Ladies and gentlemen, thank you for standing by, and welcome to the Cornerstone Building Brands Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the call over to Tina Beskid, Vice President of Finance and Investor Relations. Please go ahead.

Good morning, and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer; and Jeff Lee, Executive Vice President and Chief Financial Officer. 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 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. Throughout this presentation, management may also refer to pro forma financial results. Such pro forma results give effect to the completed acquisitions as if such acquisitions were consummated prior to the periods presented. With that, I would like to turn the call over to Jim.

Thank you, Tina. Good morning and thank you for joining us this morning. We hope you and your families are healthy and safe. Cornerstone Building Brands is committed to our customers in creating great building solutions for the communities we serve. As COVID-19 pandemic continues to create uncertainties, we remain deeply rooted in our core values. Safety is an essential part of our culture and we are focused on taking the actions necessary to ensure the health and safety of our employees. Now I’d like to turn you to Slide 3. Two years ago, we formed our company with a strong foundation of a business model that emphasizes commitment to our customers. We’ve developed a well-defined business strategy focused on driving profitable growth, leveraging operational excellence across our businesses and preserving our strong capital allocation framework. We operate our business with an ongoing commitment to sustainability from waste recycling and reuse programs to build long lasting, energy saving products and systems. We believe every home and building we create positively contributes to the community where people live, work and play. We are confident that our strategy will deliver long-term value to both our customers and to our shareholders. Now moving to Slide 4. We delivered strong results for the third quarter of adjusted earnings of $0.31 per diluted share in an all time high of 15.8% adjusted EBITDA margin. This is 160 basis points better than the same pro forma period last year on 5.5% lower net sales. This is the sixth consecutive quarter we’ve demonstrated our ability to generate year-over-year margin expansion, while navigating market volatility and the many other challenges brought on by COVID-19. As the largest manufacturer of exterior building products in North America, we’ve established leading market positions in many of our core product categories. Our…

Thanks, Jim, and good morning, everyone. We continue to deliver strong financial performance with another quarter of year-over-year margin expansion. On an adjusted basis, we generated net income of $39.4 million or $0.31 per diluted share, an improvement of 4% over the same pro forma period last year. Starting on Slide 9, the decrease in net sales was primarily driven by lower volumes. As Jim mentioned, the pace of recovery within the commercial segment is slower than what we are experiencing in the residential businesses. During the quarter and mentioned in on our last earnings call, we were subject to a ransomware attack, which impacted our ability to ship product for several days during the quarter. While we were able to recover many of our critical operational data and business systems in just a matter of a few days, the Windows segment was impacted the most. We delivered an adjusted EBITDA margin of 15.8%, a new all time high and increase of 160 basis points from pro forma prior year. This improvement reflects our success in effectively managing lower volumes and near term expenses, while executing on structural cost savings initiatives. We were able to favorably impact manufacturing, operating costs and lower SG&A. Our teams focus on executing our strategy of operational excellence has resulted in year-over-year adjusted EBITDA margin expansion for the sixth consecutive quarter. Overall, we have strengthened Cornerstone’s low cost operating model and enhanced our financial flexibility, which are critical for our company’s ability to grow earnings over the long-term. Now let’s look at our business segment results. Overall, financial performance from the segment’s were strong. Remaining focused and disciplined, we not only had margin expansion as a company, but delivered six consecutive quarters of year-over-year adjusted EBITDA margin expansion in all segments. Beginning with the Windows…

Thank you, Jeff. As Jeff just mentioned, we are committed to delivering strong operating and financial results through these unprecedented market conditions, and our near-term outlook continues to improve. We have taken a number of actions to significantly reduce leverage and strengthen our balance sheet, with a keen focus on our customers. We remain committed to the care and safety of our employees, our customers, and our enterprise. As we provide building solutions where people live, work and play. Now we’ll open up the call for any questions you may have. And again, we appreciate your interest in Cornerstone Building Brands.

