Greetings, and welcome to Cornerstone Building Brands Second Quarter Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darcey Matthews. Thank you. Please go ahead.

Good morning and thank you for your interest in Cornerstone Building Brands. Joining me today for the call are Jim Metcalf, our Chairman and Chief Executive Officer; and Jeff Lee, our 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. 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.In addition, 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 that is located in the Investors section of our website.Please note that we will be referencing our investor presentation during today's call. Throughout this presentation, management may also refer to pro forma financial results including the company's fiscal second quarter ended April 2018.Such pro forma results give effect to both the change in the company's fiscal calendar as well as the recently completed acquisitions of Ply Gem and Environmental StoneWorks, including Ply Gem's acquisitions of Atrium and Silver Line, as if such acquisitions were consummated prior to the period presented.This morning, Jim will introduce our new CFO Jeff Lee, provide an overview of our progress to-date and highlight some of the key strategic initiatives we are working on. Then Jeff will provide an overview of our consolidated and segment results, details on our cost initiatives and share our outlook for the second half before we take your questions. And now, I'd like to turn the call over to Jim.

Thank you, Darcey, and I appreciate everyone joining us this morning. As we get started, I'd like to take a moment to welcome Jeff Lee as a new CFO of Cornerstone Building Brands. We're very excited to have Jeff on board.He joins our organization with a great combination of public market and private equity experience, giving him a strong perspective on how to drive both short and long-term value. We look forward to leveraging his experience here at Cornerstone Building Brands.Now I'd like to spend some time this morning reviewing the quarterly results and our strategic priorities for the remainder of the year. During the quarter, our consolidated sales were approximately $1.3 billion. We continue to make progress on our strategic, operational and financial objectives.During the period, we captured price over cost inflation and achieved adjusted EBITDA margin expansion across all of our business segments while facing a headwind of lower year-on-year demand.We achieved gross profit of $305 million or 23.5% of net sales, and adjusted EBITDA of $172 million. Our adjusted EBITDA margin expanded by 60 basis points from the pro forma 2008 quarter results, reflecting pricing discipline across all business segments, offsetting higher raw material, freight and labor cost, while recognizing the benefits from our cost initiatives in integration of our recent acquisitions.Turning to slide 3 of our investor presentation, we are focused on strategic priorities in 3 key areas: strengthening the core, extending our reach and growing strategically. With these priorities, we expect to drive profitable growth, gain further margin expansion in each segment and deliver strong cash flow generation.These priorities will be supported by our synergies, ongoing cost initiatives and a disciplined capital allocation strategy. Strengthening our core business is critical to our success. With margin expansion as a key theme, we have opportunities within our…

Thank you, Jim. As Darcey mentioned, I'm going to provide an overview of our consolidated and segment results. Then I'll provide an update on our cost initiatives and synergy efforts, our viewpoint on the markets and will conclude with our adjusted EBITDA guidance for the third quarter.As a reminder, with the change in the company's reporting periods and the effect of the merger, I'm going to discuss both GAAP and pro forma figures for the second quarter of 2018. As presented in our Form 10-Q that was filed earlier this morning, our second quarter 2019 sales for the company were approximately $1.3 billion compared to $457 million in the reportable period ended April 29, 2018.Our second quarter gross profit was $305 million with gross profit margins of 23.5%. Adjusted EBITDA for the period was $172 million compared to $40 million in the reportable period ended April 29, 2018.The primary driver for the year-over-year change in second quarter sales, gross profit and adjusted EBITDA is the inclusion of Ply Gem and the change to our new fiscal calendar.As you turn to slide 5 on a pro forma basis, sales in the second quarter of 2019 were $1.3 billion. The decrease in 2019 second quarter sales versus 2018 was driven by lower volume across all our business segments, partially offset by price discipline and mix.Our second quarter 2019 adjusted EBITDA was $172 million, compared to a pro forma $174 million for 2018. We did experience low volume within the markets we serve.However, we did capture favorable price and mix over inflation. With lower volumes, we were challenged to get our variable labor out of our facilities and experienced lower manufacturing productivity of $21 million in the quarter. We have put actions in place to adjust our workforce for the volume anticipated during…

