no longer divest portfolio. In this context, turning to slide five, I’m excited to share that Cornerstone Building Brands had entered into a definitive agreement to acquire Union Corrugating Company, headquartered in Fayetteville, North Carolina. UCC is a leading provider of metal roofing, roofing components and accessories. The majority of the UCC business serves a 2 billion residential metalworking market, which expands our offerings in this attractive space. Metal roofing is a low maintenance and environmentally sustainable solution that is experiencing growth in many regions. We expect the transaction to close during the fourth quarter and I look forward to welcoming UCC colleagues to the Cornerstone Building Brands family. Turning to slide six, our immediate priorities are focused on executing our core strategy of profitable growth, operational excellence and discipline capital deployment, while driving towards becoming a purpose driven premier exterior building solutions company. We are hyper focused on improving our operations to mitigate as much as possible our current labor and supply chain challenges. We are investing in experienced leaders and subject matter experts in manufacturing and supply chain. We are creating lean work systems, manufacturing processes and methods that will enable step change in our productivity. Our automation efforts, which we have discussed on previous earnings calls is an important dimension of our productivity game. And of course, investment in our employees to training programs and kaizen events will enable us to sustain our games and strengthen our culture of continuous improvement. Second, we are focused on accelerating our growth through market penetration, pursuing both an acquisition and product innovation. We plan to augment our innovation pipeline with new products, applications, services and business model. Finally, we are committed to maintaining financial discipline and expect to reduce our net debt leverage ratio by three quarters to one turn next year. Now I would like to turn the call over to Jeff.
Jeff Lee: Thanks, Rose, and good morning. Starting on slide eight, pro forma net sales for the third quarter were a record $1,428 million, 20% higher than pro forma prior year and our third consecutive quarter of double-digit sales growth. The growth was driven by favorable price actions across all segments in response to the rising commodity costs and other inflationary impacts. Demand for our products is strong during the quarter and we continue to experience favorable pace of incoming orders across all our products. U.S. housing activity remained strong. With third quarter housing starts averaging approximately 1.6 million units on a seasonally adjusted basis. In addition, repair and remodel spend remain positive, supported by rising home equity, low interest rates and an aging inventory. As a result, our near-term and long-term outlook for the residential markets remains positive and we are well positioned to capitalize on these market trends. Momentum in the non-residential construction demand continues to be favorable. The Architectural Billing Index reported that the pace of billings growth remained the post-recessionary highs. Additionally, the September score of 56.6% was one of the highest reported this year. Our long-term outlook for the Commercial business is also favorable. The market for non-residential construction typically lags housing cycles by 18 months to 24 months. Furthermore, non-residential construction is supported by private and public capital spending, interest rates, government funding and consumer demands. Like many others in our industry, we have been impacted by constraints in raw materials and labor slowing the pace of recovery. As a result, volume for the quarter was essentially flat compared to the strong third quarter of 2020, which also had one additional fiscal day. We generate $182 million of pro forma adjusted EBITDA, 4% higher than the pro forma prior year, with all segments contributing the favorable price and mix net of inflation. Across all our segments, we continue to incur -- increased commodity, freight and labor costs. Production constraints for commodities such as PVC resin, steel and aluminum have resulted in supply shortages and cost increases. In response, we raise prices across our portfolio. We expect price and mix to remain favorable, offsetting these continued cost impacts for the remainder of the year and expect favorable benefit into 2022. We incurred manufacturing inefficiencies for various reasons, including disrupted plant production schedules, due to the labor shortages, supply constraints and pandemic-related absenteeism. Nevertheless, we are taking steps to make our plants more competitive through our investments in automation, wages and our employees work environment. As Jim mentioned, we completed the insulated metal panels and roll-up door business divestitures and acquisition of Cascade Windows. Portfolio optimization is an essential component of our growth strategy. We believe we have meaningful opportunity to lead within our key product categories, enhancing our position in large, deep markets. Overall, the third quarter was a strong quarter for us. I’m proud