Transcript
Hello, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Cornerstone Building Brands Q4 2022 Lenders Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. Jason Uthe, SVP, Finance and Investor Relations. You may begin.
Thank you. Good morning, and thank you for investing in Cornerstone Building Brands. Our prepared remarks include comments from Rose Lee, President and Chief Executive Officer; and Jeffrey 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. Such forward-looking statements in this presentation include, but are not limited to, the impact of several projects and initiatives for synergies and expected cost savings. The risks are described in detail in the company's SEC filings. The company's actual results may differ materially from the anticipated performance or results expressed or implied by these forward-looking statements. Finally, management will refer to certain non-GAAP financial measures. Specifically, in this presentation, we refer to adjusted EBITDA, adjusted EBITDA margin, defined as adjusted EBITDA as a percentage of net sales and pro forma net debt leverage, which are non-GAAP financial measures. You will find a reconciliation of adjusted EBITDA and adjusted EBITDA margin, non-GAAP financial measures, and other related information in the SEC filing. Our non-GAAP financial measures are not intended to replace the presentation of the comparable measures under U.S. GAAP. Please note, we will be referencing our investor presentation on the investor site 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. With that, I would like to turn the call over to Rose.
Thank you, Jason. Good afternoon, and thank you for joining us. This is our second lenders call since the company merger, and we thank you for investing in Cornerstone Building Brands. Starting on slide four, 2022 was a strong year for the company, achieving its highest net sales and adjusted EBITDA. Net sales were $6.5 billion, a 16.1% increase versus prior year and adjusted EBITDA at $799 million, a 14.9% increase versus prior year. We delivered pricing gains that more than offset inflation, reflecting our strong value proposition to our customers. Our supply chains have stabilized and our hourly workforce retention has improved. Turning to slide five, our fourth quarter performance also yielded good results. We experienced market slowdown in inventory resets primarily in our residential businesses. However, we continue to be disciplined on pricing actions to offset inflation. For the fourth quarter, our net sales of $1.5 billion was approximately flat versus prior year. Adjusted EBITDA of $172 million was favorable versus prior year by $12.5 million, mainly from lower volume in the quarter. Jeff will cover this segment with additional details, but overall EBITDA margin of 11.7% was 90 basis points lower than prior year. This decline is mainly from our Surface Solutions segment, where inflationary pressure was not offset by higher prices in the quarter. We do anticipate that the higher price inventory will work its way off the balance sheet in the first quarter of this year. Turning to slide six, we continue to manage through complex and uncertain market conditions. Strong price actions in Aperture and Shelter segments have offset raw material costs and other inflationary factors. Overall, we have seen most of the labor and material challenges subside. However, we continue to have labor shortages in a few locations, which we are addressing with specific local actions, while in other areas, we are addressing lower demand with less overtime and reductions in both direct and indirect staffing. Residential bookings began to soften early in 2022 for our Surface Solutions segment and in the second half in our Aperture Solutions segment, arising from a combination of market softness and inventory reset in the channel. Aperture Solutions continues to have the ability to pass on price increases to offset inflation, while Surfaces is experiencing price pressure due to deflationary conditions. While we recognize the near-term headwinds, the economic fundamentals support favorable mid-to-long term trends for our businesses. As demonstrated by record margins in the fourth quarter in our Shelter business, we've installed strong pricing processes and tools to effectively manage our steel spreads. Over the past two years, we have seen steel costs moving dramatically, and the team has done an excellent job in optimizing the cost-price differential. The fourth quarter resulted in softer demand in our short cycle roofing and components businesses similar to our residential businesses. Our long cycle pre-engineered metal buildings business also experienced lower bookings in the fourth quarter. However, the first few weeks of this year have seen higher booking rates. As we move forward, we are prioritizing factory cost efficiency actions and deeper engagement with our customers to strengthen share and price leadership in an uncertain market. Specifically, we are accelerating the impact of the two highest priority pillars of our business system, the Cornerstone Production System and Sales Excellence systemization. In addition, we continue to invest in our expansive innovation pipeline, comprised of new products and technology investments in our business processes and factories to ensure future new growth capabilities. Finally, we have positioned the company with ample liquidity. Jeff will provide more details about our recent actions to strengthen our balance sheet and advance our capital allocation strategy. Now, I would like to turn the call over to Jeff.
