Ladies and gentlemen, thank you for standing by and welcome to the Cornerstone Building Brands First 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 conference over to your speaker today, Tina Beskid, Vice President of Finance and Investor Relations. Thank you. 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 Brand, 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 completed acquisitions, as if such acquisitions were consummated prior to the periods presented. Questions will be taken at the end of the prepared remarks.With that, I would like to turn the call over to Jim.

Thank you, Tina, and good morning. We appreciate all of you joining us this morning. We really hope you and your families are safe and healthy during these turbulent times.Today, I'd like to begin the discussion on the actions that Cornerstone Building Brands are taking to address this extraordinary situation, while uncertainty exists we are focused on the line to lead our company through this pandemic, stronger and we remain steadfast in our long-term fundamentals of our business.We've been focused on three key areas, the health and safety of our employees and our communities, servicing our customers, and maintaining a strong financial position with a keen eye on liquidity as well as cash flow and capital discipline. The health and safety of our employees and communities is our number one priority.The U.S. Department of Homeland Security has designated our industry as life-sustaining and essential. Our products are necessary for new home construction, critical home repairs in vital projects like hospitals and medical centers. We've taken extraordinary measures and invested in practices that help keep our employees safe at work.These actions include additional cleaning of our facilities, staggering crews, incorporating visual cues to reinforce social distancing and providing face coverings and gloves as well as implementing daily health validation.Many of our policies and practices have been deemed best-in-class by local assessors and had been used by other companies. I'm also very proud of the innovation that our employees have shown as they support one another in the communities, where they live. For example, our Middletown, Ohio plant is producing hand sanitizer to distribute to other plants that need this important product and at our innovation center our team's designed class face mask that are being shipped to other manufacturing sites.And finally, we've partnered with the National Association of Manufacturers donating safety…

Thanks, Jim and good morning everyone.I would also like to express my gratitude to our employees for their commitment to a healthy and safe working environment, as they continue to engage with our customers, suppliers and other partners.In light of COVID-19 our financial actions remain focused on cost reduction, cash preservation and ensuring near-term financial stability. Which will serve us well as we manage through this uncertainty and benefit the company as the markets began to recover.Starting on Slide 8. Pro forma net sales for the first quarter were $1.1 billion up 3.1% from pro forma net sales for the first quarter of 2019. Improved market sentiment across all segments, coupled with additional ship days drove higher volumes during the quarter. Price and mix were favorable as compared with pro forma in first quarter of 2019. As we continued our price discipline and further position Cornerstone Building Brands as both the market and industry leader in exterior building products.Pro forma first quarter adjusted EBITDA was approximately $98 million or 8.7% of net sales, which exceeded a top-end of our guidance range. We delivered 210 basis points of margin improvement. The third consecutive quarter of year-over-year expansion in all segments. Favorable price and mix in the Windows segment and Siding segments, coupled with favorable spread per ton in the Commercial segment generated $37 million of price and mix, net of inflation.As discussed during our call in February, we are now reporting savings net of cost as we remained focused on continuous improvement and lowering our overall cost structure. Offsetting these gains were high direct labor cost due to our readiness efforts to serve the previously anticipated second quarter seasonal demand increase.Additionally, compensation and other benefit costs were higher compared to the first quarter of last year because of the employee-related headwinds…

Thank you, Jeff.We at Cornerstone Building Brands are committed to our customers and to creating great building solutions. We've always known that windows matter and is a vital product category in our portfolio. Now during the COVID-19 crisis, you may have noticed the windows have quickly become even more important to our community. We are proud to offer products that are helping people stay safe and connected to loved one, as we face this pandemic.As I mentioned at the beginning of the call, the safety of our employees is our number one operating principle and transparent communication is a top priority. We are committed to keeping our employees safe.Today we discuss the actions we taken so far. Our current plans and our thoughts for our business as we move forward. However, the current dynamics are fluid and still evolving, it's impossible to predict what the ongoing impact will be. So we're going to remain flexible and adjust our responses as necessary. In terms of our financial priorities, we remained focused on improving our cash generation and managing the decremental margins.Our disciplined culture is committed to delivering margin improvement from a focus on operational excellence every day. I believe the proactive measures, we are taking and the strength in the long-term fundamentals of our business will enable us to emerge from this downturn even stronger.Thank you for joining us this morning and please stay safe and now we'll open up the call for your questions.

[Operator Instructions] And our first question comes from the line of Lee Jagoda of CJS Securities. Please go ahead, your line is open.

So can we start with the structural cost reductions. And then the near-term cost management. It sounds like on the cost reduction side, it's an incremental 20 to 40 versus, what we were originally kind of contemplating here. And then on the other - on the other piece that's more of a new item. Is there a way on each of those to break up the expected savings between cost of goods sold and SG&A?

