Core Natural Resources, Inc. Q1 FY2023 Earnings Call

Good morning. 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' Q1 2023 Lenders Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. Thank you. Jason Uthe, Senior Vice President, 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 which management expects will lead to synergies and 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 refers 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 morning, everyone. And thank you for joining us today. Starting on Slide 4. I'm pleased overall with our first quarter results in an environment that remains dynamic. We're focused on managing our costs during the downturn while continuing to work closely with our customers and making investments for our future. Volatile macroeconomic conditions and slowing demand continued in the first quarter, and our top-line decreased 18% against a strong comparison in the prior year. Organic volume was down 16%, slightly offset by pricing actions. Overall price net of inflation was favorable. Manufacturing productivity was flat for the quarter, but we are seeing sequential positive momentum. Our supply chains are stable, and our hourly workforce retention has improved. Adjusted EBITDA of $141 million was a 27.2% decrease versus the prior year, mainly from lower volume in the quarter. Jeff will cover the segments with additional details, but overall EBITDA margin of 11% was 140 basis points lower than the prior year. This decline is mainly from our residential businesses, especially the Surface Solutions segment as high-priced inventory worked its way off the balance sheet. We were pleased to see our U.S. Siding business EBITDA margins within our Surface Solution segment returned to high teens in the month of March. Turning to Slide 5, we continue to effectively manage price and have seen most labor and material availability challenges improve. Overall, residential market demand for both Aperture and Surface Solutions segments remain lower and we continue to take appropriate actions by channel and by region to optimize earnings while meeting customer demands. Strong margins in the Shelter Solution segment in the first quarter continue to demonstrate our effective pricing management processes and tools. Over the past two years, we have seen steel costs move dramatically. The team has done an excellent job in optimizing the cost-price differential. We're making good progress and advancing our Cornerstone production system and sales excellence capabilities. Our focus remains on managing through the down cycle and preparing the company to meet demand as the market recovers. We believe the overall economic fundamentals of the industry support favorable mid-to-long-term growth. As such, we continue to make significant investments in both CapEx and human capital. In the past year, we have further strengthened our leadership talent with dynamic and proven leaders joining our company. Colleen Pritchett has joined the company as the President of the Aperture Solutions U.S. and Melissa Jones has joined as President of the Surface Solutions U.S. Colleen joined Cornerstone Building Brands in August of 2022 from Hexcel Corporation, where she served as President of America's Aerospace and Melissa joined in July of 2022 from Pentair, where she served as Group President of Commercial Water Solutions. We have already seen their positive impact and are excited to accelerate our company's progress under their leadership. 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. And good morning, everyone. Starting on Slide 6, net sales of $1.3 billion was down approximately 18% versus the previous year. This comprised of a 15.4% decline from organic volume and a 3.5% impact from divestiture, which was partially offset by a 1% increase in price. Our volume decline was from lower market conditions primarily in our residential businesses. As Rose mentioned, we continue to be disciplined in our pricing actions as we continue to see inflation on labor and some other commodity costs. Overall price was able to offset inflationary input costs in the quarter. Adjusted EBITDA of $141 million was unfavorable by $53 million, or approximately 27% versus the prior year. This was mainly from lower organic volume of $70 million and impact from coil coatings divestiture of $14 million. This was partially offset by net price over inflation, and unfavorable manufacturing productivity of $4 million resulted from specific sites and lower overall volume across the Aperture Solution segment. Turning to Slide 7, the Shelter Solution segment first quarter net sales of $406 million was approximately 24% lower than the same period last year and comprised of a 10.3% unfavorable divestiture impact, a 9.7% impact from lower prices due to decreasing steel costs, and a 3.6% lower organic volume. Adjusted EBITDA was $83 million, resulting in a lower year-over-year impact of $6 million or 6.9%. The impact of the coil coatings divestiture in the prior year quarter resulted in $14 million loss as well as unfavorable organic volume of $8 million. This was partially offset by effective price management, even with volatile steel costs in the quarter, resulting in a favorable $12 million impact and supporting a strong 20.5% EBITDA margin. Favorable year-over-year net manufacturing productivity with efforts to automate and focus on continual improvement also contributed to a positive $4 million. Turning to Slide 8, the Aperture Solution segment first quarter net sales were approximately 14% lower than the prior year, primarily driven by the lower organic volumes at 23.4% and a small foreign exchange impact of 1%, partially offset by favorable price and mix of 10.1%. We continue to experience inflation in labor and key commodity costs which have been addressed with higher prices. Adjusted EBITDA of $65 million was 21.3% lower than the prior year from lower volumes of $43 million, partially offset by price and mix over inflation of $39 million. The Aperture Solution segment experienced an improved supply of raw materials, but as mentioned previously, had a few specific locations with unfavorable impacts in manufacturing inefficiencies amounting to $10 million. The SG&A was higher as we invested in strengthening our sales and marketing capabilities. Turning to Slide 9, the Surface Solution segment first quarter net sales of $269 million was approximately 19% lower than the prior year, primarily driven by lower volumes of 17.4% on favorable price mix of 1.4% and a small impact of foreign exchange. Adjusted EBITDA of $26 million was down $30 million versus the prior year due to the softening volume impact of $19 million, as well as price and mix not fully offsetting the inflation of a negative $15 million. Higher price resin cost in the quarter drove the variance. As anticipated, higher cost resin worked its way off the balance sheet by the end of the first quarter of 2023. As Rose mentioned, we did see the U.S. Siding business EBITDA margins return to the high-teens in March and continue to improve in April. We continue to invest in the Surface Solution segment and have added high-speed extruders in certain manufacturing locations. The result of automation has demonstrated higher product output and lower labor costs, supporting favorable net manufacturing productivity during the quarter. Turning to Slide 10, we show our pipeline of unrealized synergy and cost savings of $115 million as of July 2022. On the right-hand side of the slide, we are showing our unrealized synergy and cost savings pipeline as of the end of the first quarter of 2023. The main difference is the realized synergy savings from acquisitions as we continue to integrate those businesses. We continue to maintain a strong savings pipeline of approximately $104 million across manufacturing freight and procurement initiatives. We continue to identify savings opportunities in our manufacturing plants that we have communicated last quarter, we have identified additional freight savings and raw material inputs stabilized and we are returning to a more normal state of production. Turning to Slides 11 and 12, we have positioned the company with a solid liquidity position. In the first quarter, we were able to deliver unlevered free cash flow of $75 million, down from the same quarter in the prior period due to lower adjusted EBITDA and some use of cash from primary working capital. Investments in support of a stronger second quarter and higher steel costs in our Shelter Solution segment drove the investment in overall working capital. We continue to invest in our core business through capital expenditures and organic growth initiatives. We continue to invest in growth and cost-out initiatives that we believe will deliver the highest returns for stakeholders while maintaining proper liquidity. 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 to Rose for concluding comments.