Thank you, Jeff. In summary, we continue to find new ways to take advantage of our scale, identify new avenues for growth across our product portfolio and execute on our plan to realize synergies across the entire enterprise.While we can't control the end-market demand, we are very focused on executing on the areas of the business that are within our control, including capturing price, realizing synergy and cost initiative savings, and a focused approach to capital allocation. To outperform the market and drive year-on-year margin improvement, we remain focused on exceeding our customer expectations in each one of our businesses.In our second quarter together as one company, Cornerstone Building Brands, we are building on a culture of safety, integrity, teamwork and innovation to drive operational excellence and execute on our vision to be the leading exterior building products company in North America. This includes making balanced investments in our key growth categories to ensure we’re deploying our capital to areas that we feel that will drive the greatest returns for our shareholders.And with that, we appreciate your time, and we'll open the line for investor questions. Thank you.

[Operator Instructions] Our first question is from the line of Matthew Bouley with Barclays.

Good morning. Thank you for taking my questions. So, I wanted to start on the guidance. You're assuming it looks like another $50 million or so further synergies in the second half between the two quarters, but the Q3 guide still sort of brackets last year's Q3 EBITDA. So I guess could you just help us understand the offsets whether between volume, what you're seeing on inflation and the manufacturing productivity side that you called out this quarter? How are those areas kind of offsetting the synergies and playing out in the second half? Thank you.

Yeah, Matt, this is Jeff. Let me address that question. So let me take you back to the slide that we actually have the -- that performance inside of Q2, if you look at slide number 5 inside of our deck.So I'm going to talk in Q2 to Q3, and I think it's a nice way for us to understand kind of what's happening inside of Q3. So starting from Q2 on a sequential basis, the third quarter, which has historically been our largest revenue quarter of the year, we're forecasting modest consolidated volume declines of about 1.5% to 1%. So 1.5% to 1% increase inside of the projections, which is pretty close to what the market expectations are.Those volumes should drop through to about 25% margin rate, and we expect the incremental savings as you look at that synergies and cost savings bucket there to be about the keep on pace with Q2 and have some improvement coming in from our manufacturing productivity, which we did see some headwinds inside of Q2 and that should improve inside of Q3.

Our next question is from the line of Lee Jagoda with CJS Securities.

Hi, good morning.

Good morning, Lee.

Good morning, Lee.

So can you talk about just the end-market outlook and how it might differ from when you completed the merger? And then maybe touch on the current trends and your outlook for the various raw materials you have exposure to? But I know you had some pricing that you put in place earlier this year. I assume, if things have stabilized or even gotten a little bit better, you don't necessarily have to give that back on all of your business?

Yeah. Thank you, Lee. This is Jim. Obviously, when we completed the merger in November, we were looking at the year, which was going to have some volume growth, particularly demand growth in the residential market. Obviously, on the commercial side of the business, we were coming off a very weak fourth quarter. If you recall, with a lot of the talk about steel increases in tariffs, there was a lot of pull-forward into the fourth quarter on the steel business on the commercial business, which had a big impact on our overall volume on commercial in the first, really, half of the year.The overall market in commercial in tonnage for the first half was down double-digit and that is something that is really carried in and we did not have a seasonality until later maybe in the last 30 days in the commercial business. So we did not see the typical seasonality on the commercial business.On the residential business, I think, everyone sees consensus housing got weak during the year. We balanced price and volume. We did not lose share, but we did see really the key to our change of our numbers is from a volume and demand standpoint. If you look at the second quarter, it was about $39 million of EBITDA.So looking at the overall market, we think the second half on the commercial side is going to minimize that double-digit decrease in tonnage volume. We are looking at, as we said in the deck, a mid-single-digit decline in demand, which is better than we had in the first half on the commercial side. We did not see the seasonality in either business until later.Typically, as you know, the business, both on the commercial and residential side, starts kicking-up in the second quarter. We did not…

That's very helpful. Thanks.

