Cornerstone Building Brands : Earnings Document

Corrected Transcript

12-May-2021

Cornerstone Building Brands, Inc. (CNR)

Q1 2021 Earnings Call

	Total Pages: 19
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Cornerstone Building Brands, Inc. (CNR)	Corrected Transcript
Q1 2021 Earnings Call	12-May-2021

CORPORATE PARTICIPANTS

Tina M. Beskid	Jeffrey S. Lee
Vice President-Finance and Investor Relations, Cornerstone Building	Executive Vice President, Chief Financial Officer & Chief Accounting
Brands, Inc.	Officer, Cornerstone Building Brands, Inc.
James S. Metcalf
Chairman & Chief Executive Officer, Cornerstone Building Brands, Inc.

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OTHER PARTICIPANTS

Lee Jagoda	Kurt Yinger
Analyst, CJS Securities, Inc.	Analyst, D.A. Davidson & Co.
Julio Romero	Matthew Bouley
Analyst, Sidoti & Co. LLC	Analyst, Barclays Capital, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Cornerstone Building Brands 1Q 2021 Earnings 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. [Operator Instructions]

I would now like to hand the conference call over to Ms. Tina Beskid, Cornerstone Building Brands' Vice President, Finance and Investor Relations. Please go ahead.

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Tina M. Beskid

Vice President-Finance and Investor Relations, Cornerstone Building Brands, Inc.

Thank you. Good morning and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer; and Jeff Lee, Executive Vice President and Chief Financial Officer.

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 those non-GAAP financial measures and other related information in the earnings release and investor presentation located in the investor section of our website.

Any reference in our discussion today towards EBITDA means adjusted EBITDA and any reference to prior year period means the prior year pro forma period. Please note, we will be referencing our investor presentation throughout today's call.

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Cornerstone Building Brands, Inc. (CNR)	Corrected Transcript
Q1 2021 Earnings Call	12-May-2021

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 results give effect to completed acquisitions as if such acquisitions were consummated prior to the periods presented. With that I would like to now turn the call over to Jim.

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James S. Metcalf

Chairman & Chief Executive Officer, Cornerstone Building Brands, Inc.

Thanks, Tina. Good morning and thank you for joining us. We are excited about 2021 and our solid first quarter start. I'm proud of the outstanding job our team has done to successfully manage through a dynamic market environment and capitalize on strong market conditions. Our commitment to execution and value creation for all stakeholders resulted in record net sales and EBITDA growth. Demand for residential products were strong during the first quarter. Overall company net sales increased approximately $145 million or 13% over a healthy prior year as a result of volume growth and price.

Volumes were 9% higher despite three fewer ship days and the weather impacts in the South. Volumes from Windows and Siding segments were 16% better than the first quarter in 2020. Also, on a comparable ship day basis, residential volumes were favorable by more than 20%. Steel prices are at a record high, which we believe is partially influencing our demand within the Commercial segment. As we discussed during the last call, the rate of incoming orders has accelerated as customers try to get ahead of further steel increases, pulling some demand forward. As a result, volumes were slightly favorable to prior year on a comparable ship days basis.

In addition, our team achieved record first quarter EBITDA of $139 million, a 42% improvement over last year exceeding the top end of our guidance range. Our sales, supply chain and operations team have done an excellent job leveraging our scale, agility and our customer relationships. Successfully navigating through the demand-related challenges, they worked closely with customers and suppliers to increase availability and ship more volume. We continued to successfully deliver margin expansion in the quarter.

EBITDA margins were 11% of net sales, a 230 basis point improvement over the prior year. This is our eighth consecutive quarter of year-over-year EBITDA margin expansion in all segments. We are focused on our strategic priorities of profitable growth and operational excellence, which include safety, quality, continuous improvement and our commitment to elevating the customer experience.

As a result of our stronger earnings and financial discipline, we reduced the net debt leverage ratio to 4.6 times, approximately a half turn better than the first quarter of last year. Jeff will be providing more details around our recent actions to strengthen our balance sheet and advance our capital allocation strategy. Overall, these record results demonstrate our ability to leverage our scale and our market leadership to capture the strength in our end use markets. Now turn to slide 4.

The residential momentum continues to be strong with solid underlying fundamentals that support long-term sustainable growth. March US housing starts totaled 1.7 million units on a seasonally adjusted basis. Repair and remodel activity also remained robust in the first quarter, supported by rising home equity, high personal savings rates and a limited resale inventory. With these encouraging tailwinds, our residential market outlook is very favorable. The April incoming order rate is approximately 20% higher than last December and over 15% higher than April of 2019. The pace of recovery coupled by industry-wide labor shortages and supply chain disruptions have caused extended lead times and growing backlogs.

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Cornerstone Building Brands, Inc. (CNR)	Corrected Transcript
Q1 2021 Earnings Call	12-May-2021

We continue to attack these challenges and remain focused on our service value proposition, solidifying our position as the partner of choice for our customers. We've also been actively investing in new product offerings in process automation that will generate profitable growth over the long term. Additionally, these investments are helping to expand our national footprint and strengthening our customer value proposition. For example, we're investing $10 million in our Sacramento, California Windows facility. This investment will enhance our West Coast presence, position us to capture more market share and increase our capacity by approximately 50%.