Thanks, Jeff. Turning to Slide 13. We have established leadership positions in our chosen segments, Shelter, Aperture, and Surface Solutions, with large operational scale, breadth and depth of channel partnerships, and a strong product and brand portfolio enabling us to create superior and differentiated value with our customers in our chosen spaces. We are advancing our capabilities in Cornerstone Building Brands business systems, which will enable us to serve our customers more effectively with strong service and quality levels, while creating a safe and inclusive work environment for our employees. 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 higher quality products. We are investing in process digitization and customer-facing platforms to enhance our customer experience. We're equipping our sales teams with processes and tools to engage more deeply with our customers and capture market share. We're making solid progress towards strengthening our cost position, growing our pipeline of businesses, becoming a partner of choice for our customers, and remaining a disciplined capital allocator for our shareholders. Operator, we would now like to open up the line for questions.

Thank you. The first question is from Terrance Balkaran with Diameter. Your line is open.

Hey guys, really nice to talk to you again. Thanks for taking my questions. So just a couple for me. In the Windows segment, I guess have you fully realized all the glass cost increases, just based on how your contracts are set up as we think about the flow through?

Yeah. Indeed, we are seeing some escalation of glass prices for Aperture, and it's in the cost that we are realizing at the moment. But on a full year basis, we are seeing the increase that we estimated.

Okay. And then in the siding business, I think you said that the margins returned to high-teens in March. I guess what is that? Did I hear that correctly to just curious like how low the margins got then in January and February, because obviously the average was much better. And then does that imply that the destock is over for the second quarter?

So the high-teens margin that we realized in the first quarter was specifically in our vinyl siding segment and within our Surface Solutions. That reporting segment has a number of other product platforms as well that experience different margin levels. And as we mentioned, the margin compression we realized in the fourth quarter and most of the first quarter has to do with the higher cost inventory that's been sitting in our factories and on our balance sheet. So as we work on productivity improvements, as well as matching the cost of our inventory with the product that we produce, we are realizing the margin expansion that we've shared. So we expect to continue to increase that trajectory. In the last quarter last year, as well as the early part of this year, we saw significant margin compression in that particular vinyl segment.

Got it. But is the destocking we observed in vinyl sidings, as a category, behind us?

For the most part, the destocking in the channels where the vinyl segment is complete in our assessments.

That's great. And then in the Shelter segment, so can you give us a sense of what the book-to-build ratio looks like and just how the backlogs are trending? And maybe a sense of what the mix of projects looks like?