Thank you, Rose. Starting on slide seven. As Rose mentioned, we had a strong year, as well as a good fourth quarter with net sales of $1.5 billion, which was flat versus the previous year. This comprised of a 9.1% price increase and a small impact from acquisitions and was offset by a 9.8% lower organic volume. We have been able to effectively manage favorable price in response to rising commodity costs and other inflationary impacts. Our volume decline was from overall lower market conditions in the quarter, combined with inventory resets in our channel and overall price discipline. Adjusted EBITDA of $172 million was unfavorable $12.5 million or 6.8% versus the prior year. Lower volumes of $44 million combined were unfavorable, but improving manufacturing inefficiencies were partially offset by net price over inflation. The unfavorable net manufacturing productivity of $11 million resulted from specific plant operations and higher freight costs, primarily in our Aperture Solutions segment. Turning to slide eight, the Shelter Solutions segment, fourth quarter net sales of $488 million was approximately 7% lower than the same period last year and comprised of an unfavorable 7.9% organic volume, slightly lower pricing actions with lower steel costs that were partially offset by a favorable 1.7% impact from the UCC acquisition. Adjusted EBITDA was $107 million, lower than prior year by $6 million or 5.3%. The effective price management to offset a very dynamic volatile steel cost market resulted in a favorable $15 million impact and supported a 21.9% record EBITDA margin. This was offset by unfavorable organic volume of $17 million as well as a $7 million impact of the UCC acquisition in the prior year quarter results. Favorable year-over-year net manufacturing productivity with efforts to automate and focus on continued improvement contributed to a positive $7 million. SG&A resulted in an unfavorable impact of $5 million from variable compensation and continued investment in key positions. Turning to slide nine, the Aperture Solutions segment fourth quarter net sales were approximately 9% higher than prior year, primarily driven by the favorable price and mix of 17.8%, which offset lower volumes of 8.5%. We continue to experience higher inflation in labor and key commodities, which have been met with higher prices. Adjusted EBITDA of $75 million, 38% higher than prior year, with price over inflation of $52 million. The Aperture Solutions segment experienced a significant improvement in supply of raw material, but as mentioned previously, had a few specific locations that had persistent unfavorable impacts on manufacturing inefficiencies. SG&A was unfavorable as we continue to invest and build resources to improve our manufacturing capabilities and to increase productivity and product output. Turning to slide ten, the Surface Solutions segment fourth quarter net sales of $304 million were approximately 7% lower than prior year, primarily driven by favorable price and mix of 8.3%, which more than offset the lower volumes of 15.4%. Adjusted EBITDA of $25 million was down versus prior year due to the softening volume impact of $15 million as well as price and mix, not fully offsetting inflation of an unfavorable $14 million. Higher price resin costs in the quarter drove the variances. As mentioned previously, we expect the higher cost resin to work its way off the balance sheet in the first quarter of 2023. We continue to invest in the Surface Solutions segment and have added higher speed extruders into certain manufacturing locations. The result of automation has demonstrated higher product output and lower labor costs. However, net manufacturing productivity was unfavorable during the quarter from specific machine downtime, which is being addressed. Turning to Slide 11. On the left-hand side of the slide, we show our pipeline of unrealized synergy and cost savings of $115 million as of July of 2022. On the right-hand side of the slide, we are showing our unrealized synergy and cost savings pipeline at the end of 2022. The main difference is the realized synergies and savings from acquisitions as we continue to integrate those businesses. We continue to maintain a strong savings pipeline of approximately $93 million across manufacturing, freight, and procurement initiatives. We continue to identify savings opportunities in our manufacturing plants but have recently identified additional freight savings as the supply chain has stabilized and we have returned to a more normal state of production. Turning to Slide 12 and 13, we positioned the company through the merger with a solid liquidity position. In the fourth quarter, we were able to increase the unlevered free cash flow by nearly $200 million year-over-year. Lower steel costs in our Shelter Solutions segment, combined with improvements in our Window Solutions segment, drove the improvement in overall working capital. We continue to invest in the core business through capital expenditures and organic growth initiatives. We believe continued discipline in investing in growth and cost-out initiatives will deliver the highest return for stakeholders while maintaining ample liquidity. While our debt leverage ratio increased to support the merger, we anticipate a continued benefit in working capital reductions. We remain committed to our balanced capital allocation strategy to invest in cost-out and automation initiatives, revenue growth initiatives, remain disciplined on strategic acquisition opportunities as well as paying down debt. And now, I'd like to turn the call back over to Rose for some concluding comments.