Yes, Lee. This is Jim, just to kind of put it in context, if you recall, when we put the companies together to form Cornerstone, we had a three-year plan in 2018 we had $25 million of cost reductions, last year we identified and hit a $110 million and then as we said in our comments that for 2020, we have identified an additional $60 million, which obviously includes as some of the things that Jeff talked about SG&A, furloughs be layering the organization.So I just wanted to put that in context of, we don't want to lose sight of the fact of the cost reductions that we've committed to our shareholders with the combination of Cornerstone. So with that, I'll turn it over to Jeff. And he will give some additional color on our, as you say, some of the new cost reduction initiatives that we put in place, because of COVID-19.

Great. Thanks, Jim. So we - as we think about our cost-out initiatives. It's important to recognize that we have speedily and with a lot of actions, with the management team to make sure that we're taking out the cost appropriately managing through this crisis.We're starting at the top and just making sure people understand, how we're thinking about the business from a volume perspective. Before we look at the cost initiatives we're expecting the impact on margins to be about 30%. So as volume comes down, the volume would come down with a 30% rate.Now to offset some of those things we are taken some dramatic actions within the company to make sure that we have reserved liquidity and also that we're restructuring the company, so we can come out of this crisis in a stronger bolder and better position.So as you mentioned we have taken out short-term or near-term $40 million to $60 million of anticipated cost actions that will result in 2020. Now, these are - some of these are volume-related so as volume comes back, we would expect some of those costs to come back with that, such as some of the compensation, when it comes to sales engineers and the like travel expenditures is probably another good example, as you think about the list is coming off of traveling, going back in our meeting with our customers, those types of things will start to ease as we start to feel better about the situation.But more importantly, as we think about the structural cost reductions, the $80 million to $100 million of which you referenced $60 million of that was identified and communicate as we came into 2020.And so, those are permanent type of reductions versus the temporary ones that I mentioned above, and they include things like the back office rationalizations, manufacturing footprint consolidation of some of those facilities and many continuous improvement types of cost-out initiatives.So we're very proud of what we've been able to do as management team managing through this crisis, specifically you talk to answer your question as we think about cost of goods sold and SG&A for both categories the near term and also the structural costs, they are about 60% related to cost of goods sold and 40% coming out of SG&A.

Got it. And just switching to the segments, maybe if I can, within each segment and I appreciate the 30% decrementals EBITDA margin commentary in total - within each segment is there a way to either rank order or give us some more clarity by segment in terms of the - what the decrementals might look like?

I think as you look at the historical segment data that we provide. We do have gross margins by segment. And that's a great way to think about the different potential between the different segments that we have keeping it. Keep in mind there's about 10% fixed expense within our gross profits and so then you can kind of back from there. Into the variable margin of contribution margins that we would expect by segment.

Got it. And I just want to make sure I got your guidance. Right. So if I take your pro forma Q2 revenue that's in the back of your slide deck, you're basically saying that April was down 25% versus April of last year. And then for the quarter, we should expect it to be 25% down or better than that for the remainder of the quarter is that am I thinking about that correct?

Yes, that is accurate.

Okay. And then just a follow-up to that, is there anything you can comment on with regard to the last, the first two weeks of May versus April and whether that trends flattened or potentially gotten a little better as states start reopening?

Lee, this is Jim, that's a great question. We have seen some positive green shoots nothing to kind of ring the bell on, but we've started to see our bookings have improved. We're starting to see also in the retail segment with some of the stores having extended hours. The point of sale has improved, particularly in the last two weeks.And quite frankly with some of the states opening up in the Mid West, Michigan, Pennsylvania, Ohio, were job sites now are starting to get lifted. We, our customers are starting to replenish inventories. So we don't want this to be a false-positive, but it has - it has improved in the last couple of weeks.

Our next question comes from the line of Andrew Casella of Deutsche Bank. Please go ahead, your line is open.

And glad to hear you guys are doing well, to follow-up on some of the color on the second quarter, have you gotten the sense that, some of what you're seeing as an uptick in the last couple of weeks, if that's jobs that were previously booked, just finally getting - getting around getting those started or do you feel like demand is actually improving, I guess what I'm trying to get out there is, I guess implied in your commentary is that made in June will improve off of April. Just given that the ceiling is 25% and should be better than that for the second quarter, but curious if you have any additional color on that?

