Core Natural Resources, Inc. Q2 FY2021 Earnings Call

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 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 the completed acquisitions 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 6 of this year. I will remain as Executive Chairman of the Board through March 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 certainty where she led businesses for the residential end 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 the 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 due to 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 cost to serve our customers. We are addressing 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 half a 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 4. 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 toward our net debt leverage target of 2 to 2.5 times that we referred to over the past year or so. Turning to Slide 5. 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. As 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 advantage 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 have 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 toward 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 6. 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 advantage 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 are 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 and strategic divestitures, we expect to improve our net debt leverage by one to 1.5 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 or work. Starting on Slide 8. 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 nonresidential construction demand continues to be favorable. The Architectural Billing Index reported that the current pace of billings 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 6.5 months. Our long-term outlook for the commercial business is favorable. The market for nonresidential construction typically lags behind housing cycles by 18 to 24 months. Also, nonresidential construction spend is tied to private and public capital spending patterns, interest rates, government funding, and various considerations. 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, continued 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 discussed, portfolio optimization is an essential component of our growth strategy, and 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. Pro forma net sales were approximately $1.406 billion, 28% higher than pro forma prior year with favorable price and volume contributing almost equally. We generated $190 million in pro forma adjusted EBITDA, $29 million more than the pro forma second quarter of 2020, with all segments contributing favorable volume, price, and mix net of inflation. Pro forma adjusted EBITDA margin was at 13.5%, as expected, and 110 basis points lower than the pro forma prior year. Across all of our segments, production constraints for commodities such as PVC resin, steel, and aluminum have resulted in shortages and steel cost increases. In response to today's prices across our portfolio, which did offset a substantial impact 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 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 a 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 Windows 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 labor challenges. We continue to make substantial investments in automation technologies to improve our production and logistical efficiency, enhancing our position as a cost advantage manufacturer. We are taking actions to advance our strategy and position toward 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 in the vinyl window and door markets. We intend to continue investing in the Windows 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 channels we serve. Also, we have been a key supplier to the majority of the nation's top 10 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 Siding segment, second quarter net sales were approximately 27% higher than the 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% and 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 EBITDA. We are also investing in an exciting 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 Brands. 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 cost. July bookings are 8% higher than the prior year and backlog 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 toward 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 door 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 and simplified portfolio builds greater brand equity, fueling growth for value creation. With the selling proceeds, we will improve our leverage, accelerating toward our target of 2 to 2.5 times and strengthening our financial flexibility to fuel accretive growth opportunities. Turning to Slide 13, 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 billion and $1.435 billion, an 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, the positive pricing index, coupled with our 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 in 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 focusing 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 1.5 times over last year. This reduction is about 0.5 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.

And your first question comes from Lee Jagoda of CJS Securities.

Hi, good morning. So first and foremost, Jim, congrats on your retirement. I assume there'll be a Labor Day retirement weekend bash, so I'll keep an eye out for that invite.

Look for the invite, Lee.

Would love to start with a question that we've been getting — Jeff, can you hear me?

Yes, we can hear you now.

Okay. So I just want to start with a question we've been getting from a lot of our clients around the earnings power of the business by segment. And maybe if we sit here today and look at all the actions that have been taken, if you were to rank order the segments in terms of runway for margin improvement from either a gross or EBITDA margin perspective, how does that look today?

Lee, thank you for the question. What I would say is the Windows segment. As you know, we are the largest, and we just made another acquisition. We have the number one position in windows with a strong brand. And we have a nice diverse customer profile for our windows, including large big-box retailers, repair and remodel customers, distributors, and wholesalers. But we think that's probably the biggest opportunity for EBITDA growth. It has the biggest upside we feel. For example, when we acquired Silver Line very early in the integration, Silver Line Windows' EBITDA was mid-single digits. And we've now improved that to low double digits and even better. We believe there are also opportunities. We have a great track record in the windows business regarding synergies and cost savings. So I think our track record reflects the upside present there. Additionally, that's where we're putting the majority of our automation investments. Our window plants, with a legacy production line, has about 30 associates. When we invest in automation, it takes it down to around 12 to 15 associates while also improving your throughput, efficiencies, and costs. So we think that segment has the best upside opportunity. We're directing considerable resources toward continuous improvement in our window business, so we think that would be at the top of the list.