of our team’s outstanding job in successfully managing through the dynamic market environment and capitalizing on our strong market conditions. Now let’s look at our business segment results. Turning to slide nine, the Windows segment third quarter pro forma net sales were approximately 12% higher than pro forma prior year and pro forma adjusted EBITDA was $53 million, as compared to $78 million in the same pro forma period. As mentioned, along with the positive market momentum, we are navigating the industry-wide labor challenges, which had impacted a few key facilities and our delivery fleet. Our commitment to our customers is very important to us. As a result, we have incurred additional costs, such as overtime and premium free to serve our customers and strengthen our long tenured relationships across the channels we serve. In addition, we continue to make substantial investments in automation technologies to improve our production and logistical efficiency, enhancing our position as a cost effective producer. Turning to slide 10, the Siding segment third quarter net sales were approximately 11% higher than the prior year, primarily driven by the favorable price index of 19%, which more than offset lower volumes due to raw material and labor constraints during the quarter. Adjusted EBITDA was $75 million, which is solid earnings generation given the strong prior year comparison. The Siding segment also faced manufacturing challenges from supplier allocations of PVC resin, and COVID-19-related absenteeism. However, our team has remained focused on serving the customer, while navigating these demands are the challenges. We continue to invest in Siding segments. We intend to drive organic growth through product innovation and new product development in attractive adjacent product lines. Moving on to our Commercial segment on slide 11. Pro Forma net sales in the third quarter of 2021 were $450 million, approximately 45% higher than the same period last year, driven by discipline price actions to mitigate rising steel costs. Order momentum remains strong for buildings and components. However, raw material shortages are constrained volumes in this business. We remain on allocation from our suppliers, limiting our output levels similar to the second quarter. Also to meet the demands of our customers we have purchased steel on the spot market, which carries a higher cost. The Commercial segment reported record pro forma adjusted EBITDA of $86 million, approximately 91% higher than the prior year and margin expansion of 470 basis points. We have been effectively managing the impacts of rising steel costs. For the quarter, price and mix outweighed inflation by $49 million due to the rapid response by the team. We expect these positive dynamics and the impact of margins to continue in the near-term. We have taken actions to advance our strategy within the Commercial segment. As discussed, we completed the divestiture of the insulated metal panels and roll-up door businesses. Additionally, we have entered into a definitive agreement to purchase Union Corrugating Company. We have developed a broad multi-channel distribution platform, covering an extensive network of wholesale and specialty distributors, independent dealers, architects, builders, contractors and big box retail relationships serving residential and low rise non-residential construction markets. This platform will position us to further our growth in large deep markets maximizing our financial performance. Turning to slide 12. We are focused on investing in the core businesses through capital expenditures, organic growth initiatives and inorganic opportunities, which we believe will deliver the highest returns for our shareholders. We anticipate the full year 2021 capital spent to be between $90 million and $110 million. Additionally, we are focused on positioning for growth with an emphasis on deleveraging our balance sheet. As a result of a higher earnings and strategic actions, we have accelerated our net debt leverage reduction and finish the quarter at 3.7 times. We expect that our leverage ratio will be between 3.2 times and 3.5 times by the end of 2021. We have demonstrated our commitment to a balanced capital allocation strategy and expect to reduce our net debt leverage ratio by an additional three quarters to one turn next year. Turning to slide 13, I would like to make a few comments about our guidance. We expect net sales to be between $1,425 million and $1,475 million, an approximate 25% increase versus pro forma prior year at the midpoint from positive price and next. We anticipate strong market momentum within the residential and Commercial end markets to remain. We expect adjusted EBITDA to be between $170 million and $185 million. The midpoint of our outlook implies an adjusted EBITDA margin of 12.2% and anticipates inflationary costs offset by price in dollars. Our third quarter performance demonstrates our commitment to serve our customers and remain discipline to navigate unusual times. We believe that many of the actions taken in the third quarter position Cornerstone Building Brands for continued success for the remainder of 2021 and into 2022. And now I’d like to open up the call for questions.