And Lee, on the – and Lee, on side of the commodity increases, commodities that – those prices have stabilized. For PVC resin, we think that the prices follow the typical seasonal pattern, so they typically have a little bit of an increase in spring, flatten out by the summer and then they've a little bit of pullback in the fall. And we think that no significant change within our aluminum or steel prices as well.

Great. Thanks.

Our next question comes from the line of Reuben Garner with Seaport.

Thanks. Good morning, everybody. So I guess on the synergies front, looks like you're tracking ahead of schedule. Two-part question is how much of this is pull-forward from future years? You guys just accelerating the initiatives versus maybe having some upside to the broader target. And then maybe what's your outlook for kind of the timing in the second half? What are you including in Q3? And is there maybe a ramp in Q4 as you move through the year?

I'll – let me start with that, and I'll turn it over to Jeff. We really found some additional savings and really focused on really on procurement and back-office SG&A. So that was really the big difference of moving our guidance up to the $85 million to $95 million for the year. As we said, we've already booked year-to-date about $40 million to $45 million, and we're expecting anywhere between $40 million and $50 million in the back half and it's pretty steady or it's pretty balanced through each one of the categories. Procurements, a really big category, SG&A, and we feel it's a pretty balanced through each, the third and the fourth quarter.

Yes. Reuben, when you look at the timing in the third quarter and then on our savings in particular, as I mentioned, we do expect it to increase over second quarter slightly. And so in the second quarter, we did about -- we did have $27 million in savings, and so we expect it to be higher than that based on the momentum we have and the new projects and initiatives that have begun.

Okay, great. And then let's see -- maybe, on the free cash flow outlook, Jeff, just trying to parse out what your comments. It sounds like you've got some working capital opportunity maybe near term and longer term. What's -- and you also said second half is typically a stronger free cash flow period. Did I mishear those comments? And then can you repeat what's your outlook was for the second half? It sounded like your free cash flow guidance for the second half was a little bit lower than the first half. So just wanted to make sure I heard all that correctly.

Yes. Let me make sure and clarify that, so our second half traditionally has more cash flow generation. Second half is higher than our first half. As you look at the second half, we expect to generate an additional $130 million to $150 million in free cash flow. And just as a reminder, on a full year basis, right, our interest expense for 2019, we expect that to be around $246 million. We expect the cash taxes to be $60 million, and our TRA that's coming due, that's the last TRA payment that we have to make is $25 million. And then our capital spending right now on a full year basis is still around that 2% to 2.5% or about $125 million.

Our next question is from the line of Sam McGovern with Credit Suisse.

Hey, guys. Thanks for taking my questions. I'm just following up on the last question on working capital. So can you talk a little bit more about how you look at overall working capital opportunity as you go forward into 2020 and 2021? Is there an opportunity to take out working capital as a source of cash over the full year?

Yes. With regards to working capital, we do see an enhanced opportunity to leverage and improve our combined working capital utilization, which will further enhance that free cash flow position that we talked about and delever the balance sheet. Working -- we're defining working capital as a combination of inventories, receivables and payables. As a percentage of net sales, just to give you an example, we are about 17% as a company, and we think there is a nice opportunity for us to address that. As a reminder, about -- its math, but every 0.5% change represents about a $25 million opportunity for us inside of the company. And we have put teams in place to address the working capital. We think we're going to see some -- achieve some benefits from those in 2019 and continue those initiatives into 2020.

Got it. And just to make sure I heard correctly. You said you plan to pay down the revolver in the second half. Is that -- should we expect a 0 balance at year-end, or is that just a partial paydown for the revolver?