And then just sticking with that Windows segment. With all the acquisitions you've made, and I know you are the market leader in vinyl windows. How do you think about your market share in windows or vinyl windows, however you want to measure it? And how much is out there to be acquired in terms of tuck-ins that are potentially available?

Yes, Lee, I'll answer that one. Our market share position, as we communicated in the past, is just around 25%. And we continue with these very strategic acquisitions. Prime Windows, for example, was a geographical play. But it also added capabilities for us as we look at multi-family and some airport-type windows. So it was an important acquisition for us. As you move to the Cascade acquisition, it furthers that western expansion for us as a company, and we're excited about it. We're motivated about that acquisition and the opportunity that we have to leverage that national footprint as a company, which we think is a real competitive advantage for us with our large retail and national homebuilder customers. So it's really getting that geographical play between the two of them and added capacity. As we think forward about potential acquisitions, we'll continue to be very strategic and look for areas where there might be a gap regarding geography or product capability perspective. We feel good right now about our national presence and what we have been able to do over the last couple of years, and now looking forward at very specific acquisitions to fill targeted needs.

Got it. And then just one last one, and I'll hop back in the queue. Just as it relates to the divestiture activities, is there anything left in the portfolio that you would view as non-core to the strategy or a potential sale candidate at this point? Just given we got rid of IMP and now the roll-up door?

We consistently look at our portfolio. We feel right now we have a balanced portfolio that has focused on deep markets. When we discuss deep markets, for example, the insulated metal panel overall market is about a $1.5 billion market, compared to, for example, Siding, which is a $2 billion market, and Windows, which is a $9 billion market. So that was one of the reasons we wanted to participate in those deep markets. But we feel really good with our commercial business with buildings and components. Both of those markets are very deep markets. For example, in components, we are the leading market share leader, but it's a very fragmented market. We believe there are opportunities in our components business to possibly do some tuck-ins there. So we are reviewing our commercial business on where we can grow it through M&A and organic growth. At this point, we are in pretty good shape, but we are always assessing what's core and what's non-core as we move forward.

Great, thanks very much. And congrats again, Jim.

Thank you.

Good morning. Thanks for taking the questions. I'd like to pass along my congratulations to Jim as well on the retirement and a great run over the years. Maybe that's a good topic to start out on, actually. I haven't met Rose Lee in person yet, and we'll look forward to hearing from her directly, but I'm curious from your perspective, Jim, if you could kind of speak to some of the early playbook that she may have, the 90 or 180 days plan on ramping the business. And then just curious, any additional high-level thoughts on why she's the right leader for the next phase of Cornerstone. Thank you.

No, that's great. And thank you for your kind comments. As I mentioned in our prepared comments, we worked very diligently with the Board and the search committee and explored numerous candidates. One of the things we wanted in my successor is someone that has a strategy in mind for top-line growth, as well as the ability to bring in innovation, particularly as we pivot from integration to growth. Innovation is a core value that Rose has talked a lot about and has a track record in. She's been in the industry and knows how to work with our customers. Rose is also very strategic regarding where the company will go in the next 1,000 days. We've had numerous conversations about our current strategy, and she really loves the company's direction. I will be working, as I mentioned, hand in glove with Rose on a very smooth transition, ensuring that she is comfortable with the direction we are headed and where there may be some small tweaks. Clearly, she will be running the show here. But we're really excited about her background and experience, not only at DuPont but also with building products and dealing with some of our common customers. So she won't be a stranger to a lot of our customers, and I believe with her strategic background, she will significantly help us accelerate our growth engine. I am personally very excited about her joining us, and we believe she will be a wonderful Chief Executive Officer and an excellent addition to the Cornerstone leadership team, and she will be very eager to meet you.