Thanks, Jeff. Turning to Slide 14. While these are dynamic times, we remain focused on executing our strategic priorities. We have firmly established leadership positions in our chosen segments, Shelter, Aperture, and Surface Solutions. Our large operational scale, breadth and depth of channel partnerships, and strong product and brand portfolio enables us to create superior and differentiated value with our customers in our chosen spaces. We are advancing our capabilities in Cornerstone Building Brands business system, CBS, which will enable us to serve our customers more cost-effectively with strong service and quality levels while creating a safe and inclusive work environment for our employees. In addition, as we build out our expansive innovation engine, we're investing for our future with priority toward organic growth while cultivating a strong pipeline of inorganic opportunities. For example, we continue to invest in manufacturing automation to make our plants more efficient and produce high-quality products. We are investing in process digitization and customer-facing digital platforms to enhance customer experience. We're equipping our sales teams with processes and tools to engage more deeply with our customers and capture market share. We are excited about our future as we continue to strengthen our cost position, grow our pipeline of business, demonstrate a track record as an efficient operator, become the partner of choice for our customers, and remain a disciplined capital allocator for our shareholders. Operator, we would now like to open up the lines for questions.
Thank you. The first question is from Andrew Casella with Deutsche Bank. Your line is open.
Hi, thanks for taking my question. So, kind of a two-parter as far as demand is concerned. So can you help us understand by segment what we would say is due to kind of just market unit volumes versus destocking at distributors? And then as you kind of, we're sitting here in the beginning of March, if you could kind of talk a little bit about what you're seeing into January and February? I know some of the builders were saying January and February have been pretty strong. So certainly, given the appearance that December or at least fourth quarter trends marked somewhat of kind of a local bottom, but curious what you're kind of seeing out there.
Yes. As we discussed, our residential segments, Aperture and Surfaces, began experiencing a slowdown at the start of the year with Surfaces, followed by Aperture in the second half. Looking at the whole year, we estimate that about half of the demand slowdown was driven by the end market and the other half was related to destocking as everyone adjusted to new demand levels. As you have already pointed out, December was certainly slower in the last quarter, and while it's uneven, we are witnessing different trends, with some areas experiencing higher demand and others continuing to see lower demand as we enter the year.
Yes. The only thing I'll add to that, Andrew, is the commercial business or our Shelters business. We did see some softening in particular in our bookings in the fourth quarter of 2022. But the first couple of months of 2023, in particular, in our long cycle business has actually been fairly good. So we've seen a little bit of a rebound. We saw some softening in that longer cycle business, but it has rebounded in the first couple of months.
