Ladies and gentlemen, thank you for standing by and welcome to the Cornerstone Building Brands Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Tina Beskid, VP of Finance and IR. 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 filed 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 Investor 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 acquisition as if such acquisitions were consummated prior to the periods presented. On August 9, 2020, the company detected a ransomware attack impacting certain operational information technology system and immediately launched an investigation, notified law enforcement and engaged the services of specialized legal counsel and other incident response professionals. As of today, we have recovered many of our critical operational data and business systems. Although the company is in the early stages of assessing the incident based on the information currently known, we do not expect the incident to have a material impact on our business, operations or financial condition. The company carries insurance including cyber insurance, which we believe to be commensurate with our size and nature of our operation. With that, I would like to turn the call over to Jim.

Thank you, Tina. Good morning and appreciate you joining us today. The COVID-19 pandemic emerged with unprecedented challenges. Yet, the Cornerstone Building Brands team rose to the occasion and delivered solid operational and financial results. Rooted in our core values and cultivated by our safe work environment, our team served our customers, kept each other safe, drove structural improvements, and strengthened the financial health of the company. Challenged with a significant decline in market demand, we took advantage of our national footprint, product breadth, and deep customer relationships to provide uninterrupted service and high-quality products to our valued customers. Leveraging our continuous improvement culture, our team was able to deliver $50 million in cost savings from structural improvements and effective near-term expense management. Overall, we have improved our profitability even in these turbulent times. We delivered adjusted earnings of €0.34 per diluted share and approximately 15% adjusted EBITDA margins which is a 130 basis points better than the same pro forma period last year. And for the fifth consecutive quarter, we have delivered margin expansion in each of our business segments. As the leading manufacturer of exterior building products in North America, we are uniquely positioned to maximize our business model and manage through this current environment. As an essential business, all of our manufacturing facilities, distribution centers and installation services were operating throughout the quarter. Now turning to Slide 4. We continue to focus our operating model on three key areas, the health and safety of our employees, servicing our customers, maintaining a strong financial position with a keen eye on liquidity and capital discipline. The health and safety of our employees remains our number one priority. We've taken extraordinary measures and invested in practices that have kept our employees safe at work and many of these policies and…

Thanks, Jim, and good morning, everyone. The Cornerstone Building Brands' business model is built on a strong culture of continuous improvement and proven execution of our strategic priorities. During the quarter, we took decisive action to align our cost structure with declining volumes and safeguarded liquidity. I'm pleased to say that these actions helped Cornerstone prove its resilience and deliver a solid financial result despite the challenging environment caused by COVID-19 pandemic. Starting on Slide 10, net sales for the second quarter were down 17% from pro forma prior year primarily as a result of lower demand across all segments due to the COVID-19 pandemic. As Jim mentioned, for most of our businesses, April was the low point. As stay-at-home orders were lifted and safety measures implemented on job sites, demand began to recover resulting in sequential improvements in May and June. We delivered an adjusted EBITDA margin of 14.7%, the highest margin in our company's history with an increase of 130-basis-point improvement versus prior year. This improvement reflects our success in effectively managing decremental volumes through near-term expenses while executing on structural cost savings initiatives. We were able to favorably impact manufacturing operating cost and lower SG&A. Our team's focus on executing our strategy of operational excellence has resulted in year-over-year adjusted EBITDA margin expansion for the fifth 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. Although, we had adjusted EBITDA margin expansion of 130 basis points, we did see reduced demand for higher margin products in the commercial segment, driving negative mix of approximately $14 million that is included in the pricing net of inflation. We continue to see net price of inflation across all our business…

Thank you, Jeff. The safety of our employees is our number one operating principle and transparent communication has been a top priority. I'd like to acknowledge and thank our employees working in all of our manufacturing plants and throughout our entire organization for their unwavering dedication and commitment to serving our customers and adhering to our safety guidelines. As we continue to successfully navigate the challenges brought on by the COVID-19 pandemic, our actions remain rooted in strategy. We are committed to innovation and investing in new product offerings that will generate profitable growth in the future, which is a key element of our strategy. While managing costs and generating additional cash are important areas of focus, we have not lost sight of the need to continue to invest in our business for the long term. We fully intend to emerge from this pandemic an even stronger company, better positioned for success, and long term profitable growth. This ends our prepared comments and now we'd be happy to take your questions.

