Core Natural Resources, Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Cornerstone Building Brands First Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. 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 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 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 is taking to address this extraordinary situation. While uncertainty exists, we are focused on leading 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, and 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, 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 have 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 has designed face masks that are being shipped to other manufacturing sites. And finally, we've partnered with the National Association of Manufacturers donating safety supplies to those who are on the front line of this health crisis. As we work to keep our communities safe, I'm proud to say we're the cornerstone of many communities. Our second area of focus is servicing our customers. Across the business, our teams are in constant virtual communication with customers, along with suppliers and government officials to maintain business continuity without disruption. We are currently operating all of our manufacturing facilities, distribution centers, and installation services. We have been flexible, effectively managing production schedules in response to short-term shutdowns for extensive cleaning, state shutdowns, and other changes in demand due to this pandemic. We know that it is more important than ever to meet our customer needs and strengthen our relationships. Within our commercial business, we received orders for COVID-19 standup medical and test facilities here in the U.S. and in Canada. And I'd like to acknowledge and thank our employees for working in our manufacturing plants and throughout our organization for their unwavering dedication to serving our customers. We safely cover the market with value-added services and solutions to our customers, and we thank our customers as well. We also remain diligent on preserving our solid financial position, which is our third area of focus. We've taken decisive actions to manage discretionary expenses and implement meaningful initiatives that will adjust the Company's cost structure, such as the recent consolidation of plants in Pennsylvania and Cambridge, Ohio, along with the continued deleveraging of our commercial business to get our associates closer to the customer. The care of our company's employees, our customers, and our cash are the foundation that we're operating on. Now turning to Slide 4, we started 2020 very strong, delivering pro forma adjusted EBITDA of $98 million in the first quarter, which exceeded the top end of our guidance range and delivered the third consecutive quarter of year-on-year margin expansion in all segments. We delivered 210 basis points on pro forma adjusted EBITDA margin expansion over the first quarter of 2019. This increase, in part, was driven by our ongoing commitment to automation investments and lean manufacturing, which lowered our cost base and drove operational excellence across our entire organization. Late in the quarter, we've responded with speed and intensity to combat the effects of this crisis and leverage our resilient business model to manage through the near-term challenges and position us to capture maximum benefits during the recovery. As you can see by our first-quarter results, we came into this crisis strong and with great momentum. Our team is now focused on navigating this current crisis to emerge even stronger. Cornerstone Building Brands' unique business model positions us well to navigate through these uncertain times. Our extensive operating footprint provides us with the flexibility to manage production schedules to ensure that our customers continue to receive our quality products without disruption. Additionally, we put a heavy emphasis on optimizing our supply chain network, rationalizing our plant footprint, particularly in commercial, and a continued focus on working capital improvement. Now turning to Slide 5, our broad portfolio of products and vast manufacturing network enables us to participate in a diversified set of end markets: new residential, repair and remodel, commercial, and manufactured housing that provides us with a unique strategic advantage. The near-term outlook for our end markets is challenged. Single-family housing starts have dropped since the beginning of the first quarter, but homebuilding has been deemed an essential service. Interest in mortgage rates has remained low in an effort to boost the housing market, and these near-term effects have the greatest impact on our residential businesses as our products are available through retail channels, our customers, and installed on homes 90 to 120 days after construction begins. The impact on the non-residential end markets is mixed. We have a broad and diversified set of product offerings such as engineered building systems, components, insulated panels, and wall systems that serve a diverse and extensive set of market subsectors, each of which are being impacted differently by the crisis. So far, the retail and manufacturing market is expected to be meaningfully lower, while warehouses, a significant market we participate in, remains stable from the strength of e-commerce. For the month of April, net sales were down about 25% compared to pro forma prior year. We believe the results we experienced during April are an indicator for the rest of the quarter and anticipate second quarter net sales to be in line with April or slightly better due to improved backlogs. We know that times like this require strong leadership and swift decisive action to preserve our financial strength and ensure sound liquidity. Our leadership team has experience successfully managing through downturns and has executed with speed to improve cash generation, lower prices, and accelerate operational improvements. Now let's turn to Slide 6. We exited 2019 with a disciplined focus on delivering results for our shareholders and our customers by permanently reducing the operating cost structure of the business by over $110 million. Faced with the effects of this pandemic, we intend to capitalize on the momentum that we created last year and are targeting between $80 million and $100 million of structural cost improvements this year. These actions are rooted in our strategy to make Cornerstone Building Brands a leading, more agile, customer-focused company and position us to deliver profitable growth as the market recovers. We have also taken prudent and precautionary steps to maintain our financial flexibility and liquidity. We've increased our borrowing under the ABL facility and cash flow revolver, resulting in the unrestricted cash on hand of approximately $476 million at the end of the quarter. We believe we have ample liquidity, which will be further supported by significant cash generation actions of more than $100 million, primarily from effective working capital management and reduced capital spending. While reducing costs and generating additional cash are important areas of focus for us, 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 introductions that will continue to grow our value proposition to our customers. Certainly, there are a number of variables that are unknown at this point, including full duration, magnitude, and pace of the recovery across our end markets. We've evaluated a number of possible scenarios and are confident that the actions we're taking, combined with the company's existing financial position and sound liquidity, will enable us to navigate whatever challenges come our way so we can emerge on the other side even stronger. Now I'd like to turn the call over to Jeff, who's going to walk through some of our financial results.