Yes, I really think it depends on geographic, where you are geographically in product segment, as I just mentioned, the states that are lifting in the Midwest is really positive for our residential business, particularly our siding business that's strong in that part of the world, where inventories are getting replenished, but also people are finishing up jobs. On the commercial side, there is still some limitations on how many people can be on jobs and that is a state by state, but we are in the traditional season as well. So jobs are trying to get finished up both residential and commercial, some inventories are getting replaced from our dealer standpoint.And then in our large retailers are as I said are expanding store hours from where they were a month ago and are also replenishing some inventories. So again it's there are some positive signs over the last couple of weeks, but we are - we are taking a conservative approach. We want to focus on the cost reductions that Jeff and I have alluded to, we have contingency plans if things don't improve, but this is a - this is a week-by-week initiative. We have a, this is a local ground game, as well.As you know counties can change, the Bay Area changes in California, almost on a weekly basis, which impacts our - our installed stone business, but there is some areas for example in the Minnesota area, where our business is quite strong for our Environmental Stone business, so it is very geographic, it's very, it's very product segment - product specific.And we have a, we've put in a - enrich the sales and operation planning process that we really look at not only housing starts and AIA and all the traditional metrics. But we're starting to look at what's happening from accounting standpoint and really what's happening with what states are coming back and our impact there. So last couple of weeks, there are some positive signs, but I don't want to say that, that is going to be permanent.

Okay, that's helpful color. And then clearly with you guys being hit by a resin, can you help us understand a little bit about the pricing environment, you're kind of net-net cost as we think about lower resin of the impact of lay on how you guys are kind of thinking about that flowing through that in the numbers?

Yes, it's a great question. So we did well with price increases inside of our residential business typically inside in the first quarter and it can bleed into the second quarter as well. And those - those announcements have gone out and we have begun to realize price similar to 2019. And so, we feel good about our pricing - pricing actions that we put in place and we feel good about our service proposition and the value that we have for our customers and they recognize the benefit that we have with our global manufacturing or national manufacturing footprint and our ability to serve our customers across multiple regions, especially during these type of environments.I think they appreciate the fact that we can - manage through these type of crisis in specific regions, where we have to slow down production or stop production we can shift that into different areas, and so it gives us a real advantage for our customers to - to not only ask for the price to get the price.From a commodity perspective, it kind of goes up and down, it depends on which business you're looking at. And also, the labor market depending on where you're looking at. You can see pressures coming in from that. So we are, right now we're assuming stable pricing across or stable costs across our commodities. And that does change on a very frequent basis and so we're monitoring that appropriately.

And then a final question for me, just on with liquidity and cash flow. So just - just to confirm the 118 of excess availability is that actually available, are there any springing covenants that we should be mindful of. And then also to the extent you guys seem like you'll be generating a bunch of cash flow just priorities as you think about it. I know you guys have done small bolt-ons in the past, obviously stuff is coming to become more attractive from valuation perspective, your debt is trading below face value. Just kind of curious how you guys think about it internally and capital allocation?

Yes. So, to your first question about the liquidity of sales. So we do have availability remaining on our asset-based loan revolving facility and there is no restrictions on that. And so it is, it is available to us today. It does modifying change based on the level of receivables and inventories that we have. So there's no restrictions on that amount and we feel comfortable that with liquidity we have in hand that we're going to be able to continue to manage through this without - without any issues specifically around the capital allocation, the way we're thinking about it.First of all, we'll continue to run the business to make sure that we've got the right investments going in around our maintenance capital and keeping our plants running and making sure we're as efficient as we can be. But we're going to continue to invest inside the company from a growth perspective to make sure we've got new products that are coming out and innovation, we're going to further continue to invest inside of capital projects that makes sense for the company and have good returns for our shareholders.So those projects are our first on our list as we think about capital allocation and then we'll think about things as acquisitions and debt pay down as other priorities for us, acquisitions obviously looking at those, that will meet our acquisition criteria which is very strict and then debt pay down is appropriate and we still have our guidance that we'd like to maintain, which is to get us to that 2% to 2.5% or 2, 2.5 times over the long run.

Our next question comes from the line of Matthew Bouley of Barclays. Please go ahead, your line is open.

I wanted to ask about the, the non-res backlog. I know you gave some helpful color on the verticals. I guess, if you can elaborate a little if the backlog is giving you any sort of go forward visibility. And I guess what are you seeing or hearing in terms of cancellations versus projects being simply postponed, so how's all that shaping up? Thanks.