Operator:
Tina Beskid: Just a reminder that, unfortunately, Rose is not feeling well and is not with us this morning. So Jeff and Jim will take your questions.
Operator: Your first question is from the line of Lee Jagoda with CJS Securities.
Lee Jagoda: Hey. Good morning, Jeff and Jim, and hope Rose feels better soon.
Jim Metcalf: Thank you, Lee.
Jeff Lee: Good morning.
Lee Jagoda: So just starting with the UCC acquisition, can you give us any more color around EBITDA margins, purchase price, potential synergies? And then I know you referenced residential roofing in the remarks, but it’s going into Commercial segments. So any color you can share around that also?
Jim Metcalf: Sure, Lee. Let me just make a couple comments. First, we’re really excited about the acquisition. Just to kind of step back, we’ve talked about these large deep markets we want to participate in. And the Commercial components market in general is about a $4 billion overall market where we have the number one position currently in the components business. This acquisition, as we said, gives us access to the high growth residential metal roofing, which is about a $2 billion market. But it also UCC is 25% Commercial as well. So it’s not all residential. It’s about 75% resi and 25% Commercial. What it also does, it leverages the core competencies from the legacy NCI in our Commercial business by expanding our metal footprints and it allows some efficiencies and it gives us really complements our current manufacturing footprint with the addition of UCC. So we’re really excited about that and what I’ll do is turn it over to Jeff and he’ll go through some of the numbers.
Jeff Lee: Great. Good morning, Lee. So a couple of comments around the financials themselves, we reported a $250 million revenue topline for the business. We haven’t specifically gone out with some the EBITDA margin. But let me give you a little bit of guide around that our. Our expectation right now, pre-synergies for that business is kind of the low-to-mid double-digit margin. We do anticipate that we’ll get about 30% to 50% of synergy benefits off of EBITDA from that acquisition as well. And we think about the purchase price on that, we haven’t disclosed that. And as we go forward into the fourth quarter and some of the performance we put together, all this information will become available. But if you think about our last couple of acquisitions that we’ve made with Cascade and Prime and going back to the recent bolt-on acquisitions, those would range anywhere between a mid single-digit to kind of a high single-digit multiple on those businesses and this would fall within that as well. So, hopefully, that gives you the details that you needed and you’re looking for.
Lee Jagoda: Yeah. That’s all very helpful. Can we switch over to the Commercial margins in the quarter, and obviously, they were very strong and it looks like you’re benefiting from a widening spread in a rising steel environment? Can you talk about the sustainability of that and if there was anything atypical this quarter that may normalize next quarter?
Jim Metcalf: One of the things we’ve done and we’ve talked about it over the last year is, as you know, the Commercial market lags the residential market by 18 months to 24 months. And we’ve seen a strong backlog, in fact, our backlog in Commercial was up almost 50% versus last year. We’re seeing strong demand. So that 18 months to 24 months really is playing right now. We’ve also -- also in the organization we centralized our pricing with the organization to make sure that we were staying ahead of price over inflation of this rising steel costs, which is really an anomaly over the last few years. So we’re really excited about maximizing our profitability. But as you know, the margins are -- we’re at statutory high margins. We think if you look at this business, it’s probably a mid-teens business as you go forward and we will always focus on improving that. But by delayering the organization, taking a lot of costs out, maximizing the price, focus on the portfolio, we think this business is a much different business than it was 24 months ago.
Lee Jagoda: Very helpful.
