Greetings, ladies and gentlemen, and welcome to Cornerstone Building Products Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] And it is now my pleasure to introduce your host, Ms. Darcey Matthews, Vice President of Investor Relations. Thank you. You may begin.

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 located in the Investors section of our Web site. Please note that we will be referencing our investor presentation throughout today's call. During this presentation, management may also refer to pro forma financial results, 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 Silver Line, as if such acquisitions were consummated prior to the period presented. This morning, Jim will provide an overview of our consolidated results, an update on the progress of the key strategic initiatives we are working on. And then share some of the trends we are seeing in our end markets. Then Jeff will provide a detail discussion of our consolidated and segment results, provide an update on our merger synergies and cost initiatives and share our guidance for the fourth quarter before we take your questions. And now, I'd like to turn the call over to Jim.

Thank you, Darcy, and I appreciate everyone taking the time this morning for our call. Overall, we are very encouraged with the third quarter results, we continue to execute on our strategic operational and financial objectives of achieving margin expansion across our business segments, despite sluggish year-over-year market demand. We are focused on improving our customers' experience with our expanded product portfolio for the residential, repair and remodel and commercial markets. Providing quality service, delivering on-time and in full is a critical component to expanding our customers satisfaction. During the quarter, our consolidated net sales were approximately $1.3 billion. We achieved gross profit of $310 million or 24.1% of net sales and adjusted EBITDA of $181 million. Our adjusted EBITDA margin expanded by 230 basis points from the third quarter of 2018 pro forma results. This was accomplished with pricing discipline and product mix, while recognizing the benefits from our cost initiatives and integration of our recent acquisitions. From a balance sheet perspective our focus of cash flow generation combined with the stronger seasonal impact resulted in a pay down of net $50 million of our ABL facility during the quarter, reducing our net debt leverage from 6.2x to 5.9x. As we have mentioned in prior calls, reducing our leverage is a key priority for the company and we are making progress on this important front. Working capital is another key area of opportunity for the company with teams established across our organization focused on inventory management and accounts payable. We are making good strides to improve our working capital metrics. As we mentioned during the second quarter call, our working capital as a percent of sales are approximately 17%. If you will recall, every half percentage improvement generates about $25 million for further debt repayment or could be reallocated…

Thank you, Jim. I'm going to discuss our consolidated and segment results. I'll provide an update on our cost initiatives and merger synergy efforts and then we'll discuss our adjusted EBITDA guidance for the fourth quarter. I will conclude by walking through the key puts and takes on our anticipated cash flow for the year. 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 third quarter of 2018. As presented in our Form 10-Q that was filed earlier this morning, our third quarter 2019, sales for the company were approximately $1.3 billion compared to $549 million in the reportable period ended July 2018. Our third quarter gross profit was 309.8 million with gross profit margins of 24.1%, adjusted EBITDA for the period of 180.8 million compared to 63.5 million in the reportable period ended July 29, 2018. The primary driver for the year-over-year change in third quarter sales, gross profit and adjusted EBITDA is the inclusion Ply Gem, Silver Line and Environmental StoneWorks in our results. As you turn to Slide 5, sales in the third quarter of 2019 were $1.3 billion. The decrease in 2019 third quarter sells versus pro forma 2018 was driven by lower volumes primarily in our commercial and window segments, partially offset by price, discipline and mix. Our third quarter 2019 adjusted EBITDA was $180.8 million compared to pro forma $165.5 million in 2018 for an increase of 9.2%. We captured favorable pricing mix, net of inflation, improved our manufacturing productivity and realized meaningful merger synergies and cost initiatives of $30 million in the quarter. In addition, each of our segments realized sequential increases in volume from the second quarter to the third quarter of…