Yeah, I'll give you a sense of that. So within our Shelters business, keep in mind, there's really three separate businesses. We've got the pre-engineered metal buildings business, which is a long-cycle business. Then you've got the components and the metal residential roofing business that are much more short-cycle businesses. So for us, long-cycle business means more like six months, and the short-cycle businesses could be anywhere between a week or two weeks to a couple of months. It really depends on the mix that's coming in. We've experienced a couple of things as we kind of came into the year. In particular, throughout 2022, the metal residential roofing business looked very similar to our other residential businesses and had some contraction inside of volumes, especially as it served the residential space. Components and the pre-engineered metal buildings businesses had quite strong performance as they finished 2022. As they came into 2023, we are starting to see a little bit of pullback, especially on the larger projects inside of pre-engineered buildings. So the booking rates are down inside that part of the business. A lot of it could just be timing, weather-related, and seasonality, but we think the contribution to higher rates that are out there, and just the ability for builders to get financing for some of those larger projects. So we're starting to see some of that slowdown. We anticipated that just thinking about that business in particular, the Shelter segment traditionally follows residential or lags residential by about 12 to 18 months. So as we think about the downturn in the residential businesses starting really in 2022, we did expect the Shelters business would start to see some of the impact of the commercial application that lives inside the residential space inside of 2023. It's early days on that. It's a little bit up and down, depending on the week or the month you're looking at bookings. It's not a consistent flow one direction or the other, but we are seeing some softness inside the building space.

Okay, that's helpful. And then just last for me on the net working capital. It looked like accrued expenses were down pretty sharply in the quarter. Just curious what drove that, and if part of it is cash taxes, I would just love some help sort of understanding what the future model for cash taxes looks like going forward?

Yeah, it's a good question. So keep in mind, a lot of the short-term incentive pay gets paid out inside the first quarter of 2023. In addition to that, we also had some of the take-private expenses that were paid out. So that's the main driver of the accrued liabilities inside of the first quarter came from the short-term incentive and also those take-private payments. As we think about cash tax for the year, we estimate the 28% rate is the right estimate for the company, combining the 21% federal rate plus 5% on state taxes is how we model things. We had a little bit of loss of deferred tax liabilities out there that did push our state tax a little bit higher than 5%, and that's why we say 28% is probably the right approach.

Okay, great. That's really helpful. I appreciate it. Thanks a lot.

The next question is from Paul Niklason with MacKay Shields. Your line is open.

Hi, thank you for taking my question. I am interested in the trajectory of margins and the cost-saving strategies you are implementing. What are your thoughts on this, given that I see some windows companies with margins still in the high teens or low 20s? I understand that might be ambitious for your company, but what is your ultimate goal? Additionally, do you believe that closing down certain product lines or adjusting your product mix will be part of the strategy to enhance margins over time?

Yeah, our Aperture business, or Windows business, which is the largest business unit in our portfolio, has the greatest amount of upside opportunity in terms of margin expansion. It's a business that has come together with a number of different acquisitions. We have a lot of upside opportunities as we continue to harmonize and introduce efficiencies, both in our factories and in how we conduct our business. We haven't run the business rally around a 12% margin. Right now, in the current quarter, because of the volume declines and headwinds, we've seen a little bit of compression. But as we introduce our production system, and as those ways of working take hold in our factories, as we continue to invest in our workforce, and the acquiring of more skilled labor force is improving, certainly over time, we expect that we have several basis points of improvements. That's a rally in the high-teens is kind of the objective that we have in mind that we will build over time to realize the margin for this business.

Now, I'll add a couple of comments on top of that as well. Just looking at it by segment, the Shelters organization, the Shelter segment typically ran around 12% margins, 11%-12% margins. If you look at '22 in particular, we finished inside of the 17% range. And we finished the quarter quite strong as well inside the first quarter. As we've mentioned on previous calls, we don't anticipate that to sustain. We think that the mid-teens is probably appropriate for the margins within that Shelter space. Now it's a nice improvement, right? So think about going from 11% to 12% margins historically to a mid-teens margin. A lot of that comes with the mix of product, but also is price discipline tools that we put in place, making sure that we're chasing the right projects and that we're not pursuing the ones that are not as profitable. In our Surface Solution business, that businesses run a long time in the range of 19% to 23%. And we think that business maintains and stays at that level. Right now, we've been running in the months of April and May in that high-19, low-20s. We think that that business kind of maintains. There are probably some operational efficiencies we gained through automation that might change those slightly. But that business is going to primarily stay where it is today. And then as Rose mentioned, the biggest opportunities inside of Aperture as we continue to take the efficiencies through the Cornerstone Production System. We see it. One of the things we look across the businesses, the Apertures Solution segment is really where the biggest opportunity for us to make margin expansion. All of the tools and efforts that are in place are being put in place are in motion at this point.

Great. And then just one last quick one for me. I'm curious about the competitive dynamics. I mean, you can talk broadly, not just segment-by-segment, but just do you feel that competitors, with respect to pricing, are acting rationally or some competitors cutting prices significantly as the market gets more challenging? Or how would you characterize the environment? Thanks.