Yes. As I talked about that $130 million to $150 million generation inside of second half, our intentions would be to pay down the ABL revolver and that puts the ABL revolver close to zero. Keep in mind, we did buy the ESW acquisition, which is around $180 million, and so that would basically pay for the acquisition inside of the current year.

Our next question is from the line of Steven Fisher with UBS.

Thanks, good morning. Any sense for why the commercial tonnage was down so much in the first half of the year? How much was weather versus other factors? And what might those factors be? And is there implied second half to get to the mid-single-digit contraction? Is that actually continue to be down? Is it flat? Is it up a little bit?

Yes. The first half numbers -- first, let me -- this is in tonnage, not in dollars and that is the industry of building 5 five storeys or less that was -- the total industry was down in the first half about 13%. That contraction really started in the fourth quarter of 2018. That had a lot to do with steel prices, the increase in steel prices in 2018, tremendous amount of labor shortages that were incurring. There was a lot of pull-forward in 2018, as I mentioned earlier, from the business, which impacted the first 2 quarters as an industry.We balanced price and volume with our product portfolio of our commercial business. And with that volume of the industry being down double-digit, we maintained and held our market share. So, we really are focused on the -- in the second half of the projections that we're seeing and this is consensus projections that the lag on commercial, non-residential starts is anywhere from nine to 14 months.So, we are looking nine to 14 months ago, we're starting to see single-digit declines in the second half. So, it's really just looking at the projections and the lag that we see on the nonresidential five storeys addressable market. So we plan and we're very focused on outperforming that.As I mentioned earlier, our Insulated Metal Panels is one of our growth products. That is the product within our commercial business that is growing. It's growing at high single-digits. We feel that the addressable market is still a great opportunity for us because it does take labor out of the business. For example, we have a product in our Insulated Metal Panels business that's called Formawall, a Formawall system, that's the name of the product, and it basically is a sustainable exterior curtain wall system that takes six components and makes it one, and this is really a sustainable product that is also taking labor out.So, we're looking at growing our commercial business with new products expansion as well. So, even with the market demand being down mid-single digits in the back half of the year, we're going to balance our price and volume. We've segmented our customers, and we plan to really continue to grow our Insulated Metal Panels business.

Great. And then any help you can give us on, say, the segment level margin direction or ranges for the balance of the year? I know you've got these cost synergy programs, but I don't know if they're going through the segments or not, if you're going to just be sort of below the line, but any help you can give us on sort of marginal -- margin direction by segment would be very helpful.

Yes, let me just make a couple of comments, I'll turn it over to Jeff. That's a really important point, and we want to make sure that we had a line of sight of the cost savings and the synergies because I know in previous calls, there might have been a little bit of confusion, so we wanted to have more transparency on that.And we've done a very focused approach over the last quarter to really put those cost savings and synergies savings into the individual business units. So, let me turn that over to Jeff and he can give you some more color on that.

Yes. So, let's address it maybe from the total company a little bit first just because I -- sensitivity in some of the segments, we don't traditionally give a lot of margin guide by company, especially EBITDA margins. We've been providing gross margins.So, as a company, we do expect to see margin expansion, and we saw that inside the second quarter, right. So, our second quarter basically went from 12.6% up to 13.2% inside the second quarter. And that a lot of those -- a lot of that margin improvement does come from the few things really is the price, over-inflation and mix and then it also has the cost savings and the synergy benefits that are coming through on those.And we expect that to continue into the second half as well. And so we're getting momentum on the cost synergies and the synergy savings inside the second half. So, we do expect those margins could improve as we move forward into the second half.

And that is one of the things that is really key on -- and our headlines and our talking points too today as we are expecting, we have margin expansion in each one of our businesses and each one of our segments. And with the market demand that we're talking about, we cannot control that. So, we are focused on cost reductions in the synergies in each one of our businesses.So, margin expansion in our commercial business, even with the demand that I just talked about, we have some headwinds there. Margin expansion both in Windows and in Siding with the initiatives that we've been discussing this morning. So, margin expansion in each one of our businesses, new product expansion and continue to delever our balance sheet are really our three key points.

