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spk02: ladies and gentlemen thank you for standing by and welcome to the cornerstone building brand third quarter 2020 earnings conference 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 to ask a question during your session you need to press star one in your telephone please be advised that today's conference is being recorded if you require any further assistance please press star zero I would now like to turn the call over to Tina Baskett, Vice President of Finance and Investor Relations. Please go ahead.
spk01: 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 presentations. 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 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 express 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. With that, I would like to turn the call over to Jim.
spk03: 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 three. 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 communities 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 four. We delivered strong results for the third quarter of adjusted earnings of $0.31 per diluted share and an all-time high of 15.8% adjusted EBITDA margins. 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 ability to maximize their business model, remain disciplined on price, and focused on operational excellence across our enterprise contributed to $155 million of free cash flow during the quarter, which is the best performance we've delivered so far. As we have mentioned previously, reducing leverage is key, and we continue to make progress towards that goal. During the quarter, we reduced net debt by approximately $150 million and improved our leverage ratio by close to a full term on a year-over-year basis. We completed a $500 million bond offering that enhanced our liquidity profile and strengthened our financial position. Our improved cost structure and liquidity positions us to take advantage of the improving market sentiment. This includes making balanced investments in growth categories to ensure we are deploying our capital that drives the greatest long-term returns for our shareholders. For example, in our North Brunswick, New Jersey window plant, we've installed two new automated vinyl window lines. increasing our capacity by approximately 20% for our largest product line. Investing back into the business is vital to strengthening our customer relationships and supporting their growth in the market. Key investments like these also create long-term value for all of our stakeholders. Now let's turn to slide five. We continue to see strong momentum within the new residential and the repair and remodel markets. U.S. housing activity rebounded sharply in the third quarter, supported by growing preference for single-family homes in less urban areas. On a seasonally adjusted basis, single-family starts improved by over 15% compared with the third quarter of 2019. Additionally, single-family permits and new home sales increased approximately 20% and 40% respectively. Repair and remodel momentum also remained strong, driven by a robust demand from the do-it-yourself market. Our signing and window segment have benefited from the positive rebound. During the quarter, average daily bookings were over 20% versus prior year levels. But the rapid pace of this recovery coupled with industry-wide labor shortages, have resulted in increased backlogs and extended lead times. At the end of the third quarter, backlogs within siding and window segments were strong, representing record levels for both segments. We are working diligently to ramp up our staffing to maximize our installed capacity to meet the current and future market demands for our customers. We are encouraged by the continued improvement in U.S. housing. Interest rates are at historic lows and demand for housing exceeds the available supply. Partially as a result of COVID-19, our business is benefiting from a broad increase in demand for housing as consumer preferences shift away from the urban living into the suburban single-family homes where our products are more prevalent. Also, we expect to continue to benefit from the strong growth in housing for first-time and entry-level homebuyers, as we believe our products are particularly well-suited for this segment of the housing market. The repair and remodel market tends to be less cyclical than new construction. This is also positive for Cornerstone because exterior building products are exposed to the elements and maintenance is less likely to be deferred. With the strong market demand and increasing costs in raw material, labor, and transportation, we have announced price increases across our residential businesses. We do remain cautious, however, of the rising COVID-19 infection rates and the potential pullback of the reopening plans, which are weighing on consumer confidence levels, as well as the potential for a further rise in unemployment. As we look to our commercial end markets on slide six, the impact from COVID-19 on the non-residential end-use markets have been significant. Non-residential construction spent is tied to private and public capital spending patterns, interest rates, government funding, and consumer demands. Our participation in this end market focused primarily on low-rise buildings five stories or below, serves to partially mitigate the impact of the housing cycles on a business. Commercial construction activity has been slow to rebound, but does remain stable. Our average daily bookings remain soft to the prior year, but is slowly improving with construction activity. As we remain focused on managing our price with fluctuations in steel costs, which have been increasing to pre-pandemic levels, we have announced price increases across all products in our commercial businesses. Low-rise commercial markets are stable with slight improvements in some areas like data centers, warehouses, and cold storage facilities, which do make up about 25% of our commercial segment. 2021 is still uncertain and dependent upon capital spending, commodity prices, and consumer confidence. Low-rise building applications are central to growing suburban areas, and the demand for commercial construction typically lags the housing cycle by 18 to 24 months. Now let's turn to slide seven. Our business model emphasizes commitment to our customers and operational excellence. This is supported by strong procurement, vertical integration, and engineering capabilities across our extensive manufacturing footprint while leveraging our strong customer connections. Our broad portfolio of products, and vast manufacturing network enables us to participate in a diversified set of end markets. This provides us with a unique strategic advantage. We see great opportunity to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each channel and optimizing our capital deployment to create long-term shareholder value. The underlying fundamental factors are favorable that will drive long-term growth across the markets in which we operate. Our business is well positioned to benefit from the broader societal and population trends favoring suburban regions as employment and living preferences shift. Our discipline culture is committed to delivering sales growth and margin improvement from a focus on operational excellence. We accelerated cost, automation, and productivity initiatives that structurally transformed the company's cost structure. We have structurally reduced costs by approximately $75 million through the successful execution of these savings initiatives. We do remain committed to delivering between $80 and $100 million of structural cost benefits this year yet preserving the fundamental elements of our business that provide a value proposition for our customers. We have further invested in talent with the appointment of Jim Kepler as Executive Vice President of Operations. Jim has over 30 years' experience leading manufacturing and supply chain operations for large, diverse organizations. I'm excited to welcome Jim to Cornerstone's leadership team where he will play a vital role in accelerating our manufacturing and operations strategy. Now I'd like to turn the call over to Jeff, who's going to walk through some of the financials.