[Operator Instructions] Your first question comes from Lee Jagoda with CJS Securities. Your line is open.

Good morning. So just starting with the price increases on the residential side, how should we think about those in terms of when they were announced versus when we should be modeling that they’re realized?

Great, Lee. Thank you for your question. As we’ve talked in the last couple of quarters, price discipline is really a core competency, say that I believe we have put into Cornerstone, not only in the residential side, but the commercial side. As we just mentioned, we’ve announced price increases across the board, both in Siding and Windows on the resident. Specifically to your question, those were put in the market this quarter, the fourth quarter, and we expect to be realizing those as we get into the first and early second quarter of 2021.

Okay. And then as I look at, housing starts and the projections for 2020, you guys are so obviously lagging that on the new residential side. And there’s significant pent-up demand, record backlogs, et cetera. Can you just remind us sort of the lag between the starts and when your product gets sold? And on the backlog, how far out does your current backlog and visibility kind of get you given how strong it’s been?

Great. On the lag, we typically lag out of the starts, residential starts anywhere from 90 to 120 days. Now that’s been because historic metric, we’re kind of in unprecedented time here. So we may even have a little longer lag when it gets back to the backlog you’re talking about and the amount of demand that we’re seeing. As you know, we really took a decisive action in March and April when COVID-19 hit. And then we had this sharp rebound on residential. So you may even see a little longer lag on the backlog, or on the housing starts to when we – it hits our businesses. If – just as a reminder, you have Windows, Siding and Stone really are on the backend of the construction cycle, when you build a build a home. Speaking of our backlog, as we said, it’s at historic levels now both primarily, Windows has a strongest backlog, Siding has a very strong backlog, and we’re expecting that to be worked out hopefully late first quarter, early second quarter.

Okay. Well, let me maybe just add a couple of comments on that as well. One of the things that we saw inside a third quarter in particular was the Windows or the ransomware that hit the company. And it was – it impacted all of our different segments, but in particular, it really had an impact on our Windows segment. And we estimate the timing of that, right? We don’t think that we lost a lot of orders, but the timing of that’s going to push, it increased our backlogs and it pushed it into fourth quarter, which will probably did continue into the first and second. But then the impact on that to about a week’s worth of shipments. So when you look at the Windows business in particular, and you adjust for that, right, it’s about a 5% impact on the Windows business. So we actually feel really good about our performance within our Windows segment. And that was just something we had to overcome as a company. We did it very nicely and we’re able to overcome that quickly.

That makes sense. Well, one more for me, I’ll hop back in the queue here. Just in terms of labor availability, obviously, that’s like the pain point in supply chain. Can you talk about how much additional labor you need to add to catch up with the current levels of demand and what you’re doing on the labor rate side to try to attract some new talent?

Yes, that’s been a big challenge. Obviously, it’s an industry-wide and we’re working diligently to overcome this really since July, we’ve increased our hourly headcount about 13% to 14%. We aren’t there yet, we’re – it takes time to get them trained and integrated and we really want to do it particularly in this environment in a very safe and responsible way with COVID-19. So that has taken a little longer, but we’ll – that’s an action that is important for us about safety of our employees. So we’re still working diligently. We have a recruiting – outside recruiting firm. We have all hands on deck and it’s still an issue. But we’re making progress. And we think our lead times right now are 2 to 2.5 times, our ideally times. But we anticipate to get that back in line sometime during the first half of 2021.

All sounds good. Thanks very much.

Your next question comes from Julio Romero with Sidoti & Company. Your line is open.

Good morning, everyone. On the ransomware attack in the five to seven days, do those sales get made up in the fourth quarter or do labor constraints, et cetera, kind of toggle how much you can make up? And should we think of that more as kind of a loss sale than a make-up?