Jeff Lee: Yeah. And let me -- let me add a couple of comments to that as well. Just looking at the quarter itself, we did see our volume go up and about 2% in volume on a tonnage basis within the Commercial segment. And just going back and reminding kind of the history around this business, as we kind of entered into COVID, we saw a 20% drop in revenue, that kind of sustained through 2020 and it started to recover inside of 2021 and then as we expected with the recovery of the residential markets in this flight to the suburbs, combined with the Commercial -- our Commercial business that really resides in the suburbs, we expected in that 18 months to 24 months, we start to see that recovery, as Jim mentioned, and that backlog is increasing too. So increase in volume, which is very encouraging for us as a company. The backlogs are rising within that business. And then just to go back as well and talk about the history of our Commercial business. Back in 2019 on a pro forma basis, right, this takes the IMP and BBCI divestitures out, our pro forma EBITDA margin was about 12%. We increase that 2019 to 2020 to about 13%. And a lot of that just as a reminder was the actions that we took place to simplify the business, take out some of the delayering within the organization and then we had a lot of price discipline that we also put into place within the organization. That the combination between those two drove the benefit from 2019 to 2020 of about 100 basis points. And as we move into 2022, we’re continuing to see those benefits as volumes coming back and the volume leverage on that organization combined with the pricing discipline is really -- is what’s sustaining some of those margins. And so as a kind of look at finishing this year, we’re going to be in that mid single-digit EBITDA margins that the Jim talked about in 2021, a double-digit, excuse me, double-digit margin for 2021 and feel like that is a number that we’re going to continue to push forward on with the price discipline that we have in place to hide backlogs as we go into 2022.
Lee Jagoda: Got it. And if I could speak one more just on the Windows margins, is this the bottom for Windows margins? Obviously it telegraphed the issues you’re seeing, but I guess, one is that the bottom, and two, if it is what is the slope of recovery look back, look like getting back to where we were and then beyond that?
Jim Metcalf: Yeah. Let me address that one as well. First quarter we had 11.5% EBITDA margins within our Window segment. Second quarter we’re at 12.6% and as you see with this quarter we are at 8.6%. So a drop off inside the third quarter, a lot of that due to the manufacturing efficiencies as we serve our customers with higher over time, just the labor constraints that are in place, the shortage of labor, freight expenses and making sure we continue to hit as many customer expectations as we can. For the fourth quarter right now we have coming back to kind of more the first quarter and second quarter margin levels. So that 11%, 12% is what we expect. So there’s a lot of work to do inside that business. We’re not claiming that we’re at the point now that we think we’ve got all the history behind us, but we’re going to continue to make efforts. We’ve made a lot of investments in wages. We’ve increased significantly the wages within our facilities. We continue to enhance the workplace environment for our associates as well. And we’ve put additional management in place over the top to make sure that we’ve got great supervision over those facilities as well. And that combination, those investments that we’ve made, plus that combination of new management, we believe will continue the momentum into the fourth quarter and into 2022. And just add one more comment on that, we’re continuing to invest inside the manufacturing efficiency and processes within the organization, when it comes to lean manufacturing, kaizen events, Six Sigma type of disciplines and practices within the -- within that business, which we do think as we move into 2022, we’re going to bear some of the fruits from that and start to increase the margins for that business.
Lee Jagoda: Great. I will hop back in queue. Thanks very much.
Operator: Your next question is from the line of Kurt Yinger with D.A. Davidson.
Kurt Yinger: Great. Thanks, and good morning, everyone.
Jim Metcalf: Good morning.
Kurt Yinger: I just wanted to start off on the M&A appetite. I mean, you’ve done a commendable job deleveraging the balance sheet. But there’s a lot going on in terms of integrating deals, divestitures and just the core business trying to manage through the supply chain challenges and maybe better leverage the demand backdrop. So I was hoping you could just talk a bit more about why M&A still seems like a big focus at this stage and how we should think about your appetite or pipeline looking into 2022?