spk04: 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 31 cents per diluted share, an improvement of 4 percent over the same pro forma period last year. Starting on slide nine, 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 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 team's 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 segments 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 window segment on slide 10, net sales of $501 million were slightly lower than prior year, primarily due to lost ship days from the ransomware attack I mentioned previously. We estimate about five to seven days of product shipments were pushed out of the quarter and contributed to our higher backlogs. In spite of that challenge, we continue to see favorable price and mix, net of inflation, and increased profits from our near-term and structural cost-out initiatives. Adjusted EBITDA was an all-time high of $71 million, an increase of 9.4% over prior year. Additionally, adjusted EBITDA margin was 14.1%, which was 130 basis point improvement versus prior year. We continue to see strong demand from the positive fundamentals in the new construction and repair and remodel trends. We remain optimistic about the market recovery and positive momentum in the residential end markets and expect it to continue into the fourth quarter. Turning to slide 11, the siting segment generated 24.6 percent adjusted EBITDA margin on $322 million of net sales, which is a 270 basis point improvement on a 2.2 percent decline in net sales versus pro forma prior year. During the quarter, order momentum was strong as wholesale and retail demand outpaced prior year, driving higher volume. However, price impact from lower aluminum costs and shift in product mix offset the volume. Cost discipline combined with structural cost improvements also contributed to the strong year-over-year margin expansion. Similar to windows, the pace of recovery within Siding was strong. We remain optimistic about the market recovery and positive momentum within residential end markets and expect it to continue into the fourth quarter. Moving on to our commercial segment on slide 12. Net sales in the third quarter of 2020 were $404 million, or 13.1% lower than the same period last year. While demand dropped as a direct result of the slowdown in construction activity, steel prices also dropped, resulting in a lower average selling price per ton. We were able to effectively manage this spread dynamic, resulting in approximately $6 million of favorable price net of inflation with adjusted EBITDA. Adjusted EBITDA margin for the quarter was an all-time high of 17.4 percent, which was 180 basis point improvement over prior year and a 220 basis point improvement sequentially. The commercial segment has been able to deliver six consecutive quarters of year-over-year margin enhancement as a result of strong cost management and structural improvements to simplify the organization. The structural improvements achieved within the commercial segment offset the negative mixed impacts realized from the market shift towards smaller, less complex projects. Overall, the low-rise, non-residential markets are stable and trending at similar levels experienced during the third quarter. Since the business environment and market conditions under COVID-19 are still fluid and evolving, it is difficult to predict what the ongoing impact may be. So we will remain flexible and adjust our near-term response as necessary in order to preserve our solid financial position. Turning to slide 13, I'd like to make some comments about our balance sheet and liquidity. We generated free cash flow of $155 million in the third quarter, a $87 million improvement over prior year primarily from lower interest expense, cash expense, and capital spending, coupled with higher earnings generation. We expect to generate strong cash flow in the fourth quarter 2020 as we remain focused on financial discipline and strong operational execution. we are reiterating our expectation to reduce structural costs by $80 to $100 million in 2020. 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 remain committed to innovation and investing in new product offerings and process automation that will generate profitable growth in the future. we anticipate that full year 2020 capital spending will be approximately $85 million. In the area of taxes, we are taking advantage of COVID-related government stimulus programs to defer certain payroll and income taxes to later in 2021 or in some cases into 2022. Additionally, provisions within the CARES Act will allow the company to deduct higher interest expense for income tax purposes that would have been previously disallowed. We expect these actions, coupled with the impact of improving demand, to have a net cash tax benefit of approximately $8 million that we expect to receive in the first quarter of 2021. During the quarter, we issued $500 million of senior unsecured notes bearing interest at six and an eighth per year and mature in January of 2029. The proceeds were used to repay debt under the asset-based lending facility and cash flow revolver, as well as some transaction fees. As a result of the transaction, we improved the company's financial flexibility and increased liquidity, ending the quarter at $1.3 billion, including $628 million of unrestricted cash on hand. As a result of our profitable growth, focus on operational excellence, and targeted capital deployment towards balance sheet deleveraging, we have reduced net debt leverage by 0.9 turns over the prior year to 4.9 turns as compared to 5.8 turns the same period last year. Turning to the fourth quarter of 2020 outlook on slide 14. We recognize that there is still uncertainty around the ongoing impact of the pandemic. However, we believe we have enough visibility, confidence in our operations and cost structure to cautiously provide guidance under the following assumptions. That momentum continues within the residential markets, non-residential markets remain stable, and we remain an essential business. We expect the consolidated net sales for the fourth quarter will be between $1,135,000,000 and $1,200,000,000 and adjusted EBITDA to be between $145,000,000 and $160,000,000. I would like to remind you that our company's fiscal quarters are based on a 4-4-5 week calendar. As such, there are three less shipping days in the fourth quarter 2020 as compared to 2019. We plan to stay disciplined on price, drive profitable growth, and capture additional cost savings, positioning us to generate year-over-year margin expansion again next quarter. Turning to slide 15, our financial results demonstrate our relentless drive for exceptional results. Our priorities to serve our customers, maximize our unique business model, and protect the health and safety of our teammates are position us to deliver strong operational and financial results. Our team successfully executed against these priorities in the third quarter despite many challenges. We are proud of the continuous improvement culture we have created and believe the proactive measures we are taking will strengthen the long-term fundamentals of our company. And now I'd like to turn the call over to Jim for some closing remarks.
spk03: 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.
spk02: Ladies and gentlemen, to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Lee Jagoda with CJS Securities. Your line is open.
spk05: Hi, good morning. Good morning, Lee. 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?
spk03: Great, Lee. Thank you for your question. As we've talked in the last couple quarters, price discipline is really a core competency 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 residents. 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...
spk05: As I look at, you know, housing starts and the projections for 2020, you guys are still 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, you know, given how strong it's been?
spk03: Great. On the lag, we typically lag the starts, residential starts, anywhere from 90 to 120 days. Now, that's been the historic metric. We're kind of in an 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 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 it hits our businesses, Just as a reminder, you have windows, siding, and stone really are on the back end of the construction cycle when you build a home. Speaking of our backlog, as we said, it's at historic levels now. Primarily windows has the strongest backlog. Siding has a very strong backlog. And we're expecting that to be worked out hopefully late first quarter, early second quarter.
spk04: Okay. We'll maybe just add a couple comments on that as well. One of the things that we saw inside of third quarter in particular was the windows or the ransomware that hit the company. And, you know, it impacted all of our different segments, but in particular it really had an impact on our window 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 is going to push. It increased our backlogs and it pushed it into fourth quarter, which will probably even continue into the first and second. but the impact on that is 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, you know, we actually feel really good about, you know, our performance within our Windows segment, and that was just something we had to overcome as a company. We did it very nicely and were able to overcome that quickly.
spk05: That makes sense. 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 the 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?
spk03: Yeah, that's been a big challenge. Obviously, it's 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. It takes time to get them trained and integrated, and we really want to do it, particularly in this environment, in a very safe environment. and responsible way with COVID-19. So, you know, that has taken a little longer, but, you know, that's an action that is important for us, that 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, you know, our lead times right now are two to two and a half times our ideal lead times, but we anticipate to get that back in line sometime during the first half of 2021.
spk05: All sounds good. Thanks very much.
spk02: Your next question comes from Julio Romero with Sidoti and Company. Your line is open.
spk00: Hey, good morning, everyone. Good morning, Julio. On the ransomware attack and 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 law sale than a make up?
spk04: You know, Julio, it's a good question. The push out of sales that I referenced from the third quarter into the fourth, you know, 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 V 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. You know, we communicated very effectively with our customers around the incident itself, and so they were aware of it and they planned for it accordingly, and so we think that it's just timing.
spk03: If you look at the third quarter results with that ransomware that Jeff's talking about, you look from a top-line basis, U.S. Windows would be up about 6% year-on-year.
spk00: Yeah, 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?
spk04: Yeah, the cash flow has been interesting for 2020. You know, 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 a 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, about 89 million. And then as we came into the first half of 2020, it was a source of cash of four. So we've got almost $100 million swing in cash flows that I think 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 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 step back and look 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, but we won't see as much improvement because we're putting more focus on our customers, making sure we hit the service requirements right. and we get down those lead times and the backlog that's in place. One thing to note, though, Julio, as 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 at 16.3%, and right now we're about 15.9%. So we have improvement on working capital and expect that to continue to improve, just not quite at the levels that we originally expected with the pandemic.
spk00: Understood. 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, would you kind of expect working capital to continue to be a benefit in 21?
spk04: Yeah, as Jim and I have 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.