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 begin 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 the first quarter of 2019. As we continued our price discipline and further positioned 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 the 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 remain focused on continuous improvement and lowering our overall cost structure. Offsetting these gains were high direct labor costs 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 as we anticipated and discussed during our last earnings call. Given the changes in demand due to the COVID-19 pandemic, we have taken actions to mitigate these impacts and to right-size the cost structure. Now let's look at our business segment results. Our team's focus on executing our strategy of operational excellence and profitable growth has resulted in margin expansion in all segments for the third consecutive quarter. As we manage through the uncertainties caused by the COVID-19 pandemic, our actions are rooted in strategy, and margin enhancement is one of our guiding principles. Turning to slide 9, in the first quarter, Windows net sales were $448 million, up 6.4% from the first quarter of 2019. The increase was primarily driven by healthy end-markets and favorable selling price and mix across the U.S. and Canada. Windows gross profit margin for the first quarter of 2020 was 16.5%, up 170 basis points on a pro forma basis as a result of price discipline, favorable product mix, net of inflation, and realized cost savings. Turning to slide 10, Siding segment pro forma net sales for the first quarter is approximately $249 million, 3% higher than the same pro forma period last year. The increase was driven by volume, price, and mix. Pro forma gross profit margin was 24.6%, up 230 basis points compared to the pro forma prior-year quarter, primarily as a result of lower material costs, favorable price, and mix. Moving on to the Commercial segment on slide 11, net sales for the quarter of 2020 were $424 million, about flat with the same period last year. Overall average selling price per ton was higher as a result of better product mix and price discipline, which was offset by lower tonnage volumes. For the quarter, gross profit margin was 23.1%, up 180 basis points year-over-year, driven by favorable spread, partially offset by higher variable manufacturing costs. Turning to slide 12, although it's still too early to determine the extent and duration of the COVID-19 impact on our business and the overall economy, we can report that net sales for April were down 25% pro forma last year. All segments were impacted with declines of 22% to 28% in U.S. residential, approximately 43% in Canada, and 20% in our commercial business. As such, we anticipate second quarter net sales to be in line with or better than April's results compared to the pro forma period last year. In response to these unprecedented times, we have implemented aggressive near-term expense control actions that we believe will help offset the impact from lower volume. We have also accelerated strategic structural expense reductions that will position Cornerstone Building Brands to be a leaner, more agile and more customer-focused organization. We took decisive action to align our cost structure with the decline in volumes. The decremental margin impact from lower volumes is approximately 30% on a consolidated basis, with some segments higher and some segments lower. Our direct cost structure is mostly variable, as approximately 10% of our cost of goods sold is comprised of fixed costs such as lease, utility taxes, and other fixed expenses. We reduced production schedules to align with customer demand while continuing to serve our customers without disruption. Additionally, we have implemented demand-related employee furloughs, and we will continue to monitor our order rates and adjust our plans going forward as necessary. Across the company, our teams are working diligently to reduce near-term discretionary spending. This includes eliminating travel, implementing hiring freezes, and delaying wage adjustments, merit pay increases, and other variable compensation programs. These actions will provide between $40 million and $60 million of savings in 2020 and will improve the decremental margins mentioned earlier. Since the business environment under COVID-19 is still fluid and evolving, it is impossible to predict what the ongoing impact will be. We remain flexible and adjust our near-term response as necessary in order to preserve our solid financial position. We plan to remain committed to our strategic priorities of improving our customer experience, operational execution, and strong financial performance. We have demonstrated our ability to reduce structural costs in many areas of the business, including material sourcing, plant and back office rationalizations, process and labor savings from automation, and many others. Previously, we communicated that we would deliver $60 million of structural cost savings in 2020. As we face this pandemic, we remain committed to delivering these continuous improvements in structural savings, along with accelerating other initiatives to simplify our manufacturing footprint and organization. For example, within one of our commercial plants, we are improving the semi-automatic crane production line by installing state-of-the-art robotic welders during the final stage of assembly, permanently reducing labor hours per ton, consuming less welding supplies and preventing costly rework. In total, we now expect to reduce structural costs by $80 million to $100 million in 2020. The resiliency and sustainability of Cornerstone Building Brands' business model is built upon a strong execution culture. Our market leadership positions across highly diversified channels and a broad portfolio of products are led by a team with proven experience in successfully navigating similar challenges. As a result, we expect to emerge as a stronger company. Turning to slide 13, I would like to make some comments about our balance sheet and liquidity. Our free cash flow usage of $30 million in the first quarter was better than the prior year as a result of delivering higher pro forma adjusted EBITDA, lower cash taxes, and effectively managing working capital. The first quarter is typically a low point for free cash flow due to the seasonal nature of construction activity. We expect a significant step-up over the rest of 2020, as it will reflect favorable working capital performance and the impact of our initiatives to reduce structural costs and other near-term expenses. In addition to cost savings, we have also put similar controls on cash and liquidity management, including the reduction of capital expenditures by approximately $30 million, 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 have been actively managing working capital, optimizing our purchasing actions, and working with our key supplier partners. We anticipate that effective working capital management will be a source of cash in 2020 between $100 million and $120 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 2020 or in some cases, into 2021. Additionally, provisions with the CARES Act will allow the company to deduct higher interest expenses for income tax purposes that would have been previously disallowed. We expect these actions to have a net cash tax benefit of approximately $25 million in 2020. We ended the quarter with approximately $476 million of unrestricted cash on hand and $118 million of excess availability on our asset-based revolving credit facility. Our liquidity is sufficient to weather the anticipated slowdown in construction activity from the impact of the COVID-19 pandemic. We have no significant debt maturities until April 2023, which is when the cash flow revolver and asset-based revolving facilities mature. In addition to the lack of near-term debt maturities, a key aspect of our flexible debt structure is the absence of any restrictive standing maintenance financial covenants. The cash flow revolver does have a financial covenant, debt to a maximum secured leverage ratio of 7.75 to 1; however, we have sufficient cushion that prevents this covenant from being a concern. Our liquidity testing has included many challenging scenarios, and under such scenarios, we expect to have ample liquidity to navigate this period of uncertainty. Turning to slide 14, over the past few months, we have taken quick and decisive actions to reduce operating expenses and defer capital expenditures with the objective of maximizing our available liquidity. We plan to stay disciplined on price, drive profitable growth, and capture additional savings. Additionally, we plan to generate significant cash and focus on working capital management. While we remain committed to our capital allocation priorities, we are proud of the continuous improvement culture we have created, as demonstrated by our three consecutive quarters of margin expansion in all segments. And now, I'd like to turn the call back over to Jim for some closing remarks.