Thanks, Jeff. At the start of the year, we highlighted our focus on improving our free cash flow with an increased emphasis on working capital improvement, prioritizing our CapEx investment to maximize customer satisfaction and providing solid returns on those investments. As mentioned in our last quarterly call, we are concentrated on a capital allocation framework, which is designed to achieve our goal of debt reduction while preserving financial flexibility to pursue our growth strategies. Reducing leverage continues to be a priority for the company and I'd like to reiterate our goal to achieve a target leverage ratio of approximately 2x to 3x times adjusted EBITDA. Additionally, our efforts to improve our working capital are generating results, which will further enhance our ability to delever our balance sheet. In summary, we continue to find new ways to take advantage of our size and scale, identify avenues for growth across our product portfolio and execute on our plans to realize synergies across the entire enterprise. We continue to build on our 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 are deploying our capital to the areas where we believe it can drive the greatest long-term returns for our shareholders. We appreciate your time this morning and now we'll open up the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hi, this is actually Christina Chiu on for Matt. Some of the data points that we've seen this quarter on the non-res side have been choppy and learning that you're expecting a mid-single digit contraction in commercial in the fourth quarter. Do you have an indication in your backlog of what commercial might look like in early 2020?

Well, thank you. Just to reiterate the addressable market that is for the commercial business, five stores or less, typically 500,000 square feet. And we've had about the last year of double-digit decline in demand and we're starting to see that dissipate as we said earlier. What we're looking at the backlog is right now our backlog is around a mid-single digit backlog and there is a lag there. Obviously, depending on the complexity of the building, the lag can be anywhere from a 30 to 60 days all the way up to four months depending on the type of the building.

Okay, got it. Understood. And can you also provide some more color into 4Q and full year guidance, just what are some of the puts and takes that might get used to the higher, the low end of the guide. And then, what is expected to incrementally improve in 4Q?

Yes. Let me address that one. So, as we think about the fourth quarter versus 2018, we provide the range of $135 million to $150 million of EBITDA. That's about $6 million to $21 million over last year. The main drivers, as we've mentioned previously, are higher volumes within the residential and that mid single digit contraction within the commercial markets. However, with the things that we control as we meet some of our customer service levels, maintain our price discipline, manufacturing productivity, and then the merger and cost initiative savings are the things that really drive the fourth quarter to beat or meet our expectations as we've as we outlined.

Got it. Thanks for taking the question.

Thank you. Our next question comes from the line of Lee Jagoda with CJS Securities. Please proceed with your question.

Hi. Good morning. So, if I start with the commercial segment and I look at the quarter down, call it mid teens, can you just parse out volume versus price in the quarter? And then with fuel likely down year-over-year in Q4, can you talk about how your current inventory position matches up with the expectations for demand and how you price products given that dynamic?

Yes. Lee, let me talk about some of the components within the third quarter itself. So as we look at just reconciling the sales itself, you looked at last year and be in $551 million of sales and this year coming out at roughly $465 million of sales, it's primarily a volume drops. So, if you take that 15% drops, 13% of that is coming in from volume and we got a little bit of contraction in price. Now keep in mind, we did see the high skill price increases in the back half of last year and we've seen steel prices come down. At the, the first half of this year. If you look as we've typically talked about this spread within the commercial business and you look at the third quarter in particular, we continue to see positive spread in the business. So our net economics, which is our price and mix and our inflation combined is a positive $12.4 million. So, if you look at EBITDA and reconciling those components, we did see that that volume fall through down to EBITDA of about 21 and then we saw the benefit come in from net economics of 12.4 and then we have the cost initiatives that are really make up the difference on that.

And then, can you talk about the expectation in Q4 volume and price?

Yes. So we do, as we talked about, we do see the mid-single digit contraction. It's split between kind of the price and volume. And again, it's really more of the dynamic between the skill of fluctuations as that continues to move down. We're not seeing margin contractions, right? So, again, as you look at the spread across the business, we see positive economics inside the fourth quarter and we do expect to see the benefit between cost initiatives, manufacturing productivity being positive.

Okay. And then, just one quick question on the cost synergies. Obviously, you're doing a great job, well ahead of expectations for this year. And you reiterated the $185 million total goal. Is that to say that the 15 million or so million got pulled forward or is there really more room and as we model this, should we just assume that at the end of this there'll be either another round or more given that the exceeding your internal expectations?