Yes. Thank you. That's a great question. What we saw in early-April, we saw quite a bit of not cancellations, but push outs, we typically see push outs in around of the 10% range and they the push outs got upwards of 30%, 40%. That's come back down to a traditional, traditional zip code, but it really depends on the sub segment. If you look at e-commerce warehousing that business and that business is still very steady, but if you look at typically anything retail, office, commercial those jobs are will finish, but there is nothing on the book.So it really depends on where you are retail office is going to be challenge this year, warehouse is also that's going to be a positive in health care. So it really depends on where we play. We are seeing bookings have improved really in the last couple of weeks and the customers are really positive on the commercial side.They want to get their jobs finished, they're concerned if you're in the - the retail commercial side of the business, you're seeing things being stopped or pushed out. But if you're focused on data warehouses, E warehouses, things like some jobs like that there is quite a few jobs that are on the docket that we're chasing right now.So we're - we're being cautious about the commercial next couple of months, as we said in our comments, we are rationalized in our plant footprints, we're looking at - as we're looking at what is the best footprint to have from a - from a demand standpoint going forward to service our customers and also we're de-layering the organization to get really front and center with - with our - with our customers, with the decision makers.So it's a mixed bag some segments are going to be challenged, the retail segment, the office segment as I said, industrial manufacturing will be challenged, but health care, e-warehouse. We think there is some, there is some opportunities there.

Got it. That is very helpful, Jim. So I mean, the follow-up to that, I guess would be I mean, since there does seem to be such large variations in the verticals, are there - is there any sort of margin differentials for Cornerstone related to different product mix on those that we should be aware of, going forward on the assumption is that some of these trends might - might be persisting for an extended period? Thank you.

Yes, thank you. And there are definitely, we look at each segment, what the margin is in each segment and we've really balance as Jeff said, we balanced price and volume with looking at margins, quite frankly there are some jobs that we will pass on, because the - the margin profile, isn't something that we want to participate and we would rather have competition take a job like that. So we're very focused on the segments, the margins, not only on the commercial side.But we - we look at the same - the same pricing strategy on the residential side, by customer, by repair and remodel also by end used markets, so that is a really core competency that I'm extremely proud of what our organization has done over the last couple of years of really looking at the value proposition of Cornerstone, getting the value, where the price in volume, volume mix, how do you balance that and really it's extremely important, particularly on the commercial side, where you see our steel prices will be - have been moving down and we want to make sure that we balance price and volume with - with our cost structure, so we have processes in place, we have internal software that tracks our pricing we have pricing policy individuals that really monitor our pricing, our strategy here, and I'm really proud of the results that we've had over the last couple of years on pricing and I continue and will continue to be strategic on balancing price volume and margin as we go forward.

Our next question comes from the line of Zane Karimi of DA Davidson. Please go ahead, your line is open.

Two quick questions for you guys. Are we still planning to bring down debt by that three quarter to a full churn by year-end. And then also with the CapEx spend what percent, can we be attributing to growth focused initiatives versus like more maintenance?

Yes. So Zane, let me - let me talk about both of those. There are still lot of uncertainty right now around the forecast for 2020. And so it's very difficult for us to talk about, where the leverage ratio might be at the end of the year. And so we pulled our guidance on kind of full year and from because of that we also.We also want to make sure that we're not giving guidance right now on the leverage ratio that - that could be anticipated. We are looking at a lot of different scenarios that are out there, but at this time, we want to - we want to continue to make sure we understand the demand forecasting our volume assumptions before we - before we committed to that.Long term just to reiterate, long term, we're still committed to getting our leverage ratio beyond to that - to those low-twos that we talked about. And so that's the commitment we have. The second question on CapEx, it's a good question and we're focused as an organization, making sure that we put the priority on the projects and the things that will create the most value for the company.We have about $30 million to $40 million worth of maintenance CapEx as a company and that's just to kind of keep things running, keep our equipment up and fresh and making sure, it's sufficient and keeping it safe for our employees, and so that will continue, right? And we'll make sure that we're investing those dollars appropriately for the business. And then the rest of the CapEx, we really prioritize, right? It's a real process we go through as an organization to make sure that we're putting those projects that have growth in front of them first and making sure that we are investing appropriately, so that we can continue to maintain organic growth rates within the company.And then second, we look at those projects they have the highest return on investment or for the safety of our employees, right? And so we balance those to make sure that we're appropriately - appropriately managing that, that spend that we have.

Thank you. And then can you talk about any pockets in the U.S. or even Canada that have experienced greater COVID impacts with regards to customer demand?