As I mentioned earlier, the outlook for the commercial market is improving, and we believe we're positioned for growth. The Architectural Billing Index reported positive growth for the month of March, reaching its highest point in over a decade. This is a positive indicator of future commercial activity. And as a reminder, low-rise commercial construction projects typically lag residential markets by approximately 18 to 24 months. We're also experiencing a strong pace of incoming orders across all products within the commercial business and backlogs are starting to rise. We feel that the continued rate of steel costs increases have accelerated market demand.

While demand is strengthening, challenges exist on the supply side, particularly as I mentioned steel that's impacting our business. Supply shortages due to demand and curtailed production have resulted in some supply chain disruptions and rising input costs. Our team is committed to meeting the needs of our customers, and we have plans that leverage our scale and flexible manufacturing footprint to maximize service, which has led to increased costs throughout our network.

In response to this inflationary environment, we are continuing to take price actions across all of our businesses. We are committed to price discipline and expect our actions will offset inflationary cost impacts over 2021. However, margins will likely be slightly compressed in the second quarter. We feel we're taking the necessary actions to combat these cost increases.

We continue to lean into our continuous improvement culture to help maintain our strong profitability and track record of margin expansion. During the quarter, we made advancements towards being a cost advantage manufacturer and achieved approximately $25 million of structural cost savings. We're on track to realize our cost savings target of $75 million to $80 million for 2021, strengthening our manufacturing footprint.

Our improved cost structure and liquidity positions us to take advantage of the improving market sentiment. This includes making balanced investments in key growth areas to ensure we are deploying capital where we can drive the greatest long-term returns for our shareholders.

We have advanced our strategy towards profitable growth and operational excellence with the acquisition of Prime Window Systems headquartered in Denver, Colorado. This acquisition strengthens our market leadership position in windows and doors by expanding our West Coast presence and our product portfolio with new product offerings in structures up to 15 stories. I'd like to welcome the Prime Window Systems team to the Cornerstone Building Brands family.

We also took actions to improve the company's capital structure. We've refinanced all of our credit facilities, and Jeff will provide more detail in a moment. These actions strengthen our balance sheet and provide a meaningful opportunity to advance our strategic priorities for growth.

Now, if you could turn to slide 5. We're excited about the growth opportunities ahead of us. Our 2021 priorities of advancing our strategy, elevating the customer experience, operating with excellence and maintaining our financial discipline are positioning us for sustainable growth and value creation.

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Cornerstone Building Brands, Inc. (CNR)	Corrected Transcript
Q1 2021 Earnings Call	12-May-2021

We will continue to advance our strategy by investing in innovation in targeted acquisition opportunities like Prime Window Systems. We have a well-defined product innovation process that is centered around reducing complexity, offering better-performing products such as lighter materials with easy installation with an emphasis on labor savings for our customers. We remain committed to elevating the customer experience. We pride ourselves on maintaining strong customer relationships, delivering exceptional service and being the partner of choice.

As Jeff and I have mentioned on each call, we are committed to maintaining financial discipline and reducing our net debt leverage ratio by three-quarters to one turn this year through higher earnings generation with our ultimate goal of 2 times to 2.5 times in the future. By staying focused on our priorities, we expect to grow our market leadership and deliver long-term value for all of our stakeholders.

Now, I'd like to turn the call over to Jeff.

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Jeffrey S. Lee

Executive Vice President, Chief Financial Officer & Chief Accounting Officer, Cornerstone Building Brands, Inc.

Thanks, Jim, and good morning. Our relentless drive for exceptional results led to another quarter of record earnings and year-over-year margin expansion. We continue to deliver strong financial performance by leveraging our national scale and expansive product offering, which highlights the strength of our business model.

Starting on slide 7, net sales were approximately $1.267 billion, 13% higher than pro forma prior year, reflecting continued strength within the residential end markets and improved pricing in response to rising commodity and other manufacturing costs. There were three fewer ship days in the fiscal first quarter of 2021 compared with 2020. Adjusting for the difference in days, net sales were 18% higher than the prior year.

We generated $139 million of adjusted EBITDA, $41 million more than the pro forma first quarter 2020, driven by $29 million from higher volumes. Adjusted EBITDA margin was 11%, an increase of 230 basis points from pro forma prior year. This improvement reflects our success in effectively managing through a dynamic raw material environment, while staying disciplined on executing our strategy towards profitable growth.

Across all our segments, production constraints for commodities such as PVC resin, steel and aluminum have driven steep cost increases. In response, we have raised prices across our portfolio, mitigating substantial impacts to our financial results. At the end of the first quarter, inflation cost did outweigh price by approximately $5 million, inflationary increases are occurring at a steeper rate and continuing longer than originally anticipated resulting in a time lag between when the costs are incurred and the offset from revenue. We expect price mix to offset inflationary impacts through the cycle.

Additionally, as previously communicated the impact of price offsetting inflation slightly compressed gross margins. Despite the margin headwind, we were able to deliver our eighth consecutive quarter of year-over-year adjusted EBITDA margin expansion across all segments. Operational excellence is fundamental to our business model and market leadership position. We continue to transform our cost structure and improve the way the work gets done. During the quarter, we realized approximately $25 million of structural savings, which helped to mitigate additional cost we incurred to serve our customers, such as expedite freight and overtime. As a result of our ability to consistently deliver on our cost savings initiatives, we were able to favorably impact manufacturing operating costs and SG&A. We are on track to deliver $75 million to $80 million of operational improvements in 2021 with over 70% of the savings targeted in cost of goods sold.

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