Yes. It's a great question. So the $185 million, just to make sure that we all have the same numbers. We realized about $25 million of savings in 2018. We're expecting to be around that $100 million for 2019 which will leave $60 million in 2020. Now every year, this company, if you look at the legacy Ply Gem and NCI business, we have cost out initiatives. And so that's not going to slow down as we move into 2020 and with that, the numbers around those have been between the $40 million and $50 million range historically and we think that will continue into the future, not only 2020 but as we continue into the future years as well. So we will see some of the merger synergy start to conclude as we get into 2020, but the ongoing cost out initiatives through lean Six Sigma, continuous improvement automation, those types of things will continue to move forward in 2020 and beyond.

Great. Thanks very much.

Thank you. Our next question comes from the line of Reuben Garner with Seaport Global Securities. Please proceed with your question.

Thank you. Good morning everybody. So, I've got -- can we maybe dig into the puts and takes on the free cash flow front a little bit? It looks like you may be reduced your outlook there a little bit. And, if I'm looking at the components, it looks like CapEx interest and cash tax all came in some. So, there was some positives there, where were the offset to a result in the free cash flow guide coming in looks like about $30 million.

Yes. So Ruben, just to make sure we're talking about the same numbers, I think you're referring to the full year cash flow versus the quarter itself?

Yes. The full year, I mean the last quarter, I think you guided to the back half being 130 to 150. Now if I'm doing the math correctly, I think that's maybe 25 million to 30 million lower than that. Am I doing it right?

That's correct. So I'd say two things on that. We did come in about on expectations for cash flow on the third quarter. We did see some softening in the markets in particular across their commercial business that carries into the fourth quarter. So, when you take that $30 million to $50 million reduction in the guidance that we gave inside of the second quarter for the full year cash flow that's primarily about half of that comes in from EBITDA and the other half comes in from working capital and non-cash or non EBITDA expenses. And I would say that the non-EBITDA expenses that are coming in there are one time in nature, they are cash but they will go away as we go into 2020. We do see positive working capital inside the fourth quarter. It was a little bit less than we anticipated with the lower volumes. But we do have positive working capital inside that quarter.

Jeff, by lower volumes, meaning your inventory is going to be higher than you want it to be exiting the year. Is that what you're implying?

That's correct. As we think about the lower volumes, we have a backlog and skill and different components within our business with that anticipation. And so, we weren't able to get as much inventory out as we would have liked. Although if I think about the fourth quarter, we saw $22 million, $23 million worth of positive working capital inside the third quarter. As I think about the fourth quarter, it's going to be a higher number, closer to the 40, 45 number. So we will see a little benefit coming in from working capital, just not quite at the higher levels that we anticipated last quarter.

Okay. And then, so maybe help us with -- since this year's kind of been a funky in terms of working capital and one-time items, can you maybe provide us with what kind of a normalized free cash flow profile looks like as we head into 2020, so people can -- investors can get an understanding of how the deleveraging path is going to look like as we move into next year.

Yes. Let me walk through the components of cash. And let's start, with consensus EBITDA for next year is kind of the way to start, right? We're not giving guidance on EBITDA for next year at this point, but let's take a point that is out there in the public markets on consensus, which is $616 million. So, if we take the $616 million of EBITDA, we expect to have about $125 million worth of CapEx. There would be cash taxes of about $60 million and cash interest at 230. And then I put in about $10 million worth of other expenses that would be adjustments to EBITDA. And then, we put in the extra $25 million roughly for the cost to realize some of the synergies. So if you take all those together, you can see the benefit that we'll have on a year-over-year basis inside of our cash available to pay down debt.

Okay. And you didn't mention working capital. I know that's come up quite a few times on the call today. Can you talk about, Jim mentioned you're at 17% of sales, where do you think you can get it to, how quickly and maybe some examples of how you're able to do that and the benefits to cash flow. And that's it for me. Thanks guys.