Yes, obviously, the first outbreak was in the Washington - State of Washington and they - the state seem to get on that pretty, pretty extensively rates, really the Northeast is obvious, everyone watches the news, it's a New York, New Jersey area. Also we've seen some hot spots in Atlanta and Dallas, where there have been some operates as well. But really, really the key area. And I believe, almost half of the cases are in that New Jersey, New York area.And I will say, I am extremely, extremely proud of the job that our entire team has done on the safety of our employees. We've been told by outside experts it's industry leading. We've been very aggressive about deep cleaning our facilities, doing temperature checks of all of our employees, mask when there is any doubt of its safety or volume or we lean on the safety side, safety is a core value of Cornerstone and it's something that we swung into action, as Jeff said in his comments, very decisively, proactively, we have a crisis management team that is led by the senior management team that of the company we meet sometimes not only on a daily basis.But in an hourly basis, particularly in April, when things were changing so fast, you saw just, it was a state-by-state, county-by-county ground game that we jumped into this and I think everyone on this call and I'm so proud of our employees at our plants that, that have gone there every day, they are our front-line heroes, but also what we've done as having the safety of our employees and our customers to get through this terrible crisis.We feel we're maybe in a little bit of a stabilization in the middle of this crisis. We've gotten used to this thing, but every day something changes, we are going. We have contingency plans as Jeff said depending on if demand gets worse, but also we've talked a little bit, if there is some greens - green shoots, where there are sort of sustainable volume increases and what's great about Cornerstone is our extensive national footprint.But we can, if we idle our plant for deep cleaning, we can put that production in other plants and I'm proud to say that we have done a really super job and our customers have said this of servicing our customers with under undistributed service here over the last six weeks, and we continue to, we plan to continue to do that.

Our next question comes from the line of Richard Kus of Jefferies. Please go ahead, your line is open.

Most of my questions have been answered here, but just quickly on the decremental margins that 30% that you're talking about, does that already include the benefit from the near-term cost saves that you plan to get or would you end up running that through and then you end up getting the near-term cost saves that offset some of that impact?

Yes, Richard, I appreciate the question on that and clarification. So the 30% is pre-actions, right? So take the volume assumptions whatever assumptions, you may have and bring it down by 30% and then add back those different near-term and structural cost benefits to get to a revise decremental rate.

Got you. That makes sense.

And Richard maybe just talk a little bit about history, and we've done a lot of work in a lot of analysis around this as well. Going back to 2019 was a good example of what we've been able to do, right? So from 2018 we finished our EBITDA margins at 10.6% and in 2019 we increased at a 130 basis points to 11.9% and that was a - it was really a couple of things that drove that, right? We talked about the price strategy that we had and net of - net of some of the inflation.But we also communicated that we had about $110 million or we did have a $110 million worth of cost out inside of 2019. So it's a nice comparison as you think about the additional cost out that we're taking now and you go back and look at 2019. I think you can help a lot of people understand the value that comes from these cost out initiatives that we're embarking upon.

For sure. And then in terms of the 40 to 60, how much of that impact do you think you can get through the numbers in Q2 alone?

So estimating about $10 million from the 40 to 60. And we, as Jim said, and we both commented on. We are pretty quick in making decisions around the end of March, as we start to see things turn a little bit south and so we quickly put a lot of these things in place to make sure we were maximizing liquidity and preserving as much profit as we could.

Got it. Okay, that makes sense. And then lastly for me, in terms of working capital savings you expect pretty impressive number there, how do you see the breakout between receivables, payables, and inventory? Where do you see the most opportunity?

Yes. So we're going to continue with our strategic objectives around working capital management, we have put as we talked about last year $50 million on working capital improvements coming from inventories, payables and receivables. Our primary working capital we're going to continue with that, right?So it's one of the things that we haven't slowed down on, it's a focus for us as a management team, and as a company to make sure that we've got the proper amount of inventory in particular to run the company and service our customers appropriately, we put in a lot of effort around our sales operating planning process within the company, which has enabled us to have better visibility into the customer demand anticipate what might be happening and then putting our inventory levels appropriately to make sure we hit the service levels that our customers require of us.So we haven't taken any focus off of that. In addition to those things we will continue to see a little bit of the recent trends inside the first quarter with some of the lower steel costs that are coming in, that has a benefit on working capital and then some of the volatile volume assumptions that we've seen as of recent also have some contributions to working capital.

And our last question comes from the line of Andrew Casella of Deutsche Bank. Please go ahead, your line is open.

Hi, thanks for taking the follow-up. I apologize if I missed this, but did you guys indicate what type of impact you were seeing at the tail end of March. I mean obviously you guys had a really good first quarter, but just curious if you start to see headwind showing up towards the end of the month or that was more of a second quarter?

Yes. It really - it really started right after St Patrick's Day, it was mid-March the month of March was down about 5%.

Okay, great. Thank you so much.

Thank you ladies and gentlemen, this is all the time that we have for Q&A. This concludes today's conference call. Thank you for participating. You may now disconnect.