Okay. Got it. That's helpful. And then just focusing on margins, if you could kind of help us think through some of, I guess, the dynamics there. I guess specifically on the siding business. I know you had said that you're expecting the higher priced resins to kind of roll off into the first quarter of '23. But curious if there's going to be a ramp up to more historical levels? Or if you think coming first quarter of '23, we're going to see numbers kind of in the high teens level where you've been historically? And then I guess on the commercial business, I'm not sure if you disclosed like a $1 spread that you're at, if that margin was more a function of just the dynamics of maintaining a $1 spread and typically in deflationary environments, there's a percentage increase. I think a lot of folks have kind of expected more of a normalization to kind of the low teens horizon and you guys have been outperforming that. So, just curious to kind of think about that cadence as we go into 2023. And any comments on the Windows business as well as far as any pricing dynamics with competition, potential price wars, etc., that would be helpful. Thank you.
Yes. As we've previously mentioned, our Siding or Surface business has faced a more challenging margin profile in the fourth quarter. This situation is largely due to the discrepancy between the higher priced inventory in our warehouses and the lower demand we've been experiencing. We expect the first quarter to continue to see somewhat compressed margins, but we are confident that we will resolve these issues. However, we will still face some permanent inflationary factors in our business, such as labor and other inflation-related costs. We are committed to working with our factories to improve efficiencies and other aspects. We anticipate returning to more normal margins in the high teens and low 20s throughout the year. Regarding the Shelter business, we achieved record margins last quarter, which resulted from our management of raw materials and market conditions. Compared to our historical margins in the low teens, we have implemented lasting improvements in our operations, including our pricing processes and competitive data analysis. As a result, we believe we have increased the margins for this business to the mid-teens range. While margins above 21% are not sustainable, we expect them to perform several points higher than our historical averages. Lastly, in our Windows business, we faced some challenges last year that affected margins. However, our workforce and operations have returned to normal, and we have recovered most of the margins reflected in our last quarter's performance. We have been able to maintain our pricing in Windows, despite some pricing actions and discussions in the marketplace. Overall, due to the mix of our remodel and new construction activities and various channel dynamics, we are currently able to sustain our established pricing from previous quarters and years.
Okay, very helpful. And then final question for me, Jeff, I know on the last call, I think there were two milestones that you guys were looking at in February and November on how to kind of deploy the coder's sale proceeds. I'm just curious if you have an update for us. I know there were some bond repurchases done in the fourth quarter. Just curious if that's continued into the beginning of the year, or how you guys are kind of thinking about those levers as we look into the next 12 months?
Yes, Andrew, I appreciate the question. We are maintaining a disciplined approach to our capital allocation and internal operations. First and foremost, we will continue to invest in cost-reduction capital expenditure initiatives. This strategy has enabled us to automate certain labor-intensive roles in our Siding division, particularly those that are less appealing to our workforce. Continuing on this automation path makes a lot of sense. We are also committed to investing for growth across our various segments. For our Shelters business, we have implemented significant investments to streamline processes, and in our Surfaces business, we have allocated capital expenditures to capture higher growth as our products advance this year. The decision to buy back bonds was strategic, aimed at strengthening our balance sheet and utilizing our available cash more effectively rather than letting it remain idle. We have continued this practice in the first couple of months of the year and assess it regularly to determine its viability based on market conditions and our liquidity needs. Our expectation is to invest approximately $140 million in capital expenditures in 2023, and we have identified promising projects to utilize that capital throughout the year.
The next question is from Chris Piccolella with Apollo. Your line is open.
Hello. Good afternoon, good quarter, as usual. And Rose, just congrats on being named to the NAM Board. It's pretty cool.
Thank you very much, Chris.
No problem. So, just wanted to ask on Siding, I mean if you think that margins begin to normalize a bit in, call it, 2Q '23 because it sounds like you're going to have some similar pressure in 1Q. Like, how should we be thinking about the back half of '23 if demand kind of hangs in just from a destocking perspective because the second half of the year, it looks like it's setting up for a pretty good year-over-year comp, even if margins go back to this, call it, even like mid-teens level, about 12%, 13%, 14%. Is that kind of the right way to think about it?