Hey, Ruben, just -- that's a major focus of working capital, 17% is at the high-end. We feel there's some opportunities there, particularly on the inventory side. On our siding business we're really focused in on inventory reduction also on payables and we aren't putting any guidance out there, but we feel that, the focus that we've had in the first year of the merger as we're coming up has really been on the costs out and the synergies and some of the things that we're hitting on us 185. So the 185 has been a really a top priority. Now we're digging into the working capital and we think there -- over the next year, or so there could be at least $100 million of working capital that we can release. But, we're very focused on getting that to a level that is acceptable with some of our peers.

Okay. Thank you.

Thank you. Our next question comes from the line of Sam McGovern at Credit Suisse. Please proceed with your question.

Hey guys, I just wanted to follow up on that prior question. I just want to clarify, did you say $100 million of working capital release and if so, over what timeframe?

Yes. So I say a couple of things. The $100 dollars is -- are areas that that we have looked at within the business that we think in particular we can address. The timeframe we're still working through, we're going through a sales operating planning process to make sure that we've got consistency across our businesses. As that process becomes more and more ingrained within the business, we should start to have a much better indication of how quickly we can pull it out and how much we can pull out, right? As Jim mentioned, we think there's at least $100 million there, but as we get through that, we'll be able to determine how much exactly that could be. So, I would say that, as we think about the next couple of years to $100 million feels very comfortable over the next two years. And it's -- the quicker we can pull in those processes, the faster we can take some of that that working capital out.

Okay. Great. And then, with regards to the free cash flow that you sort of enumerated earlier, you mentioned in your prepared remarks primarily sort of a debt repayment and other areas of interest. How do you think about, where you want to put that money, is it primarily debt repayment or are you looking at acquisitions or do you have the ability and are you looking at the potential for dividends or buybacks for the equity?

As we've been saying, really since the merger, a focus on our balance sheet has been -- is a priority for us. And we still have a target of getting to two to three times, as we said, over the next few years of debt to EBITDA. But along with that we want to have a balanced approach to look at investments both on the organic side of new product innovation. We're investing in our product pipeline and our sidings and our windows business also in our I&P business. But also we will look at acquisitions that make strategic and financial sense that don't go into the face of our overall financial strategy.

Okay. Got it. Thanks so much. I'll pass it along.

Thank you. Our next question comes from the line of Richard Kus with Jefferies. Please proceed with your question.

Hey guys. Good morning. Q4 last year was pretty soft quarter, I think overall just in residential housing markets. Can you talk a little bit about why, you still expect low single-digit growth this year. I thought maybe it would open to better?

We're really looking at the lag as we talked about in our prepared comments. And particularly in single family, we have about 120 day lag. And if you look at -- if you pull the lag forward for the third quarter, the overall number was down about 7%, but particularly in two areas in the Midwest and the Northeast were areas that we have a big footprint. We're down a double-digit from a lag basis. So, we were -- that was the demand we had in the third quarter. If you look at the fourth quarter lag, we're looking the consensus of a single family is about a 1%, which the Midwest is up about four. So there's been a big change from that lag factor. So, if you look back a year ago housing starts where we're, we're going the wrong way. We're working on 120 day lag now and that's where we come up with our single-digit -- for our fourth quarter low-single digit approach for our residential business.

Okay, I see. And then, just follow up on Sam's question about capital allocation. Could you guys talk a little bit about the M&A pipeline, how it looks for you right now and particular product areas where you might be focused on some things?

We obviously don't talk about specific M&A, but we do look at the overall opportunities as we've said, that are strategic to us that where, we can add to our portfolio that are really critical to our customers. So it's one of those things that we have a very diligent process to make sure that we don't overpay, but also that acquisitions that would come into our portfolio that would really provide value to our overall customers. We're really looking at both from a residential and a commercial side what products that we can add to our portfolio but not get way out of our swim lane.

All right. Thanks very much.

Thank you. Our next question comes from the line of Bill Newby with D.A. Davidson. Please proceed with your question.

Good morning. And thanks for take my questions. Jim maybe -- we talked about single payment a little bit and the expectations for the multifamily sector as you guys move into 2020. And I guess how large of a portion of your business is that now?

We look at the single family as the larger proportion of the residential business. It's broken down about 60:40.