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

So, I guess, we started last quarter with you giving us the sort of April down mid 20s and then earlier on the call you gave us some clarity on how June shaped up on the residential side. Can you talk about the Commercial side in June and then also just by segment trends you’re seeing in July?

Yes. Let me give you a couple global comments and then I’ll turn it over to Jeff. July, the trends continue to be strong, a strong backlog in July both on the residential side and we're starting to see stabilization on the Commercial side. If you look at the Commercial bookings and backlog, as I said, the backlog is low-single digit for Commercial and we're seeing sequential improvement in our back - our bookings from the second quarter. So, we feel, Lee that the Commercial business has stabilized. The overall market has stabilized. We feel steel costs have also stabilized even though at low levels. And we, on the Commercial side, we're still cautiously optimistic about the third quarter and margin expansion continues to be a focus that we have in the business.

Lee, as you think about the month of June itself, you can see from the change in July, it has significantly improved. The month of June was down about 25% for the Commercial segment.

And then just following up on the Commercial side, you've done a really good job holding on to price, you know, excluding the mix issues that you’ve seen in the face of both lower raw materials and soft demand. How should we think about this, you know, I guess pricing over the next couple of quarters just given the demand environment? And would you continue to expect EBITDA margin expansion in Commercial in Q3?

That is our focus, our margin expansion. Price has been under, really under pressure most of this year. And as you mentioned, we have a pretty good track record of balancing price and volume with the fluctuation in cost that we've seen really over the last five quarters. So, pricing, we feel has stabilized even though at a low level. And we're very focused not only on balancing price and volume to expand our margins, but really focus on our plan efficiencies and also cost-outs in the commercial business. We've de-layered the organization. We feel that we've lowered the overall breakeven of the commercial business, and we're really focused on margin expansion into this quarter.

Okay. One last one for me and I'll hop back in. Just on the residential side as it relates to pricing. In Q1, I think you had mentioned you put in around the 5% price increase and we were waiting to see what would ultimately stick just given the environment we were entering into. Any update on what actually has stuck and what you expect for the rest of the year?

Yes. We put in price increases in our residential business late first quarter. That really took effect late in the first quarter and really, impact in the second quarter. So, we've been pleased with our price performance on the residential side. Again, we think that's a core competency that we have as Cornerstone. And with the strong volumes that we're seeing, pricing is pretty solid at this point.

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

I guess my first question is just on the backlog. I know you mentioned backlog for siding and windows were up 55% and 40% year-over-year. Can you just talk to the mix in that backlog maybe from a good, better, best perspective for both siding and windows?

Yes. If you look at our overall residential business, the mix is about 50/50 new res versus repair/remodel where the siding business has that heavier percentage on the repair and remodel market.

And I guess you mentioned on the commercial side, 25% of your sales are coming from the warehouse end market which continues to be strong. Could you maybe give us a sense of our end market breakout at the moment? I mean warehouses maybe compared to office, retail, manufacturing?

Yes. That’s a great question. One of the advantages, we've talked a lot about diversification of the overall Cornerstone portfolio of repair and remodel, new commercial and new residential. We haven't talked a lot about the diversification we have in our commercial business. We actually participate in each one of the end-used market that are five stories or below. Right now, as we said warehouse is strong with the data centers and e-commerce, that’s right now making up about 25% of our business. But we stayed really closed to our customers and whatever end-used segment shows growth or potential, our customers really gravitate to that. Right now, it’s the warehouse data centers where there is a mix. You aren’t seeing a big, a strong demand on office and retail. So, the advantage we have in our commercial business, we don’t have one of this MU segments that were completely focused on or it’s really our base business. So, we’re really spread out on anything that’s five stories under and our customers stay close to what are the growth opportunities. Along with that, there's a trend that people have started talking about with COVID-19 and going out to the suburbs and with getting out of the urban centers, and we think that also a long term plays well with our diversification of our commercial business where smaller commercial business, five stories or below will be - could be built around suburban areas.

Understood. So, you may be sticking more to five stories and below unless you may be more nimble and able to adjust your business not necessarily tied to one specific end market.

Absolutely. That’s very well said and that's why we think. That’s a great advantage for us.