spk00: Got it. Thanks very much. I'll hop back into the queue.
spk02: Your next question comes from your line is open.
spk06: Great. Good morning, everyone, and thanks for taking my questions. I just wanted to start, you know, looking ahead, how do you guys think about the volume 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?
spk03: Yeah, thank you. That's a great question. And really, you know, our philosophy has not changed. We're very focused on, you know, 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. You know, our goal as we look into next year is really, you know, we want to outperform the market with our 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. You know, we have 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, you know, 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 two to two and a half 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.
spk06: 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 in manufacturing is still going to be an impediment to that?
spk04: So, Kurt, as we think about the fourth quarter and our guide in particular, right, so we have $1.135 billion on revenue to $1.2 billion. And it puts the overall comparison versus prior year at kind of 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, in particular 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, you know, being stable with the run rates that we have. So we don't see the market really improving much. We don't see it declining much. 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 talk about the operations in particular, we're making improvement, right? So we added 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, you know, 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 really working hard to make sure that we've got the operational effectiveness to make sure our costs are in line, but more importantly to service the customers and to start bringing back that value backlog and lead times in particular. Now, we are projecting margin enhancement again for the fourth quarter, right? And that's really one of the guiding principles that we have as a company. It's something that, you know, we think is a core competence as we look at our structural cost out and the ability that we have. and we guided to that $80 million to $100 million worth of structural cost out in the company, we've realized $75 million of that year to date. And so, you know, coming into the fourth quarter, we feel really good about our position there and the things that we've put in place. And then near-term expenses is also something that we guided to that $40 million to $60 million on the year. And, you know, we have been able to achieve a lot of those savings. We've allowed some of those costs to come back in in the residential business in particular as the volumes have increased. And those are things such as, you know, the commissions and things like that for the sales folks. Travel is starting to pick up a little bit on the residential side as they're meeting more customers. And we're starting to see some of those expenses, variable compensation, come back into the forecast. but still expect us to be a benefit inside of 2020 and some of that benefit carrying over into 2021.
spk06: Got it. Okay, that's very helpful. And then just lastly on the siting business, some of your non-vinyl peers have posted some pretty strong growth numbers. I'm just curious, how do you think about the risk there with substitution perhaps away from vinyl and from a new product or marketing perspective, How might you look to combat that going forward?
spk03: Great. That's a great question. We're really excited about our siding business. We are the only manufacturer in the industry, actually, that's reinvesting back in the business and new products that we will 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. Seventy percent of our siding business in the U.S. is really repair and remodel. So, you know, we have a very unique value proposition in our siding business. We believe and we see it's a growth business. It's regional as well. I'm 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 in the market and has great success. Our product also has ease of installation. So when you look at 70% of our business, our siting 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 siting business.
spk06: Got it. That's helpful. Okay. Well, appreciate all the details, gentlemen. I'll turn it over.
spk02: Again, as a reminder, to ask a question, please press star and the number one on your telephone keypad. Your next question comes from Matthew with Barclays. Your line is open.
spk07: 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 amidst this residential recovery. And, of course, I hear you about the impact of the ransomware specifically in the quarter. But maybe you could speak a little bit about this capacity increase, you know, the timing of how that rams, how quickly you can ramp that up. And if there's anything else besides the labor issue that it would take to work through that Windows backlog. Thank you.
spk03: Yeah, great. Yeah, Matthew. You know, let me just step back. You know, we're a really different company than what you've historically seen in the Windows business. You know, we've consolidated Atrium, Silverline, Flygem. You know, we have a broad network. We really professionalized our manufacturing business. with automation, SNOP, we're looking at better sales forecasting. So we've really put a platform that we want to be the best service provider for our customers. You know, 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 step back on a window line, typically a window line has approximately 30 associates on a window line. With 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 a less than a two-year payback, but if you look at just from a productivity standpoint, it will allow us to get more throughput out of the plants. Also, with the recent investments we've made that we 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 an additional capacity coming out of our fastest-growing product line, which is our 1500 series. Along with that, it's continuing to get labor into the business. So we're working a few fronts, automation, these new window, these 1,500 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 in, 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 industries. 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.
spk07: Got it. Thank you for that color, Jim. Second one on the margin guide for Q4, you know, 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 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.
spk04: Yeah, so, Matt, a couple things around that. We are seeing the SG&A in particular, some of those costs are coming back that I talked about, those near-term expenses that, you know, 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 laborers inside of the cost of goods sold so that we have more competitive wages out there and 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? As 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 mix within the businesses depending on, you know, which segment's 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 EBITDA as a percentage of sales, we see margin expansion inside the quarter.
spk07: Got it. Thank you, guys.
spk02: Okay. There are no further questions. Thank you for participating in Cornerstone Building Brand Third Quarter 2020 Earnings Conference Call. This concludes today's call. You may now disconnect.
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