Okay. And then, I guess any expectations for multifamily as we move or is it, I mean pretty similar to what you're seeing on the single family side?

Yes. I think it's pretty similar. We're looking at low single digit growth, particularly with the lag. I was calling out the single family, but the overall housing starts will be low single digit. And we're just really -- we aren't being the industry forecasters here we're just looking at what consensus is and what we're seeing from the individual groups that look at housing.

Got it. Got it. Okay. And then, I guess…

And if I could just add to that, we're really focused as a company on what we can control. The demand will be the demand, we're focused on our taking costs out, delivering on the synergies that we talked about earlier, focusing on innovation and continuous improvement in our plants. So, we really taken the approach here over the last year. Let's focus on what we can control. The market demand is the market demand and we want to take care of our customers and continue to grow the business. But we're going to continue to have a margin expansion and that's really our key objective here, is grow our margins and the market will do what the market does.

Understood. And then, I guess just from a synergy perspective, obviously plenty have talked about the cost synergies and the progress you guys are making there, which is good to see. But I mean, have you seen any benefit from a sales standpoint as you guys have gotten deeper into this transaction? Are you seeing kind of revenue synergies pop-up that maybe you weren't expecting or just any color there?

Yes, that's a great question. As we talked a few times and a little bit today about cross selling and that really was not a top priority coming with the merger, we really want to focus on the integration of the companies as we indicated, we had a few acquisitions here and we really focused on the cost out and the synergies and the commitments that we made to the street. But, we're now in the phase that we're really looking at what are some of the opportunities for cross selling and having that larger portfolio to our customers. That's including stone cladding, metal roofing and windows just to name a few. And we're in the early stages of this, but this we've had some good reactions from our customers and I've talked in previous calls on our metal buildings business where we manufacture about 12,000 a year. The average buyout is anywhere between $5,000 and $6,000. And those key buyouts are windows, main doors and products that we make. So, we think there's some great opportunities for our stone business on a commercial -- on our commercial buildings. The teams are already working together on that. We've started to pick up some jobs, nothing of significance, but we think long-term there's some nice opportunities here. Just a couple of facts. If we leverage our product lines with our customers, the residential, metal roofing market is about a $0.5 billion market and we have a very, very low percentage of that market, very small single-digit. So we're leveraging our residential relationships with our large retailers and the large distributors that are now part of the portfolio to really expand our footprint here. So it's early but our team is focused, our environmental stone team and our commercial team are working really well together on mutual job leads and we think as the year unfolds in the 2020, we'll be able to talk a little more about some early wins. But it's early, but there's some great opportunities there and our customers that we've talked to are really excited about the expanded portfolio because a lot of our large residential distributors are also in the commercial business and now they have one place to call and one stop shopping, which really a lot of our competitors don't have that advantage.

Great. Thanks.

Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn it back to management for closing comments.

Thank you. I really appreciate all the questions and the time that you spent on the call here today for Cornerstone Building Brands and as most of you know, we're coming up on a year of the merger. I'd like to say we're very proud of the hard work the entire team at cornerstone has put into really, as I said a minute ago, is focus on the controllables. We really focused on sitting down with our large customers and presenting Cornerstone with our enhanced product portfolio. Extremely focused and proud of margin expansion across the board and quite frankly, some pretty trying markets, particularly our commercial market reenergizing our innovation pipeline for some of our legacy businesses. And last, but absolutely not least is focused on our balance sheet and getting our debt levels to that 2x to 3x over the next few years. There's obviously -- there was a positive demand in the first half and it was more in a positive -- in the commercial business and the seasonality really got pushed back this year. But as I said, we are not going to focus as much on the demand is what we can do is on our controllables. So, we have institutional knowledge and foundation of balancing price and volume to maximize earnings in spite of demands. We've put processes in place for pricing. We've really focused on providing value for our customers. So we're going to continue to focus on the controllables. We still have work to be done but the organization is very focused on maximizing the shareholder value for all of you. And we really appreciate all of the support we've had in the market. So, with that, we'll close the call and we appreciate the time you've spent with us this morning.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.