Core Natural Resources, Inc.

Good day, and thank you for standing by. Welcome to the Cornerstone Building Brands 2Q21 earnings call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, please press star 1 on your telephone keypad. 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 hand the conference over to Tina Beskid, Vice President of Finance and Investor Relations. Please go ahead.

Good morning, and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer, and Jeff Lee, Executive Vice President and Chief Financial Officer. Please be reminded that comments regarding the company's results and projections may include forward-looking statements that are subject to risks and uncertainties. These risks are described in detail in the company's SEC filings, earnings release, and other 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 the completed acquisition as if such acquisition was consummated prior to the period presented. With that, I would like to turn the call over to Jim.

Thank you, Tina. Good morning and thank you for joining us. Before Jeff and I review our second quarter results, I'd like to discuss the press release that was distributed this morning. I have decided to retire as CEO of Cornerstone Building Brands. It has been a privilege to serve our company since its inception and to work with the most dedicated and talented employees and leadership team in the industry. I am proud of the tremendous accomplishments we have made as a company. Over the last year, I've been working closely with our board of directors to identify my successor. After a thorough process, I'm pleased to announce that Rose Lee will be joining the company to succeed me as chief executive officer beginning on September 6th of this year. I will remain as executive chairman of the board through March of 2022 and ensure a seamless transition. Rose has an impressive background. She has held multiple senior leadership positions at DuPont, most recently serving as president of the safety and construction business and at CertainTeed, where she led businesses for the residential and markets. I'm honored to have Rose join Cornerstone Building Brands as we have pivoted to growth from integration. As Rose and I walk through the transition, we will continue to focus on driving value creation for our shareholders. Now turning to second quarter. The second quarter was another strong quarter for cornerstone building brands as we faced headwinds from commodities, freight, and labor inflation. Our commitment to execution and value creation for all stakeholders resulted in record net sales and adjusted EBITDA, contributing to an outstanding first half of 2021. During the quarter, demand for residential and commercial products continued to be robust. Net sales increased approximately $308 million, or 28%, over a COVID-impacted prior year due to volume growth and price. Compared to a healthy second quarter of 2019, net sales increased 6.5%. Several solid underlying fundamental drivers indicate that these market conditions are more than a temporary rebound, providing increased confidence in our outlook for next year, especially for our commercial end markets. We achieved record second quarter adjusted EBITDA of $190 million, an 18% improvement over last year, and an 8% improvement over 2019. As expected, we experienced margin compression versus the prior year as a result of increasing costs from commodities and other manufacturing inputs. In response to this dynamic inflationary environment, we continue to take price actions across all of our businesses. We are committed to price discipline and expect our actions will offset inflationary costs for 2021. Additionally, material and labor shortages persist. driving up costs to serve our customers. We are attacking these challenges and remain focused on our service value proposition, solidifying our position as partner of choice for our customers. As a result of our stronger earnings and financial discipline, we reduced our net debt leverage ratio to 4.6 times, approximately a half turn better than the second quarter last year. Jeff will be providing more details about our recent actions to strengthen our balance sheet and advance our capital allocation strategy. Now if you could turn to slide four. We have taken several actions to advance our growth strategy and drive sustainable value creation. Sustainable value creation is critical because it allows us to deliver shareholder return while establishing a foundation to support our long-term growth aspirations. Our portfolio is large and has tremendous breadth and depth. To deliver long-term value, we must participate in categories where meaningful growth exists. So we continually evaluate our portfolio, taking actions that will result in a more focused and simplified portfolio. As a result, we unlock the potential to maximize top-line growth and profitability. Additionally, these actions strengthen our financial flexibility and position the company to advance towards our net debt leverage target of two to two-and-a-half times that we've referred to over the past year or so. Turning to slide five. Our portfolio optimization is rooted in our core growth strategy and leverages areas where we have a competitive advantage. Let me touch on each one. First, our portfolio innovation. We have leading product solutions with deep market exposure across our segments. Maintaining a focus on the customer, we look for opportunities that will enhance our delivered value with an expansive portfolio of products to meet our customers' evolving needs. A scale player, we are the largest exterior building products company in North America. We must grow our categories to grow our business. We look to enhance our geographic profile and drive category growth in large, deep markets. Serving our customers with channel strategies that provide tailored solutions is our value proposition. By leveraging our integrated supply chain and delivering a differentiated customer experience, we become a long-term partner of choice for our customers. And finally, as a cost-advantaged manufacturer, we look to leverage our scale in procurement and our manufacturing processes. Generating fuel to invest in our business requires a continued focus on cost discipline and productivity gains. Our approach to optimizing the portfolio places a focus on high-growth, high-profitability businesses. For example, we've announced the divestiture of our insulated metal panels and our DBCI roll-up door businesses. These transactions fit within the framework I just discussed. For cornerstone building brands, both businesses have limited channel strategies, cross-segment customer opportunities, and scale