Yes. Certainly, at our planning also, we anticipate the most challenging quarter to be the first quarter for the reasons that we talked about of mismatch inventory, which we will work off. And certainly, the sooner the market can help us in terms of our demand profile, the stronger we will become at a faster rate. Once we have the mismatch managed, we will continue to progress towards more historical stabilized margins. But as I mentioned earlier, we had some of the permanent inflationary factors that will still be there, which we will work to mitigate with other additional efficiency actions. But by the second half, assuming that the market strengthens to some degree in the second half, we should be able to deliver the more normalized margins for the business.
And Chris, I'll add just a couple of comments on that as well. So, the Siding business was a little bit different in 2022 than Windows. We started to feel the decline in order rates really starting inside of the last couple of months of 2021 and then carry all the way through 2022. So you're absolutely right, the comparisons get easier for us as we kind of get further throughout the year. This business has historically run around those 19% to low 20% in margin, and we don't feel like there's anything that significantly changed the profile of that. It's just the volatility in that supply chain in that resin in particular, that drove the timing differences that we're kind of experiencing right now. But we do expect it to get back to much more normal levels. And as we think about our lead times, we think about our backlogs a year ago as we kind of came into 2022, we had excessive and high backlogs that we had to work our way through. And as we come out now in 2023, those backlogs are in a much more normalized pace. So things are running back to normal, and we expect those margins to get back to those high teens and low 20s again.
Okay. Since we are about two-thirds through the first quarter, should we anticipate similar margin performance across the segments?
Yes. I mean, again, it's quite dynamic, and we're monitoring it on a daily basis, but as anticipated, we anticipate the first quarter to be the most challenging quarter of the year.
Okay. And then even at these depressed margin levels in Siding, that segment on it, obviously, on an unlevered basis would be cash flow positive, right? So there's very little CapEx associated with that?
Yes, it's a high fixed cost business compared to Windows, for example. The labor percentage is much smaller because it's running high-speed extruders. So, you're absolutely right. The cash flows continue to move through there. We got a working capital benefit in the second half. You probably noticed that inside of our financials. We picked up a nice amount of working capital as we came into the third and fourth quarter of 2022. But we don't think that that necessarily means there's not an opportunity for us in 2023 to improve on working capital. And like we have in previous years, we think there's probably a 1% reduction in overall primary working capital. So inventory accounts payables and receivables having that come down as a percentage of revenue by about 1%.
Got it. Okay. And then that makes sense. And then my last question would just be, as you think about rising SOFR rates today and you're conducting the buybacks of your fixed-rate debt in the open market, albeit below par, how do you think about reducing some of your now your highest cost of debt? Because even with the hedge, if you're roughly 50% hedged on your SOFR rates, with those loans having current yields of somewhat close to 10%, how do you think about reducing cash interest burden versus doing like EV accretive transactions when you're buying at a discount?
Yes, we are currently satisfied with our existing capital structure. We have long-term debt that will remain for several years, and the market remains uncertain. Therefore, our approach is to stay the course, while considering specific opportunities for small bond buybacks. Overall, we aim to maintain our current debt structure. Our net interest expense is expected to be around $300 million to $310 million as we move into 2023, but we believe we can handle that due to our investment plans and other cash outflows. We are confident in our liquidity and capital structure, so for now, we will continue on the current path.
Got it, makes sense. All right. Good quarter and talk to you soon.
Thanks, Chris.
The next question is from Michael Clerico with Onex. Your line is open.
Yes. Hey, guys. Hey, thanks for continuing to provide a nice level of detail for lenders here and investors in the business. I guess, Andrew asked my first question on the Shelter Solutions segment, just the margins there and the sustainability at the 20% plus range. Do you see that continuing through any portion of '23 at all?
That's like asking us to have the crystal ball on steel prices. I think quality directionally, what I would say is certainly for us, when the steel prices are increasing, it gives us more means to maximize the value that we would realize. And when steel prices are decreasing, is when we have to manage the level of compression. I think what we've been able to demonstrate that in both directions, we've been able to realize a spread that is noticeably stable to how we have been demonstrated in the past. So, I think if the steel prices are more favorable for us and has an upward trend, which the latest indications are there is a little bit of an uptick by the steel producers, then certainly, that will enable us to realize higher margins. If it goes the other direction, then we will have to adjust according to the steel market.