Jim Metcalf: Let me just make a couple comments and I’ll turn it over to Jeff. We continue to evaluate our portfolio and we want to take actions where result in the more focused and simplified portfolio. But we’re also looking at growth and value creation. And we talked about those deep markets. The UCC acquisition is an example of that, of the integration, I think, our track record of integration from really three years ago and the acquisitions that have occurred this year, our integration processes has had worked out extremely well. We have a, of course, dedicated team on that. We also look at a balanced portfolio of residential, Commercial and repairing remodel opportunities. And we have a financial discipline and we believe we don’t overpay for any of these. It’s also really important that we look at organic growth as well. It isn’t just M&A. It’s organic growth as we said in our prepare comments of new products, for example, patio door expansion in our Windows business, expanding our portfolio in our Siding business. So it is not just, it’s a balanced portfolio. If you look at our capital -- while our capital deployment, first and foremost is, we talked about that leverage goal of 2 times to 2.5 times. And we’ve made great progress over the last few years on leverage. That’s our first priority. Investing in M&A is a second priority. And then investing both in automation, as Jeff indicated, particularly in our Windows plants, about half of our capital -- our CapEx is for automation in Windows, but also investing in organic growth opportunities or expanding our product line, again, back into the high growth, deep markets where we can be number one or number two.
Jeff Lee: And Kurt, just to add on a couple of comments on that as well, as -- we can’t control when the -- when great businesses come to market, and in this case, UCC was a business that we felt like is very strategic for us. It gives us that deep market and the opportunity for us to grow inside those markets. And we’ve got a nice right to win inside that business with our competences around manufacturing of metals, the channels that we support on both sides, the Commercial and residential sides and so it’s just a really good fit for us as an organization. And I’d like to go back to kind of the comment around the leverage ratio. We’ve been very successful in the leverage ratio, taking it from the end of 2019 5.3 times, down to 4.9 times in 2020 and then we committed to three quarters to one turn reduction in 2021 and we’ve exceeded those expectations commitments that we made in light of M&A activity and divesting activity. And so it’s very much on our minds. It’s very much a priority for us to continue down that path of deleveraging the company and committed to another three quarters to one turn reduction by the end of 2022 and that puts us back in our target of that 2 times to 2.5 times. So we feel like we’ve got to continue down the path of exercising on all fronts a very balanced approach when it comes to investing, right, so we can get the growth, investing inside of our CapEx and other things, so we can get the benefits on the margin side and continue to work on the leverage and so we’re trying to exercise all of those at the same time.
Kurt Yinger: Got it. Okay. That’s helpful. And I guess just a clarification point on the leverage target. Does that include, I guess, what’s assumed for the UCC deal in terms of this years, 3.2 to 3.5 and then three quarters to one turn reduction for next year?
Jim Metcalf: Yeah. Kurt, I’ll take that question as well. So if the guidance that we put in place does not include UCC from either the sales, gross margins, EBITDA or the net leverage ratio, that we don’t know, when it’s going to close. We’re anticipating right now at sometime in the fourth quarter. So we don’t know if that’s going to be late in the fourth quarter or early in the fourth quarter, anticipating a close in the fourth quarter. But as we think about 2022 leverage ratio and that three quarters to one turn reduction, it -- we do anticipate that it will be included inside that -- in that guidance. And as you think about the EBITDA that comes on, plus the purchase price for this business, it’ll put us in a position where it has a very small impact on the leverage ratio, just with the combination and the way that we’re buying that business.
Kurt Yinger: Got it. Okay. That’s good to hear. And then just looking across the business, I mean, there’s a lot going on the supply chain, raw materials and labor. As you look forward, I was hoping you could maybe walk us through your expectations around which pressure points might be alleviated over the next one to two quarters versus what areas you think will kind of be persistent into 2022? Kind of mainly, as it relates to how that’s going to impact your own production volumes?
Jeff Lee: Yeah. Just a couple comments, we’re tight supply, to talk about raw materials, we are tight supply as we talk on steel, PVC, resin and aluminum. Those are really the three big categories. Steel costs are historic highs. And with the macro data that we see, we don’t see any immediate change in steel costs. PVC supply is slowly getting better, though. We’re working very closely with our suppliers to manage demand and I think that’s one of the advantages of Cornerstone having a very large procurement team that works very closely with them. We’re also seeing some progress on labor. As you know, the U.S. Windows has the biggest labor opportunity, I’ll say, and since the second quarter, we’ve increased our headcount about 10%. So we’re starting to see some slow progress there and that’s really because of the actions that Jeff alluded to a few minutes ago. There’s not a silver bullet on this. It’s really a local ground game that we’re working with our select plants to get labor. So we’re starting to see some progress there. On the Commercial side, it’s not as much a labor issue, it’s more raw materials, as well as Siding. So if you look at those labor, it’s -- we have actions in place. We’re slowly making progress. But it’s a long part as we’ll be getting into next year.