leverage. The sale of these businesses frees up resources to focus on our highest growth opportunities. Additionally, the divestitures unlock immediate value by monetizing strong assets at an attractive multiple. We expect the proceeds of approximately $875 million after tax. The proceeds will be used towards investments where we see the greatest potential to drive growth and also to pay down debt. We're very excited about the recent acquisition of Prime Windows and Cascade. These acquisitions advance our strategy to grow in the large, deep residential windows market, strengthening our market leadership position in vinyl windows and doors. Additionally, the acquisitions expand our manufacturing presence across the rapidly growing West Coast region and enhance our tailored solution for our customers. We believe our recent portfolio activity will strengthen our long-term growth potential by providing a greater focus in redeploying investments to our highest growth opportunities. We are confident in our ability to generate value because our businesses are well positioned in great categories and our leadership team is aligned on delivering. Turning to slide six, we are excited about the growth opportunities ahead of us. The company embraces a continuous improvement culture focused on optimizing cost and building greater brand equity to fuel growth, solidifying us as a cost-advantaged manufacturer. Our relentless drive for exceptional results and superior execution have generated strong results. These actions provide the fuel needed to advance our growth strategy. Our investment approach is now organic and focused. we're using our efficiency gains to reinvest in the business. We're simplifying our portfolio so we can leverage unique customer insights and our scale more quickly and broadly across the categories. Additionally, we are intently focused on investing for growth in the business through capital expenditures that are focused on automation and other organic growth initiatives, which we believe will deliver the highest return for our shareholders. Finally, we are focused on positioning for growth with an emphasis on deleveraging our balance sheet. As a result of our profitable growth in strategic divestitures, we expect to improve our net debt leverage by one to one and a half turns from the end of last year. We have prioritized leverage improvement over the last few years, providing the financial flexibility for a more balanced approach to capital deployment. We remain committed to our balanced capital allocation strategy, driving sustainable growth for our business and continued returns for our shareholders. Now I'd like to turn the call over to Jeff. Thanks, Jim, and good morning. Our drive for exceptional results led to another quarter of strong financial performance. As Jim discussed, Cornerstone Building Brands is a company guided by our strategic priorities. By focusing on our business strategy every day, we create a platform for growth and long-term value for our customers, shareholders, employees, and the communities where we live, work, and play. Starting on slide eight, we continue to experience a strong pace of incoming orders across all of our products. The U.S. housing activity remains robust, with second quarter housing starts averaging 1.6 million units on a seasonally adjusted basis and total permits averaging 1.7 million units. The backlog of single-family homes yet to be started grew in June to the highest level since October of 2006. Repair and remodel activity also remained strong in the second quarter, supported by rising home equity, lower interest rates, and an aging inventory. Our near-term and long-term outlook for the residential market remains very favorable, and we are well positioned to capitalize on those market trends. Momentum in non-residential construction demand continues to be favorable. The architectural building index reported that the current pace of buildings growth remains near the highest levels ever seen in the index's history. In addition, Inquiries surged to an all-time high, and firms reported their highest backlog in two years with an average of six and a half months. Our long-term outlook for the commercial business is favorable. The market for non-residential construction typically lags behind housing cycles by 18 to 24 months. Also, non-residential construction spend is tied to private and public capital spending patterns, interest rates, government funding, and consumer demands. Supply chain and labor disruptions are slowing the pace of recovery while increasing commodity costs and other input costs are pressuring margins. Increased commodity freight and labor costs coupled with manufacturing inefficiencies resulting from the supply chain disruptions continue in the second quarter. We are working closely with our key suppliers to avoid or minimize the impacts. In response to this dynamic inflationary environment, we have increased prices across all of our businesses. As Jim talked about, portfolio optimization is an essential component of our growth strategy. We believe we have a meaningful opportunity to lead within our key product categories, enhancing our position in large, deep markets. Turning to slide 9. Proforma net sales were approximately $1,406,000,000, 28% higher than Proforma prior year, with favorable price and volume contributing almost equally. We generated $190,000,000 of Proforma adjusted EBITDA, $29,000,000 more than Proforma second quarter of 2020, with all segments contributing favorable volume and price in the next net of inflation. Proforma adjusted EBITDA margin was 13.5%. As we expected, 110 basis points lower than Proforma prior year. Across all of our segments, production constraints for commodities such as PVC resin, steel, and aluminum have resulted in shortages and steep cost increases. In response, we raised prices across our portfolio, which did offset substantial impacts to our financial results. We expect price and mix to remain favorable and offset these continuing cost impacts. Operational excellence is fundamental to our business model and market leadership position. We continue to transform our cost structure and improve the way work gets done. We realized approximately $30 million of structural cost savings during the quarter which helped to mitigate additional costs we incurred to serve our customers, such as expedited freight and overtime. We continue to experience the return of volume-related near-term costs in both cost of goods sold and SG&A. Overall, the second quarter was an excellent quarter for us. I'm proud of our team's outstanding job in successfully managing through the dynamic market environment and capitalizing on the