And Michael, the only thing I'll add to that is the interest rates right now being higher do have an impact on long-term projects that are out there. And in our buildings division itself, this is the pre-engineered metal buildings, we do have high engineered products that are out there. And so, as those projects continue to move forward as long as they can afford the capital because of the higher interest rates, we should continue to see the mix be favorable for us. So, it's something that we monitor and you're probably very aware of our long cycle versus our short cycle business within the pre-engineered metal building space, which is a long cycle components and residential metal roofing, which is much more short cycle. So, we monitor each one of those. The shorter cycle businesses have a tendency to react more like our residential markets. And as prices are going up, steel costs are going up, we have a little bit of margin compression on those. And then as it turns the other direction we get some expansion. So, we monitor and watch it. We do have a little bit of that diversification that has a tendency to offset as steel costs are going up or down. But as Rose said, we're very, very disciplined right now looking at the different price by geography, by mix, by customer to make sure that we're getting the value that our products really deserve.
I appreciate the connection to steel prices, but I didn't realize the timeframe was so brief. Do you have any backlog from forward sales that might secure good margins? Regarding overall demand in that business, how is it looking when we consider the non-residential and residential markets? There's typically a delay, but what is your outlook for 2023 given the current trends in the residential market?
Yes. Certainly, I think overall for all of our businesses, the backlog has kind of tempered to more pre-COVID historical levels in terms of units, certainly the case in Shelter as well. For the because of the two distinct lead time or two buckets, two segments of lead time short cycle and long cycle, certainly, we do have orders in our books which we capture at a more favorable price that we will be then servicing as we move out during the year. But rounding, let's say, long lead time items, but three month plus-ish. So, depending on what is happening in the marketplace, we may or may not get more of those as we move out in time. And so, it's very much a function of, I think, how the end demand in the market will that move forward. And you are correct, historically, in a more typical cycle, which we don't know whether we're in a typical cycle or not, there is about a 12 month to 18 month lag in the commercial side versus the residential side. So, we're also trying to monitor, is that really evolving that way? Or are there other dynamics that's creating a difference at profile.
The next question is from Anna Pack with Jefferies. Your line is open.
Good afternoon, and thanks for taking my question. I was wondering if you could talk more about the manufacturing challenges you've cited, particularly in the Aperture Windows segment. Is this also machine downtime that you're seeing? And it sounded like things are improving. So, should we think about this as persisting through 1Q and then being better by 2Q?
Yes. Manufacturing improvement is really one of our highest priority initiatives that we've shared. It's really driven by the backed traditionally, historically, Windows manufacturing is a very labor-intensive process. And so, the more we can find efficiencies and consistent quality and productivity, the better we will be. And so, we have a systematic approach, our Cornerstone Production System of how we organize our factory floors, how we train our operators, how we roll out our work instructions, how do we continue to improve. They're all part of our Production System. And so, that's what we've been investing in. And that's what the Windows business, which has the highest largest opportunity for improvement, but all of our factories have been experiencing. And so, that's what you will see have an impact on a go-forward basis of the continued margin expansion that we should be getting from the particular Windows business, but overall for our company profile. As it pertains to the specific challenges that we had in the quarter, a combination of some of the equipment, unanticipated maintenance issues, some of it is driven by some of the power source and weather-related things, and some of its related to some of the one-off supply chain issues, which have impacted our productivity in a particular quarter versus a little bit of what we're alluding to. But we anticipated we get increasingly systematic in how we operate our plants. We intend to introduce more increasing margin expansion due to our factory improvement.