Wonderful. Absolutely looking forward to it. Second one, if I could drill down on the near term a little bit here. If I'm looking at the Q3 guide and what you're implying around gross margins, it still seems like there's some pressure assumed in the next quarter. It looks like you're positive on price net of inflation, at least in Q2. So I'm just curious, what bridges you there in Q3? Is it labor, is it just other manufacturing efficiencies? Where else is the pressure coming from? And how do you think about price versus cost in that margin guide?

Yes, Matt, good question for us. You're right, we are getting price over inflation as a company, and a real core competency for the company involves putting real discipline in place across our segments to ensure that we are capturing that price over inflation. We're navigating a challenging environment where we're unable to ship everything that we'd like to due to some of the supply constraints in place. Additionally, we are experiencing labor shortages. This combination proves difficult to manage. We must ensure we retain and maintain as many employees as we can within our manufacturing base while also addressing some of the supply constraints. This situation causes natural inefficiencies as we're attempting to staff appropriately for the demand we see. All of our demand is coming in strongly across all three segments right now, including the commercial segment, which has transitioned to growth in our bookings on a tonnage basis over the last couple of quarters. So we're seeing strong demand across the company, and we are incurring some extra costs to service our customers. That's really the key message: we're having some extra freight expenses that we are incurring to move products from one plant to different plants to better serve our customers. This involves temporary shifts or a short-term increase in expenses. However, we firmly believe that it is the right decision in the long term to maximize our relationships with customers. They are aware that we will always be present to serve them in good times and bad. But this, in turn, will incur some costs right now inside Q3. Again, we believe that we will navigate through this if stability returns to the supply chain and the markets themselves. For now, this represents the best way to operate and ensure exceptional customer service.

Wonderful, thank you for that color, Jeff. And Jim, congrats again and best of luck.

Thank you.

Great, thank you. Good morning. I just wanted to start on the window side. It looked like price was maybe kind of a 10-point benefit to sales growth this quarter. As we look ahead and think about the various pricing actions you've taken, is that benefit something we should expect will continue to expand until you start lapping some of these benefits in 2022? Or is that the run rate we should be looking at in the back half of the year?

That's a great question. We have a really strong backlog in our Windows business. When we implement a price in the market, for example, we just recently released a price increase over the last couple of weeks; we won't feel that impact until the back half of the year. Thus, some of the pricing for windows will still come through that we've announced in the first and second quarters because of the lead times we have. Therefore, we expect to continue seeing strong price performance in our Windows business through the second half of the year. We have made it a priority to care for our customers while incurring additional costs, and we are committed to offsetting as many of those costs as possible. But most importantly, we want to ensure the consistency of our lead times, which we believe is critical for all of our customers. Having long lead times is not a concern, but maintaining the consistency of those lead times is imperative in the market. We will remain aggressive with pricing due to the costs discussed. Additionally, improvements in the second-half price performance will be realized as we work through our backlog of orders.

Got it. Okay. That makes sense. And on the pro forma net leverage targets for the end of the year, a lot of moving pieces there with the acquisitions and divestitures. Could you help us frame what that 3.5 times to 3.9 times range means in terms of your expectations around free cash flow generation?

Yes, Kurt, let me talk a little bit about some of the things and how we're thinking through the pro formas. We try to be transparent with the pro formas and provide as much detail as readily available. I think we're going to still provide some additional detail as time moves forward around those moving parts. We aim to provide clarity around two acquisitions and two divestitures. Looking back at the appendix, we have tried to be very thoughtful about the guidance for Q3, expecting these transactions to close within the current quarter. A couple of important notes: If you review the pro forma statements, the reported EBITDA margins, and subsequently the post pro forma EBITDA margins, you will see a decline of about 50 basis points inside the EBITDA margins. However, I also want to remind everyone that what is not included in the pro forma historically are the synergy savings and the benefits we anticipate from the acquisitions. When taking all of this into account, we expect our position to remain generally positive. More importantly, we are transitioning away from markets that are not as large, deep, and fast-growing toward those where we can expand margins and enjoy faster growth rates. We are excited about how we repositioned the company around these opportunities and their potential to positively impact our EBITDA margins in both the short and long term. Specifically, regarding your point on free cash flow: we've worked to provide guidance for that based on the EBITDA outlook for Q3 as a starting point. Our capital spending has been adjusted slightly to the range of $100 million to $120 million due to supply constraints impacting the capital equipment availability rather than a lack of opportunities. This slight adjustment will push out some of our projects into future years but not significantly. As for cash flows, it's essential to highlight that we anticipate a more normalized working capital use and cash generation this year compared to the previous year. Our usual seasonality has seen cash utilization in the first two quarters and cash generation in the third and fourth quarters. However, due to the pandemic, 2020 experienced the opposite trend, but we expect a return to normality in 2021.