strong market conditions. Now let's look at our business segment results. Turning to slide 10. Overall financial performance for the window segment was strong. Second quarter pro forma net sales were approximately 33% higher than pro forma prior year, with strong volumes across all sales channels, driving increased volume of approximately 23%. Pro forma adjusted EBITDA increased approximately 18% over the prior year, primarily driven by higher volume. As mentioned, along with the positive market momentum, we have experienced supply chain disruptions and are faced with labor challenges. We continue to make substantial investments in automation technologies to improve our production and logistical efficiency, enhancing our position as a cost-advantaged manufacturer. We are taking actions to advance our strategy and position towards long-term growth. We recently completed the Prime Window System acquisition and reached an agreement to purchase Cascade windows. These transactions expand our market opportunities into vinyl window and door markets. We intend to continue investing in the window segment through organic growth and strategic acquisitions to drive margin improvement and expand our geographic reach while remaining committed to our net debt leverage goals. We have long-tenured customer relationships across the channel we serve. Also, we have been a key supplier to the majority of the nation's top home builders and retailers for close to a decade. Our goal is to be the supplier of choice in the exterior building products industry with the best and most innovative product offering marketed through our well-respected and trusted brand portfolio. Turning to slide 11. In the signing segment, second quarter, net sales were approximately 27% higher than prior year, with strong order momentum in the wholesale and retail channels driving increased volumes of approximately 12%. Adjusted EBITDA increased approximately 26% over the prior year, primarily due to increased volume of 20% in favorable price and mix, net of commodity and other inflationary impacts. As mentioned, along with the positive market momentum, we have experienced supply chain disruptions and are faced with labor challenges. Despite these challenges, strong performance from both the U.S. and Canadian regions delivered an all-time high adjusted in Degas. We are also investing in a siding segment. We intend to drive organic growth through product innovation and new product development in attractive adjacent product lines. We remain optimistic about the market recovery and positive momentum in the residential end markets, which will create long-term sustainable growth for Cornerstone Building Grants. Moving on to our commercial segment on slide 12. Net sales in the second quarter of 2021 were $458 million, approximately 23% higher than the same period last year. driven by disciplined price actions to mitigate rising steel costs. July bookings were 8% higher than the prior year, and backlogged tons were up over 25%. However, raw material shortages are constraining volumes in this business. We remain on allocation from our suppliers, limiting our output to levels similar to the second quarter. Additionally, the current supply environment has led us to make spot market purchases, which carries a higher cost but allows us to serve our customers. The commercial segment generated adjusted EBITDA of $68 million, approximately 19% higher than the prior year. We have been effectively managing the impacts of rising steel costs. For the quarter, price and mix outweighed inflation by $21 million due to the rapid response by the team. We expect these dynamics and the effect of margin compression to continue in the near term. Positioning towards long-term growth, we have taken actions to advance our strategy within the commercial segment. As discussed, we announced the divestiture of the insulated metal panels and roll-up to our businesses. We have developed a broad multi-channel distribution platform covering an extensive network of wholesalers and specialty distributors, independent dealers, architects, builders, contractors, and big box retail. We believe our strategy enables us to minimize channel conflict, reduce our reliance on any one particular channel, and reach the greatest number of end customers. This strategy will position us to further our growth in large, deep markets, maximizing our financial performance. Our focused, simplified portfolio builds greater brand equity, fueling growth for value creation. With the seller proceeds, we will improve our leverage, accelerating towards our target of two to two and a half times, and strengthening our financial flexibility to fuel accreted growth opportunities. I'd like to make a few comments about our guidance. We anticipate closure on all of the announced strategic actions within the third quarter. As such, our projections include these impacts as if they occurred at the beginning of the quarter. Additionally, we have provided pro forma third quarter 2020 measures as a comparison. We expect pro forma net sales to be between $1,385,000,000 and $1,435,000,000 and approximate 20% increase versus pro forma prior year at the midpoint with volume, price and mix contributing equally. Strong market momentum within the residential and commercial end markets, positive price and mix coupled with unprecedented backlog support our revenue guidance. We expect adjusted EBITDA to be between $180 million and $195 million. The midpoint of our outlook implies an adjusted EBITDA margin of 13.3% and anticipates inflationary costs offset by price and dollars. We are intently focused on investing in the core business through capital expenditures, organic growth initiatives, and inorganic opportunities, which we believe will deliver the highest returns for our shareholders. We anticipate the full year 2021 capital spending to be between $100 million and $120 million. Finally, we are focused on positioning for growth with an emphasis on deleveraging our balance sheet. As a result of our profitable growth and strategic actions, we are able to accelerate our leverage ratio. We expect that by year end, we will be able to reduce our leverage by one to one and a half times over last year. This reduction is about a half a turn better than originally anticipated. We remain committed to our balanced capital allocation strategy as we move forward. Our second quarter performance demonstrates our drive for exceptional results and passion for superior execution. Our solid foundation and the actions we have taken to strengthen our industry leadership are positioning Cornerstone Building Brands for growth. And now I'd like to open up the call for questions.