Jim Metcalf: And just going back to slide eight and looking at the walk, the EBITDA walk on the quarter itself, obviously, the big area of opportunity is manufacturing productivity. And that’s the area that we’re really putting a lot of focus on, right? That’s where the investments gone. And I’ll put some numbers around broad levels. We put $50 million plus in wages into the 2021 year to increase our wages as a company for our hourly workforce. And that was specifically to make sure we retain the best employees inside the industry and attract the best employees. So we got a lot of investment inside that area, but it’s really attacking that manufacturing productivity area and I think we’ve got some great actions in place. It won’t recover completely as we go through 2022. It’s going to take us some time with all the demand that’s on the company and expected demand inside in 2022, with the carryover backlog and the continuation of favorable economics, we expect this is going to be a little bit more difficult to claw our way through that. But we would expect to see sequential improvement inside of our manufacturing productivity as we move forward.
Kurt Yinger: Got it. Okay. That’s helpful. And just last one for me on the sales outlook, 25% pro forma growth, any color in terms of what’s assumed within that between volumes and price next?
Jeff Lee: Yes. It is -- think about Q3 is a good guide for Q4 and with the high comparables to prior year. And what will -- with the constraints we have on supply right now, we’re running as fast as we can from a manufacturing productivity or manufacturing capacity perspective. Now, it’s not machine capacities, it’s labor capacity, those types of things that are constrained right now. But as we look at the fourth quarter and look at the third quarter, we expect them to be very similar. So the volumes are going to be fairly flat to very high fourth quarter last year and we’re going to continue to see a lot of price inside of the fourth quarter to offset the commodity inflation that we experienced.
Kurt Yinger: Okay. All right. Well, appreciate all the color and good luck here in Q4.
Jim Metcalf: Thank you.
Operator: Your next question is from the line of Julio Romero with Sidoti & Company.
Julio Romero: Hey, Jim, Hey, Jeff. Hey, Tina. Good morning.
Jim Metcalf: Good morning.
Jeff Lee: Good morning.
Tina Beskid: Hi.
Julio Romero: Starting on the Windows side, what are your lead times for Windows right now and how does that compare to, say, lead times, at this time last year, or beginning of year, or however, you want to talk about that? And maybe when do you see that delta start to narrow?
Jeff Lee: Sure. Right now our lead times are about 3 times to 4 times our ideal lead times. The key really is consistency. So even with longer lead times, we’re very focused on being consistent in communicating with our customers of that what that lead time will be and then the customers can plan accordingly. As I’ve mentioned that the backlog, if you look at historical levels across all segments in Windows, the backlog is up about 85% year-on-year. So it gets back to what Jeff was just talking about on the Windows side, it’s not our installed capacity, we have enough installed capacity to meet demand, demand continues to be very strong and it really gets down to that labor factor that we just talked about. And in the starting, as I said, we have improved in the third quarter about 10% on our Windows business. So really focused on lead times, lead times can vary by geographic area. But again, that’s something that is first and foremost on our Windows team to get those down. But also being consistent is the most important thing for our customers at this point.
Jim Metcalf: And who…
Julio Romero: Got it.
Jim Metcalf: Just add…
Julio Romero: Go ahead.
Jim Metcalf: Just add a few comments on that as well. We are expecting that lead times will improve as we get into 2022 in particular as the supply chain constraints, right? There’s just been a crazy amount of constraints coming into this year with the storm in the first quarter of this year inside of Texas, et cetera, and continued pressures across the Board. So as those moves through, as those improve, as we get the wages, and the turnover within the manufacturing sites more in line with what we’ve had historically, we should expect to see those lead times improve. And we are we are starting to feel like some of those constraints are starting to lighten up as we move in the back half of the third quarter and as we move into the fourth quarter.