Julio, it’s a good question. The push out of sales that I referenced from the third quarter into the fourth, it’s really customer specific as we kind of look at each one of those. We don’t believe that we lost a lot of revenue. We think it’s really just timing as they push. Now with the increased backlogs, just because of the re-recovery that we saw really inside the third quarter, which continues into the fourth quarter as well, those growth that we’re expecting in the fourth quarter on a daily basis, it’s hard to catch up, right? So we have the backlog and you’ve got lead times. It’s hard to catch up that revenue in that short period of time. But we do believe we’ll get it, right. It’s just a matter of timing. We communicated very effectively with our customers around the incident itself. And so they were aware of it and they plan for it accordingly. And so we think that it’s just timing.

Julio, if you look at the third quarter results with that ransomware that Jeff is talking about, you look from a top line basis. U.S. Windows would be up about 6% year-on-year.

Yes. No, that’s helpful. I guess on the free cash flow, I guess your guide, I think implies slightly lower working capital benefit in the fourth quarter than maybe in the prior year. Is there anything notable there? And do you expect kind of that benefit to come from inventory? Or would receivables or payables play more of a role in the fourth quarter?

Yes. The cash flow has been interesting for 2020. The pandemic has caused some shifts in timing. And let me talk a little bit more about that. If you look at 2019 first half, right? Our operating cash flow as a company was a use of cash of about $30 million. And if you look at our first half for 2020, we’re up $67 million. So our source of cash is $67 million. The real driver behind that is working capital, right? And so in the first half of 2019, we had a use of cash of about $90 million – about $89 million and then as we came into the first half of 2020, it was a source of cash of $4 million. So we’ve got almost a $100 million swing in cash flows. That I think is, is a combination of what we’ve been able to do as a company from a management perspective and also just the timing with the pandemic. So typically, we see our third and fourth quarters – or second and third quarters be higher than our first and fourth. But this year, it was kind of interesting. We saw that big drop inside the second quarter. And so that caused, the receivables in particular to have a source of cash. And then as we come back now with our growth rates coming in higher, we have that use of cash. So it’s a complicated question when it comes to how cash flows are flowing this year. However, as I stepped back and looking at it, one of the things we did is put priority on our customer service and the levels that we have within the company. And we backed off a little bit and that’s that $50 million guide that we had on working capital down to the $25 million guide. We’ll still see improvement. We won’t see as much improvement because we’re putting more focus on our customers, making sure we get the service requirements and we get down those lead times in the backlog that’s in place. One thing to note though, who knows you think about our working capital as a percentage of sales, the 13 month average, if you will. If you look at the end of 2019, we finished the 16.3%. And right now, we’re about 15.9%. So we have improvement on working capital and expect that to continue to improve, it’s not quite the levels that we originally expected with the pandemic.

Understood. And I appreciate the comprehensive answer. I guess, just my last question, I guess – a follow-up to that would be, I guess maybe stepping back from the fourth quarter and looking towards 2021, what would you kind of expect working capital to continue to be a benefit in 2021?

Yes. As Jim and I talked about in previous quarters, there’s an opportunity for us. We don’t think the opportunity is anything less than it was the beginning of this year. We’ve taken some of that benefit. We think it will continue. We talked about $100 million over a two year period. And we’ll pick up $25 million benefit this year, and we would expect next year to be back to that $50 million commitment, but the opportunity still exists.

Got it. Thanks very much. I’ll hop back in the queue.

Your next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

Great. Good morning, everyone. And thanks for taking my questions. I just wanted to start, looking ahead, how do you guys think about the volume for debt trajectory of your residential businesses relative to the underlying markets? I mean, obviously, the cost side has been a priority as of late, but how does, what looks like a really healthy residential backdrop perhaps change your philosophy or approach to those businesses?