Our next question is from the line of Richard Kus with Jefferies.

Hey guys. You guys have been active, obviously, historically, on the M&A front. What are you considering in terms of M&A right now, particularly with Masco looking to sell their windows unit?

As we said, our first priority, as we look at our capital allocation, is deleveraging our balance sheet. That is a top priority, and we've been talking about that. We're very focused. But in conjunction with that, we are -- we do look at what are opportunistic -- opportunities for us that are -- that have a strategic fit, that are -- that make financial sense and don't go to the face of our strategy of deleveraging our balance sheet.I think a great example of that was we talked about the Environmental Stone -- acquisition that we made, Environmental Stoneworks. It made sense, it was strategic, it was financial. So, we focused on our balance sheet as well as looking at opportunities that are strategic for us. We are going to continue to keep our eyes open.

Okay. And then with respect to the synergies, maybe I'm reading this slide incorrectly, so I apologize if I am. But it seems to me like your -- the run rate that you expect on a quarterly basis from the back half of the year isn't very different from what you have realized so far in Q2. Why isn't that increasing as we progress through rest of the year?

So we do see a modest increase as we go into the back half of the year. A lot of the benefits that we put in place in Q2 are going to continue over. You can see a nice jump from Q1 to Q2 and a lot of those initiatives are complete and so they're going to carry over into Q3 and Q4. And then we have additional initiatives that we're going to be putting in place to hit the 2020 target that we provided.

[Operator Instructions] Our next question is from the line of Reuben Garner with Seaport.

Thanks. Just a couple of quick follow-ups. So one, any -- did -- are you guys able to quantify any weather impact in the quarter? I know it's something we've heard a lot and obviously your products are primarily outdoors. So I'd assume you see just as big as an impact as anyone. Is there any way you can give us a thought on what you lost out on the quarter and maybe you can catch up later in the year potentially?

I hate to use weather as an excuse, but it did have an impact on the business. As we look -- mentioned, the typical seasonality, we really saw a pushback. If you look at the business, the second and third quarters are typically the stronger two quarters. We just didn't see it. April started out fine and then May. May, we had a lot of weather. It really affected the commercial business, a lot of job sites were really the first half were just underwater in the Midwest. The far west was another geographic area that was negatively impacted, mostly on the residential new commercial side.I mean, if you look at just the recent -- the single-family housing year-to-date, the West 2019 starts are down 13% versus plus 9% in 2018. If you look at the Midwest, housing starts were down 8% and 5% last year. And then the Northeast was down 14%. So those were some areas that we saw that were hit with weather. But again, we want to create our own results, and we have not quantified weather, I don't like using that as an excuse, but it did have an impact, particularly on our commercial business.

Okay, great. And then Jeff, one clarification -- sorry for the confusion, but the free cash flow guidance that you're giving, is that the definition that's in the presentation or is EBITDA minus CapEx or is that -- because you mentioned your interest expense and your cash tax rate? I'm just trying to understand or maybe you can frame it in where you think leverage stands at your end or what's your full year free cash flow target is, just to make sure we're all on the same page?

Yes. I appreciate the question. I understand maybe where the confusion came from. The $130 million to $150 million of cash that I referred to is the cash generation, right? So it's the incremental cash that we expect to get from today until the end of the year. And so I think that might have caused a little bit confusion as I might have called that free cash flow, but it's the incremental cash.

Thank you. We have now reached the end of our question-and-answer session. I would like to turn the floor back to Darcey Matthews for closing comments.

Thank you, Brenda, and thank you, everyone, for your interest in Cornerstone Building Brands. We look forward to speaking with everyone soon. Have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.