Julio Romero: Got it. That’s helpful. And then, I guess, the 10% increase in headcount in the Windows should definitely help pretty immediately. But, Jeff, I think, you mentioned earlier that, you expect the fourth quarter segment margins for Windows to kind of look closer to what they did in the first half and that’s obviously very encouraging. But I’m wondering if you had any overarching challenges in the third quarter that you can kind of be more granular on that would only stay in the third quarter, right? Was it over time? Was it in efficiencies or fright? And I guess, what gives you the confidence that it doesn’t fit, the margins do improve in the fourth quarter?
Jeff Lee: Yeah. Just looking at our Windows business in the third quarter, so we did get price over inflation, we had a slight increase in volumes and so both of those positive. What drove the inefficiencies or the lower margins inside the third quarter really resulted from the manufacturing inefficiencies that took place. Specifically, the wage in particular, or excuse me, the hourly workforce is what drives it, the labor constraints that we’re seeing. And just to put it in perspective, if you got a line that requires 15, 16 people or even 30 people to run and you end up with 25 or you end up with 30 people showing up, you can still run the line. It’s not like you can’t run the line with a couple of short people or a few less people. But it does put a lot more pressure on the throughput of those lines. And so that’s what we’re experiencing is, you expect a full line to show up on Monday morning and you end up with short staff, and you continue to run through those. And so the inefficiencies that come with that, the overtime that comes with that, the freight expenses, we’re doing less than load shipments to satisfy customer demands and get as much product to our customers as we can combine, which is the overall freight expenses right now with truck drivers, I’m sure you’ve heard this across the industries, that shortage of truck drivers and those types of things are driving higher expenses as we’re looking to ship our products. So those are the two big ones would be the labor constraints and the freight within the quarter.
Jim Metcalf: And something just to add on Jeff’s comments of what we’re doing differently, we have focused -- a focus plan approach where we brought in subject matter experts looking at continuous improvement. This isn’t a broad brush Windows issue. We know where the opportunities are to improve. We brought in some talent from the outside, both from a manufacturing leadership, but also a continuous improvement. We’re doing kaizen events at these plants. So there’s been, and as Jeff said, the wage is $50 million of additional wages we put in. It’s also a simple thing, like, making sure your break rooms and restrooms are in great shape, the environment around there and welcoming those new employees. So this is an all hands on deck. It’s very focused approach. So I think that’s something different than we turned up the heat on that to get us from one quarter to the next, what Jeff was talking about from a margin standpoint. So this is one of our top, if not our the top priorities and we know what the issues are and we have the right subject matter experts on it.
Julio Romero: Understood. And then just last one for me would be, you talked about a lot investing into automation, as well as expanding product lines, a lot of organic opportunities. The CapEx guide of $90 million to $100 million, I think looks on the surface at least a relatively low. If you can just talk about opportunities, maybe going beyond 2021, right? What is CapEx look like in the outer years?
Jeff Lee: Yeah. Julio, the CapEx guide that we provide that $90 million to $110 million is not a result of desire. It’s a result of our ability to get equipment from the manufacturers right now, just the supply chain disruption on that -- from our original equipment manufacturers. And the projects are still the same projects. We have a lot of opportunity inside of automation. We have a lot of opportunity to just simplify some of the lines that we have in place and so we’ll continue down that path. We’ve placed orders inside of Q3 and Q4 to continue to move forward with -- within our business. And just last of all to says, we’re kind of thinking about 2022 and forward, we’ve always had that 2$ to 2.5% guide that’s out there of revenue and we think that’s very appropriate for this business. Keep in mind about 1% of our capital is maintenance and just kind of keeping the lights on and keeping things in decent shape. And then the other 1% to 1.5% comes in cost out and growth opportunities. And so we move that up as a company as we’ve seen more and more opportunities for us to invest that capital and get a nice return on that capital.