Okay. All right. That's really helpful. And just one on M&A. You've made good progress deleveraging, but even at the end of the year, you'll still be kind of a ways away from your net leverage target. With the deals you've done, is there a digestion phase where you may want to take a step back from acquisitions, or is that still a key priority for the growth trajectory over the next 18 to 24 months?

Kurt, I guess we see it may be just a little bit differently. We're accelerating our net debt leverage ratio as a company inside of 2021. We've consistently stated that we anticipate 3/4 to a one-turn reduction each year, which historically we have accomplished. We did slow down somewhat in 2020 with a half-turn reduction but guided toward a slight change. As we entered 2021, we initially aimed for a 3/4 to one-turn reduction, but we quickly accelerated our progress, essentially achieving it a year ahead of schedule. Therefore, our ending target for this year of 3.5 times to 3.9 times places us in a strong position as a company moving forward. Fast forward a year, and we aim for another 3/4 to one-turn reduction, placing us where we'd like to be. Thus, we are confident about our financial position. Our liquidity remains strong, and your comment on acquisitions: we will continue to be very strategic. We have been disciplined and have declined opportunities when they did not align with our objectives. We will look for the right acquisition opportunities that align with our long-term strategy. Tuck-in acquisitions for the right geographies and capabilities could be appealing, and we will maintain discipline in our approach to ensure that any acquisitions we pursue are also advantageous in terms of our leverage ratio.

Okay. All right. That makes sense. And just last one for me. Any thoughts or color around the potential to actually pay down a material portion of that and the interest expense implications as we look into 2022?

Yes. If you do the math and look at the proceeds that are coming in from DBCI and also from IMP, and you consider the Cascade acquisition, there's a significant delta there. There are a lot of moving parts inside the marketplace right now, and we want to ensure that we have thoroughly thought through our strategies regarding potential opportunities and debt repayment. This is a very active discussion among the team and the Board of Directors.

Okay, got it. Well, I appreciate the color, and good luck with the back half.

Thank you.

We have no further questions at this time. I will turn the call back over to Tina Beskid for closing remarks.

Just before I turn it over to Tina, I want to frame how we see the quarter and the years that lie ahead. We see continued strength in the residential market into 2022, likely at least for the first half of the year. Demand is expected to remain strong, with attacking our backlog as our number one objective. The second area is a positive outlook for the commercial market, and we are witnessing improved backlog and strong order intake. With the lag on pricing, we believe we have positioned ourselves well for the commercial business heading into 2022. The key is to ensure that every one of our segments—Siding, Windows, and Commercial—are all thriving simultaneously. I believe we are well-positioned as we enter into 2022. The third key point is our commitment to accelerating our leverage and debt pay down, which is critical. We have been very consistent regarding this on every call, and the recent divestitures give us extra financial flexibility to accelerate this by one year. Additionally, it provides us with opportunities for potential tuck-ins in areas where we can achieve deep market presence, and we believe we have the right to win. Lastly, we are genuinely excited about repositioning our portfolio to focus on growth and to engage in deep markets where we can establish ourselves as industry leaders. We are looking forward to the future. Thank you for your continued interest in Cornerstone. We hope we have delivered on our commitments over the past few years, which is something Jeff, the team, and I have collectively focused on. So I appreciate your interest, and now I'll turn it over to Tina.

Thanks, Jim. Thank you again for your interest in Cornerstone Building Brands. As Jim mentioned, we are very excited about our value proposition and the favorable long-term outlook for the company. This formally concludes the call.

Thank you. This does conclude today’s conference call. You may now disconnect.