Okay. And I guess just last one for me to hop back to Windows, have dealers rebounded there and can you maybe speak to the strength you’re seeing in that channel in July?

Yes. Our customers are quite busy. They're - we really watch the inventory levels of our customers. As you know, COVID-19 customers kept inventories very tight with the rebound in commercial. It hasn't been an inventory rebuild. It's been flowing through. We also follow the point of sales for a lot of our retail customers which has been quite strong and continues to be very robust as we speak. So, our dealers and customers are flowing through the products. The only areas that were a problem a few months ago is when job sites were being stopped. Those have opened up. And right now, it's a very positive.

Your next question comes from Richard Kus with Jefferies. Your line is open.

Thanks for taking my question. So, just to talk a little bit more about the Commercial business and the backlog there. One of the things you mentioned in your comments is that you've kind of, you know, moved from a negative mix standpoint to some of the lower complexity type business. As you look at your backlog that you guys have, is that something that persists in the backlog? And then what does it take to get some of that, you know, better higher margin business back?

Well, the - in a higher margin business, really, if you look at that, it's more on the IMP business, our insulated metal panels business, which has gone from higher end architectural business which has slowed. And those jobs have been paused even at the architectural level to jobs like cold storage, which has shown growth within the IMP segment. And that is a price mix, the price and product on the high end. Architecture is much higher than the cold storage. Also, we're seeing from a building standpoint, the lower complexity buildings which are, you know, basic warehouses, lower complexity buildings which come at a lower price point in the segment. So, it's really the overall demand. We need, you know, private capital spending to start up again, which will - which should help and really, there's still a lot of unknowns there as well.

And then just in terms of the backlog itself, how far does that extend out? And then, is it really hard to have visibility later this year because, obviously, some of the indicators on the commercial side weren’t great for a long period of time there during this last quarter? So, I think people are concerned that maybe late this year or early next year, you hit a bit of a soft spot. How do you guys view that?

Depending on the complexity of the building, the lower complexity of the building, you’re looking at 90 to 120 days.

And then, last question for me on the cost take-out side of things, you guys did a great job in the quarter. It looks to me from the bridge that you got about $45 million cost take-out there. How much of that benefit that you ended up getting an EBITDA, represents a permanent cost take-out versus some of the more temporary items?

Yes. It's a great question. We've been focused on both. Obviously, with the uncertainty inside of Q2 and even the forecast going forward is there was just a lot of uncertainty in the marketplace, we've been making sure that we're managing both the structural side permanent reductions and also those near-term expenses for liquidity purposes in particular. And so, as you look at - as you look at Q2, about 50/50 of that was kind of split between structural and near-term expenses. And as we look forward into Q3 and Q4, as volume comes back as we talked about last time, we would expect some of those near-term expenses to come back as well. It would be a very positive thing. Right? And even as Jim mentioned, inside of some of the conversations around labor and some of the issues that we're having with labor right now, we have gone out and increased some of our wage expenses for our employees to make sure that we keep the retention there. So, some of those near-term expenses are coming back into the company as we predicted and that’s a good thing as volumes are coming back, as structurally, we’ve taken out those. Year-to-date on structured cost out, we’ve taken out $50 million so far inside the company and that’s coming through a lot of different initiatives that are in place with automation. It’s coming through some of the plant closures in the footprint rationalization that we’ve gone through and there’s still more to come, right? There's another projects that we're working on right now.

Your next question comes from Matthew Bouley with Barclays. Your line is open.

Thanks for taking the questions. I wanted to ask about that backlog acceleration in windows and siding, and I hear you mentioning potentially some labor issues there. I guess, are there production issues overall that are sort of preventing you from fulfilling orders there and maybe if you could reconcile that large backlog acceleration, the up 40% and 55% kind of with the revenue guidance for a year-on-year decline in Q3. Thank you.