Julio Romero: Great. Thanks very much for taking the questions.
Operator: Your next question is from the line of Matthew Bouley with Barclays.
Ashley Kim: Hey. This is Ashley Kim on for Matt this morning. So, I guess, my first question is on the free cash flow. Can you elaborate more on what drove the use of cash in the quarter? Are you having to keep more inventory due to supply chain issues or anything along those lines that we should be aware of moving forward?
Jeff Lee: Yeah. Ashley, I’m really glad you asked the question because I want to make sure it’s clear on everybody’s mind here. There’s -- if you look at our free cash flow for the quarter, it’s roughly a use of cash of about $200 million. Now, we’ve also got underneath that a lot of investing activity around the divestitures and proceeds from the divestitures and the acquisition information, but there’s a little bit of mismatch is just the way the financials are put together. So the proceeds of cash inside the investment opportunity, you can see that in the cash flow statement, but the cash tax that’s paid in the quarter is actually up inside of the operations. And so just to kind of put some numbers around that, $200 million of -- roughly $200 million of use of cash on free cash flow, including the CapEx of roughly $27 million. And then if you take the estimated -- not the estimated but the payment for tax -- taxes on the divestitures was about $208 million. And then there’s about another $22 million on fees paid on those divestitures and lawyers and accountants and those types of things as we had the strategic initiatives around those divestitures and acquisitions. And so if you kind of back those out, you end up with a positive $30 million worth of free cash flow and then to add to that, as well, we did invest inside the quarter in our steel business, in the Commercial business, in particular, with some of the rising steel costs, we play some orders in advance to try to take advantage of some discounts, with the strong demand that we’re seeing inside of our Commercial business. We want to make sure that we could secure as much supply as we could within the quarter and so we’ve increased our working capital inventories, in particular within our Commercial business. So, all-in-all, we had a good quarter when it came to free cash flow, that tax component in particular, really kind of skews the way you look at the operating cash flow and free cash flow. So hopefully that clears things up.
Ashley Kim: Yeah. Thank you. Thank you for that detail. And then just my second questions going back to UCC acquisition, just given the residential exposure, are there any revenue synergies, maybe the distribution expansion that you’re trying to capture with that acquisition or are the synergies mostly on the cost side?
Jim Metcalf: That’s a great question and you hit the nail on the head, we’re really excited about those opportunities with the multi-channel approach. It is residential, a lot of our large customers that we have relationships on the residential side, either the distributors, big box retailers, our big distributors of metal roofing. So this gives us an opportunity to use those customer relationships that we have. We talked about cross-selling in the past. I think this is a great opportunity for us to really grow our business. That’s why we’re really excited about it. And again, this is just not a residential play. This also adds to our footprint of our components business, which we have the number one positions I mentioned earlier in a $4 billion market. So, yes, there are synergies both on procurement and rationalization of facilities. But most importantly, we’re really excited about the topline opportunities we have in this high growth business.
Jeff Lee: And Ashley, just to make sure we’re clear on kind of the comments that we’ve made. So I indicated there’s 30% to 50% of purchase EBITDA and synergy savings that we anticipate with this acquisition. Those are all outside of what Jim talked about on the growth side. So the 30% to 50% of the synergy savings from an EBITDA and most of those come from purchasing and they come from just some of the things that we’ve identified specifically within the business. And then the upside on top of that is the growth piece that Jim reference with our deep relationships with our channel partners.
Ashley Kim: Great. Thanks for taking the question and good luck on the quarter.
Jim Metcalf: Thank you.
Jeff Lee: Thank you.
Operator: There are no further questions. Are there any closing remarks?
Tina Beskid: Yes. Thank you, everyone, for joining our third quarter call. As we indicated, it was a strong quarter and we are very excited about our outlook. Look forward to your continued interest and have a great day.
Operator: This concludes the Cornerstone Building Brands third quarter 2021 financial results conference call. Thank you for your participation. You may now disconnect.