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 ones 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 discussed the actions we have 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 remain 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 contemplating here. And then 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 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 $110 million, and then as we said in our comments that for 2020, we have identified an additional $60 million which includes some of the things that Jeff talked about: SG&A, furloughs, de-layering the organization. So I just wanted to put that in context; 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 new cost reduction initiatives that we put in place because of COVID-19.

Great, thanks, Jim. As we think about our cost-out initiatives, it's important to recognize that we have acted quickly to make sure that we're taking out costs appropriately while managing through this crisis. We're starting at the top and ensuring that 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 decremental impact would come down at that rate. Now to offset some of those, we are taking some dramatic actions within the company to ensure that we have preserved liquidity and that we're restructuring the company so we can come out of this crisis in a stronger, bolder, and better position. 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, some of these are volume-related, so as volume comes back, we would expect some of those costs to come back, such as some compensation relating to sales engineers and travel expenditures. However, more importantly, as we think about the structural cost reductions, the $80 million to $100 million, of which you referenced $60 million that was identified and communicated as we came into 2020. Those are permanent type of reductions versus the temporary ones that I've mentioned before, and they include things like back-office rationalizations, consolidating some manufacturing facilities, and many continuous improvement types of cost-out initiatives. So we're very proud of what we've been able to accomplish as a management team managing through this crisis. Specifically, to answer your question regarding both categories for near-term and structural costs, about 60% is 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% decremental EBITDA margin commentary in total, is there a way to rank order or provide more clarity by segment in terms of 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. Keep in mind, there's about 10% fixed expense within our gross profits, so you can back 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 for the quarter, we should expect it to be 25% down or better than that for the remainder of the quarter. Am I thinking about that correctly?