Thank you for the question. Really, it gets down to very - to knock that backlog down. It’s very simple. It’s bringing in the labor. As Jeff just mentioned, we have labor shortages. We put in initiatives. We've talked about the wages. We put in internal marketing, retention bonuses, recruiting. We're very aggressive about bringing the labor in. Our biggest area is our windows business of having the appropriate labor. So knocking those big backlogs down really, really, equates to bringing back the labor with this quick turnaround. That is why also we talk a lot about automation. Automation is critical because this labor shortage is not going to end in the very near future. So, our strategy is to investing a large percentage of our CapEx budget to automate not only our windows plant but our siding plant, the commercial pant because just overall manufacturing bringing back the hourly employees at this time has been very difficult. The CARES Act and in some of the - some of the government stimulus package was impacted that. Just the COVID-19 overall issue has impacted it, but we are extremely [technical difficulty] we get the labor, we can shift the backlog.

And Nat, just to follow up a little bit on that as well. As we kind of came into the months of April - March and April, we were putting the brakes on, right? We're really slowing down things in anticipation of what might come with the sudden shutdown type of scenario. And then as we get into the May-June time frame in particular in our residential businesses, window and siding, it is completely reversed, right? And so, we went from putting on the brakes and stepping on the gas and trying to get as much production as we can. It's not a capacity issue for manufacturing when it comes to equipment. It is that labor component that Jim talked about. And that’s all effort right now put in place to make sure that we have that. And we've seen some improvement there. Some of the actions that we've taken with the wage increases and modifications of hiring practices, et cetera have allowed us to increase that and to get more wage or more value to employees back into the organization.

And then secondly, just I guess it’s kind of a segue from that but also on the Q3 guide. Since you're guiding the margin expansion - EBITDA margin expansion but with gross margins perhaps down at the midpoint and correct me if I'm wrong. You know and I hear you that there's going to need to be some cost coming back into the system but clearly that margin guidance suggesting that there's a fair bit of SG&A control into the quarter. So, maybe if you could just put a little more color around SG&A dollar expectations. What costs are coming back and kind of what level of confidence is there that you know the SG&A side is really going to drive this EBITDA margin uptick? Thank you.

Yes Matt, let me take that question. A couple of things, right? When you look at it on a year-over-year basis, we are seeing a slight downside to gross profit margins. But on a sequential basis, they continue to move up. And as we thought about that on the lower end of our EBITDA margin range, it's still a 50 basis point improvement versus prior year. And on the high end, it's 150 basis point improvement. It shows that that volume benefit that we get as a company as volumes come back and the operating leverage that we have around that. We are being very cautious on SG&A expense, right? We want to make sure we don't know - there's still a lot of uncertainty and we want to make sure that we're acting appropriately until we can fully see our way through this pandemic. And so, because of that, we are keeping a lot of the controls very tight around our SG&A spending when it comes to new hires or wage inflation, those type of things. Travel obviously is down maybe the things that we can really control, we want to make sure that we keep that under control. So, we feel good about the guidance that we put out there which is margin expansion and we have a little bit of pressure inside of our commercial markets with the steel spread, but we are continuing to see margin enhancement even with that inside of our commercial business with some of the SG&A and other things that they were doing to make sure we maximize the profitability for the company.

Your next question comes from Lee Jagoda from CJS Securities. Your line is open.

Just two quick follow-ups. One with regard to backlog, I appreciate the percent increase dynamic and, I guess, color there. Can you just give us the dollar backlog in Windows, Siding and Commercial?

Just one minute here, we’re grabbing the data.

And I guess while you’re looking for that, probably an easier question, the tax guidance you gave of $10 million benefit is a little bit lower than you gave previously, is that just because of the increased financial performance?

That's correct, Lee. It's a combination of a couple of things actually. We've got higher expectations, obviously, on earnings from the expectation that we had last quarter as we look at the second half of 2020. And it’s got some benefits in there as well from the CARES Act, and in particular the 1639(j) which is the interest rate limitation move from 50% to 30% and so it allows us to take a little bit more advantage of that. So, the combination of those two things, one offsetting, but obviously, the increase in the forecast being most of that dropped.

And is it too early to tell what 2021 looks like from a tax standpoint?

It's too early Lee.

Okay.

Lee, we're still looking that dollar amount, just the backlog that we set on the residential side, we - the windows sub 40% and sidings plus 55%, we said low single digits on the commercial backlog. And we will get you the dollar amount and post that.

We can post that correct.

And those percentages are year-over-year as of the end of Q2?

Yes.

Yes. The dollar amount will be great and I'll look for it once you post it. Thank you.

Yes. You're welcome.

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.