Yes, thank you. That’s a great question. And really, our philosophy has not changed. We’re very focused on taking care of our customers, operational excellence, deleveraging our balance sheet. We’ve been very consistent on that and we will continue to do that. Our goal as we look into next year is really, we want to outperform the market with a value proposition. We think not only on the commercial side, but all of Cornerstone – but I’ll just focus on the commercial side, since that was your question. We’ve leading brands. We have customer – we deal with every major customer in each segment, the big box retailers, new residential, repair and remodel. So we have a customer reach that I believe sets us apart from our competition, our national footprint, as well as our innovation and new product development. So our overarching goal has not changed. We feel with operational excellence and getting our balance sheet in order, as we’ve been talking about. Our goal is to get our leverage to 2 to 2.5 times. And as we just indicated, we’re making progress in our commitment to our shareholders on that. But really our goal is, our value proposition is vast. We have leading brands in Windows and Siding. We deal with every one of the large customers and we think we’re really hitting our stride as we get into 2021. And our goal is to outperform the market.

Got it. Thanks for that. And just on the Q4 guidance, could you talk about some of the big drivers that you think about maybe going from the low end to the high end and then realizing you have less shipping days and perhaps a tougher comp on the commercial side. Do you expect the year-over-year trend in the top line in the Residential segments to continue to improve? Or do you think throughput manufacturing is still going to be an impediment to that?

So Kurt, as we think about the fourth quarter and our guide in particular, right, so we have $1.135 billion on revenue to $2 billion. And it puts the overall comparison versus prior year at kind of a 7% to 2% down on revenue. Now, keep in mind that does have those three less days from a fiscal perspective, if you adjust for that, we’re kind of more flat to growth, right? So we have growth that’s coming in and particularly on our residential businesses. When you think about the daily run rate that we’re seeing, we have growth coming in, in both Sidings and Windows, but that year-over-year comparison because of the days kind of takes it back down a bit. And then as we talk about our commercial business in particular, being stable with the run rates that we have, so we don’t see the market really improving much, and we don’t see it declining. And we’ve been around that 15% decline in the commercial business. And we think that’s probably appropriate as we think about the fourth quarter as well. As we talked about the operations in particular, we’re making improvement, right? So we were able to add quite a few individuals into Cornerstone inside of Q3. And we’ll get the benefits of those as those employees get trained. And as we start to move into production inside of our residential businesses and on the commercial side, we’ve been very, very diligent around making sure that we have the right cost structure to support the volume that we have. So we feel good about our position as we come into the quarter. And again, we’re going to feel that growth, right, from a volume perspective, we’re feeling that growth inside of our residential businesses. But we’ve been…

Got it. Okay. That’s very helpful. And then just lastly, on the Siding business. Some of your non-vinyl peers have posted some pretty strong growth numbers. And I’m just curious, how do you think about the risks there with substitution perhaps away from vinyl? And from a new product or marketing perspective, how might you look to combat that going forward?

Great. That’s a great question. We’re really excited about our Siding business. We are the only manufacturing industry that actually that’s reinvesting back in the business and new products that we are – we’ll be really announcing next year. We’re in the midst of building a new plant in North Carolina. We have all the large customers as I talked in one of the earlier questions about the customers, our Siding business does business with every major customer. There is 70% of our Siding business is in the U.S. is really repair and remodel. So we had a very unique value proposition in our Siding business. We believe and we see it’s a growth business. It’s regional as well. Very strong in the Midwest, the Northeast, but we’re also getting into areas where the darker colors and it’s a hotter climate. We have a new product called solar defense, which is a great product, that we’ve introduced into the market and has a great success. Our product also has ease of installation. So when you look at 70% of our business, our Siding business is repair and remodel. And the average age of a home right now is 40 years old. So we’re very busy, as you can see our backlog that we just talked about, and we’re really excited about the growth of our Siding business with new products coming into the market. Our customer reach, we have great customer relationships and really with our footprint on repair and remodel of a 40 year old home. We believe that there’s going to be a great 2021 for our Siding business.

Got it. That’s helpful. Okay. Well, appreciate all the details, gentleman. I’ll turn it over.