Yes, that is accurate.

Okay. And then just a follow-up to that, is there anything you can comment on with regard to the first two weeks of May versus April and whether that trend has 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 ring the bell on, but we've started to see our bookings improve. We're also starting to see, particularly in the retail segment, with some of the stores having extended hours, where the point of sale has improved. Particularly in the last two weeks, with some states opening up in the Midwest—Michigan, Pennsylvania, Ohio—where job sites are now starting to get lifted, our customers are starting to replenish inventories. So we don't want this to be a false positive, but there have been improvements 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 is jobs that were previously booked, just finally getting around to getting those started, or do you feel like demand is actually improving? I guess what I'm trying to get at is that, implied in your commentary is that May 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 I’m curious if you have any additional color on that?

Yes, I really think it depends on geographic regions and product segments. As I mentioned, the states that are lifting in the Midwest are really positive for our residential business, particularly our siding business, where inventories are getting replenished and people are finishing up jobs. On the commercial side, there are still some limitations on how many people can be on job sites, which varies state by state. However, we are in the traditional season, so jobs are being completed, both residential and commercial, and some inventories are being replaced from our dealer standpoint. In our large retailers, we've expanded store hours compared to a month ago, and they are also replenishing some inventories. So, again, there are some positive signs over the last couple of weeks, but I want to stress that we are taking a conservative approach. We want to focus on the cost reductions that Jeff and I have referenced. We have contingency plans if things don't improve, but this is a week-by-week initiative. It's a local ground game. Counties can change, like the Bay Area in California, almost on a weekly basis, which impacts our installed stone business. However, there have been opportunities in areas like Minnesota, where our Environmental Stone business is quite strong, so it varies significantly.

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

Yes, it's a great question. We did well with price increases inside of our residential business, typically in the first quarter, which can carry into the second quarter as well. Those announcements have gone out, and we have begun to realize a price similar to 2019. We feel good about our pricing actions and our service proposition, and the value we have for our customers. They recognize the benefit of our national manufacturing footprint and our ability to serve customers across multiple regions, especially during these types of conditions. I think they appreciate that we can manage through crises in specific areas; if we need to slow down or stop production, we can shift it to different regions. This gives us a real advantage for our customers to not only ask for the price but to actually get the price. On a commodity perspective, it continues to fluctuate, depending on the specific business and labor market. We are currently assuming stable pricing across our commodities, which shifts frequently, and we are monitoring it closely.

And then a final question for me, just on liquidity and cash flow. So just to confirm, the $118 million of excess availability, is that actually available? Are there any springing covenants that we should be mindful of? And then also to the extent that 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 going to become more attractive from a valuation perspective. Your debt is trading below face value. Just kind of curious how you guys think about it internally and capital allocation?

Yes. To address your first question about the liquidity, we do have availability remaining on our asset-based revolving credit facility, and there are no restrictions on that. It is available to us today, modifying its change based on our levels of receivables and inventories. We feel comfortable with the liquidity we have in hand that we'll be able to continue to manage through this without issues. Specifically regarding capital allocation, first of all, we'll continue to run the business to ensure the right investments are being made in maintaining our capital and keeping our plants running efficiently. But we are also going to continue to invest inside the company from a growth perspective, ensuring we've got new products coming out and innovation. We will prioritize those capital projects that make sense for the company and offer good returns for our shareholders. Those projects come first on our list, followed by potential acquisitions and debt pay down as other priorities, with acquisition looking at those that meet our strict acquisition criteria, and debt pay down is appropriate. We still maintain our guidance to target a 2-2.5x leverage ratio in the longer term.

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 non-residential backlog. I know you gave some helpful color on the verticals. 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 simply being postponed? So how's all that shaping up? Thanks.