I'll just add a couple of comments on top of that. Labor, supply chain, and freight present the biggest opportunities for us. The pandemic caused significant disruption in labor due to turnover across the industry and the country, and we were not immune to it. Replacing that labor comes at a cost, as we need to hire at higher wage rates and train the employees to be efficient in manufacturing windows, which poses a real challenge across our multiple sites. The turnover has decreased significantly, with many locations returning to normal levels, although it remains persistent in a few areas where we are addressing it with local analysis and solutions. The supply chain was also heavily disrupted during and coming out of the pandemic, leading to challenges in maintaining production levels and resulting in inconsistencies in supply that have caused labor and freight inefficiencies. We often resorted to less than load shipments while trying to meet customer demands and felt that was the right approach. As things stabilize in terms of labor and supply chain, we see a significant opportunity to return to full load shipments rather than less than load shipments across the company. We anticipate regaining the benefits we lost due to those inefficiencies as we maintain discipline and implement the necessary training and measures to get back to a normal state.
Thank you. It sounds like we are improving gradually. That’s all from me. Thank you and good luck this quarter.
Thank you.
The next question is from Richard Stevens with Amundi USA.
Hello. Thank you. Most of my questions were answered, but I did have one follow-up. And just kind of looking at the housing space and seeing coming out of Q4, most of the order trends down, on average, call it, 35% to 40% with some of the build order guys much worse than that. But the one observation that comes through is that the backlogs seem to be reasonably stable and the people that are in backlog seem to be pretty well stuck in backlog. They've got pretty big deposits and houses on it. I think our view is that they probably don't back out. So with all of that in mind and with order trends down and a pretty solid backlog, I mean can you give some color around the general idea of how to think about that as we work through the year. I mean this should be a reasonably good year for Windows, I would think as that backlog gets built out, still reasonably solid. But then is there a lag effect similar to what you see in commercial that kind of impacts that as well as the Windows kind of go into the mid to sort of the end of the construction cycle.
Yes. We'll provide an overview of our current outlook for the year. Our business portfolio is divided evenly into three segments: residential new construction, residential remodeling, and light commercial. Analysts have varied predictions, but there's a general consensus that new construction may decline by over 10 percent this year, with light commercial projected to decrease in the high single digits and potentially low single digits. The extent of these changes may vary based on individual perspectives. Given this overview, we expect the first half of the year, particularly the first quarter, to be the most challenging in the residential sector due to the slowdown we experienced in December and the current uncertainty surrounding interest rates. However, as confidence in interest rates improves, we anticipate a rise in activity levels. In summary, the residential sector faces difficulties in the first half of the year, with hopes for improvement later on. Meanwhile, the non-residential sector is currently showing robust activity, though we’ll need to monitor for potential lag effects that we have historically observed.
The next question is from your line is open.
Good afternoon, and thanks for taking my question. I was wondering if you could talk more about the manufacturing challenges you've cited, particularly in the Aperture Windows segment. Is this also machine downtime that you're seeing? And it sounded like things are improving. So, should we think about this as persisting through 1Q and then being better by 2Q?
Yes. Manufacturing improvement is really one of our highest priority initiatives that we've shared. It's really driven by the backed traditionally, historically, Windows manufacturing is a very labor-intensive process. And so, the more we can find efficiencies and consistent quality and productivity, the better we will be. And so, we have a systematic approach, our Cornerstone Production System of how we organize our factory floors, how we train our operators, how we roll out our work instructions, how do we continue to improve. They're all part of our Production System. And so, that's what we've been investing in. And that's what the Windows business, which has the highest largest opportunity for improvement, but all of our factories have been experiencing. And so, that's what you will see have an impact on a go-forward basis of the continued margin expansion that we should be getting from the particular Windows business, but overall for our company profile. As it pertains to the specific challenges that we had in the quarter, a combination of some of the equipment, unanticipated maintenance issues, some of it is driven by some of the power source and weather-related things, and some of its related to some of the one-off supply chain issues, which have impacted our productivity in a particular quarter versus a little bit of what we're alluding to. But we anticipated we get increasingly systematic in how we operate our plants. We intend to introduce more increasing margin expansion due to our factory improvement.