[Operator Instructions] Your next question comes from Matthew Bouley with Barclays. Your line is open.

Good morning. Thank you for taking the questions. On Windows, I guess one thing we’ve been hearing, is that windows supply broadly has been one of the tighter building products across the spectrum on this residential recovery. And of course, I hear you about the impact of the ransomware specifically in the quarter. But maybe if you could speak a little bit about this capacity increase, the timing of how that ramps, how quickly you can ramp that. And if there’s anything else besides the labor issue that it would take to work through that Windows backlog. Thank you.

Yes. Great. Matthew, let me just step back. We’re a really different company than what you’ve historically seen in the Windows business. We’ve consolidated atrium, silver line, ply gem. We have a broad network. We really professionalized our manufacturing with automation of S&OP, we were looking at better sales forecasting. So we really put a platform that we went on to be the best service provider for our customers. As I mentioned, we deal with all the large home builders, the big box retailers as well as the large distributors. But we’ve also – we know this labor issue is not going to go away. As we mentioned, we’re adding labor, we’re getting them into the mix here. But we believe really it’s automation. We have 21 automation projects completed to date. Some of them did slow up because of COVID-19. And if you just stepped back on a window line, typically a window line has approximately 30 associates on a window line, with the automation, which is anywhere between $3 and $5 million of capital. We can go from 30 associates down to approximately 16. So that is – obviously, it’s a less than a two year payback, but if you look at just from a productivity standpoint, it will allow us to get more throughputs out of the plants. Also with the recent investments we’ve made that we’ve mentioned at North Brunswick, we’re looking at approximately 350,000 units that will be coming out of that. And if you look at the average home has anywhere from say 12 to 15 windows per average home, you can do the math there. So there’s additional capacity coming out of our fastest growing product languages are 1,500 series. Along with that, it’s continuing to get labor into the business. So we’ll work in a few fronts, automation, these new window – these 1500 lines, but also getting the appropriate associates trained safely into the operation. So we’re going to work through this backlog. As we mentioned, we hopefully will have things done in normal state, by late first quarter, early second quarter. And as we continue to put more automation and get better on our S&OP process and also as I mentioned, we’re bringing in talent, that’s been there – done that in other industry. So this is not going to be a continual issue for us. We’re on it. This is our core competency. We know how to do this and we are going to continue to satisfy our customers.

Got it. Thank you for that color, Jim. Second one, on the margin guide for Q4. It does look like, as you mentioned, the EBITDA margins are higher year-over-year at the midpoint. But it does seem like the gross margin is guided down year-over-year. And clearly steel is inflating. I hear you that, that you’re lifting prices in the commercial segment. Is that mainly the driver or what else is kind of pushing those gross margins down in Q4? Thank you.

Yes. So Matt, a couple things around that. We are seeing the SG&A in particular, some of those costs are coming back. Did I talked about those near-term expenses that, we put on hold and we call them near-term expenses just for that reason, right? We put them on hold and some of those expenses are coming back now inside the fourth quarter and intentionally, right. That’s going to enable us to – for example, increase the wages for our direct labors inside of the cost of goods sold. So that we have more competitive wages out there, we can retain employees. We are seeing an increase inside of steel costs. And we put the price increases in effect for that as well. Typically, that’s a good thing for us, right? When we think about steel costs going up, it gives us the opportunity to – it gives us the opportunity to increase our prices as well. Our margins sometimes get a little bit more compressed with that, but we make more margin dollars on that. And so it is something that we look at. We’ve also just got some mixed within the businesses, depending on which segments selling more or less, and that’s driving some of it as well. But again, like you said, it is an improvement as we look at the EBITDA as a percentage of sales, we see margin expansion inside the quarter.

Got it. Thank you, guys.

Thank you. There are no further questions at this time. Thank you for participating in Cornerstone Building Brands third quarter 2020 earnings conference call. This concludes today’s call. You may now disconnect.