Yes, thank you. That's a great question. What we saw in early April was quite a bit of not cancellations but pushouts. We typically see pushouts in around 10% range, but they got upwards of 30% to 40%. That has come back down to more traditional levels, but it really depends on the sub-segment. If you look at e-commerce warehousing, that business is still very steady. However, retail and office jobs are still finishing up, but there is not a lot booked for the future. So it really depends on where we are located. The retail office will be challenging this year, while warehouse is a positive opportunity, and health care as well. We are seeing bookings improve over the last couple of weeks and our customers are very positive on the commercial side. They want to get their jobs finished but are concerned about the retail commercial side of the business. We are rationalizing our plant footprints and considering the best footprint to have from a demand standpoint going forward to service our customers. It's a mixed bag; some segments are challenged while others like retail and office are seeing pushes, but e-warehouses have a lot of jobs we are chasing right now. So we are being cautious about the commercial outlook in the next couple of months. As we mentioned in our comments, we are rationalizing our footprint and getting front and center with our customers.

Got it. That is very helpful, Jim. So my follow-up would be, since there are such large variations in the verticals, are there margin differentials related to different product mixes that we should be aware of going forward on the assumption that these trends might persist for an extended period? Thank you.

Yes, thank you. There are definitely margin differentials that we look at for each segment, and we examine the margins carefully. Our pricing strategy incorporates both residential and commercial sides, by customer, by repair, and remodel, along with different end-use markets. Balancing price and volume with cost structure is extremely important, particularly on the commercial side, where we manage our steel prices and ensure we maintain competitive pricing. We have implemented internal processes and software to track our pricing effectively, and I am very proud of what our organization has accomplished regarding pricing through the past years. We will remain strategic about balancing price, volume, and margins as we move 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 turn by year-end? And then also, with the CapEx spend, what percent can we be attributing to growth-focused initiatives versus more maintenance?

Yes. There remains a lot of uncertainty surrounding the forecast for 2020, making it difficult to predict our leverage ratio by year-end. We have pulled our guidance due to that uncertainty. We want to ensure we understand the demand forecasting and volume assumptions before we commit to those targets. Long-term, we're still committed to achieving those lower leverage ratios that we discussed. Regarding CapEx, we prioritize projects that create the most value for the company. We typically have about $30 million to $40 million worth of maintenance CapEx just to keep things running and maintain safety standards. Then we focus on growth projects that provide the highest return on investment for our shareholders. We make sure to balance these investments appropriately.

Thank you. And 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, the first outbreak was in Washington State, and they appeared to manage that outbreak effectively. The Northeast is particularly challenging, especially New York and New Jersey. We have also seen hotspots in areas like Atlanta and Dallas. However, the key area is primarily New Jersey and New York, which sees nearly half of the cases. I'm incredibly proud of the dedication of our team on employee safety. We were commended by outside experts for our initiatives, including deep cleaning facilities and conducting temperature checks on employees. Safety is a core value at Cornerstone and we acted actively and decisively, meeting frequently to assess the situation as it changes day by day. We've done an excellent job at ensuring employee safety as well as that of our customers.

Our last 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 get the near-term cost saves that would offset some of that impact?

Yes, Richard. I appreciate the question for clarity. The 30% is pre-actions; take the volume assumptions, whatever decrementals you may have, and bring it down by 30% while adding back those near-term and structural cost benefits to get a revised decremental rate.

Got you. That makes sense.

Richard, let me speak a little more on some historical context. We have done extensive analysis in this regard. Back in 2019, we finished our EBITDA margins at 10.6% and we increased that by 130 basis points to 11.9%. A variety of factors drove this improvement, including our price strategy, net of inflation and, as communicated, we successfully executed $110 million worth of cost-outs during 2019. These improvements are a solid comparison to the additional cost-out initiatives we're currently taking.

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

We're estimating about $10 million from the $40 to $60 million category, and as Jim mentioned, we acted quickly at the end of March to put many of these measures in place in response to things turning south.

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

We are continuing with our strategic objectives around working capital management. We've implemented $50 million in working capital improvements centered around inventories, payables, and receivables. This is one of our significant focuses as a management team to ensure we have the proper amount of inventory to run the company and properly service our customers. We have put significant effort toward sales and operations planning, which allow us to better manage customer demands and inventory levels efficiently. Additionally, the first quarter trends of lower steel costs and volatile volume assumptions will also contribute positively to our 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 started to see headwinds showing up towards the end of the month or if that was more in the second quarter.

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

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.