I think broadly, like us, our competitors are experiencing the kind of more sticky inflationary factors. One might say, whether it's labor or raw materials, et cetera, because we as manufacturers are now experiencing significant inflation. The cost structure that we have to make the products in general is at a higher level than relative to history. On the demand side, certainly, as we're all experiencing the downturn in both new construction and remodeling on the residential side, it's quite dynamic, particularly due to very few existing homes being available for sale. New construction is realizing a little bit more of a positive outlook that we've been reading about and being discussed in the marketplace. But in a down market, certainly in select projects and certain customer opportunities, we are feeling some level of cost-down pressures. But I think in general, all the suppliers are managing through that. And it's part of our job to make sure that you're receiving fair value for the solutions that we're providing. So I would say it varies somewhat by region and certainly by channel and certain projects. But in general, the inflationary factors that everyone is realizing seem to be there as part of how we're conducting business today.

Great, thanks very much. That's all for me.

The next question is from Nicholas Paskalides with LCM Asset Management. Your line is open.

Hi, I appreciate you guys holding the call and taking the questions. So just to start on the Surface Solutions business, just making sure that you're running at 19% to 20% EBITDA margins in April. I'm just trying to understand what drove the improvement again?

Yeah, so as Rose mentioned, within our Surface Solution segment is our U.S. Siding business, right. And that's the business that traditionally runs that 19% to 24% EBITDA margin. There's also our stone business that's in that segment as well. But the comments specifically around the U.S. Siding business that was running in the high-single digits to low-double digits, kind of 10%-11% margins through the fourth quarter and into the first couple of months of the first quarter have returned back to the historical rates, which is that 19% to 24%. The reason behind that was high priced vinyl resin. We had too much inventory as resin went the other direction, and our negotiations were favorable; we ended up with high-cost inventory on our balance sheet. So that worked its way through the P&L in the fourth quarter and particularly the first couple months of the first quarter of 2023. Now we're back to our more normal state.

Okay, that's good to hear. And then so will that offset the elevated margins from the Shelter's business that are currently elevated?

Yeah, I don't know if I think about them as combined. I think about them separately, right? So the Surface Solution segment getting back to a more normal state of margins, and the Shelter's business returning to kind of that mid-teens, which ran at 17% last year and historically ran at 12%. We think that's going to get back to 15%. But it depends. There's a lot happening inside that space with volumes, in particular on that, like commercial business in our Shelter segment that we're going to have to continue to watch throughout the year. So far this year, it's been performing nicely. But we anticipate, as we mentioned, it's going to lag those residential markets. Think about fire stations, libraries, and other such projects as our end applications for that business. So as that residential sector moves into the suburbs, it took some time for that commercial business to catch up. As things are slowing down in the residential space, we would expect the commercial business to lag that by around 12 to 18 months. Right now, it's more of an anticipated decrease in what we're filling in the first quarter.

Okay, great. Thank you for the color there. And then can you just talk about Q2 and then the full year? Would you be able to quantify what you expect volumes to be in Q2 and for the full year, and just the cadence of the overall margins for the business on Q2 for the full year? It'd also be helpful.

We can definitely see some comments indicating that we're experiencing various numbers on a more quantitative level. In the first quarter, we've definitely felt the headwinds that are affecting us. The situation can change daily, with multiple factors influencing our performance. Currently, we believe there will be some seasonality, as the second and third quarters are usually busier times for activity. Sequentially, we anticipate increased activity, particularly in construction, and hopefully a more exciting remodeling cycle as well. Looking at the overall year, comparing the first half to the second half is somewhat uncertain. However, we are managing our business with the expectation that end demand will not differ significantly. Therefore, we are carefully managing our costs and implementing the necessary measures as we continue to face headwinds. Our perspective for the year has shifted somewhat from the end of last year. When planning for this year, we thought the second half might perform slightly better than the first half. However, it’s wise for us to prepare and manage our business while assuming that the current headwinds will persist for most of the year.

Now, I'll add a couple of follow-up comments on that as well. Our two segments that primarily service the residential space, the Surface Solutions and the Aperture Solutions, mix on RMR and new construction are a little bit different. Inside our Surface Solutions business, it's about 60% RMR and 40% new home construction. Inside our Aperture Solutions, it's 60% new home construction and 40% RMR. That does cause some change with just what we're hearing. There’s a lot of speculation right now that the decline for 2023 for new home construction is improving. It's still a decrease, but it’s getting better. We are seeing some of that. Inside our Surface Solutions segment is our manufactured stone business, which provides us with a nice feel for what's coming at us through the large new home construction builders. We have seen the order rate pick up quite a bit inside that space. So we are filling some of the momentum on the orders. We haven't necessarily turned into revenue yet. But it's a nice indicator that some of that new home construction space is heading in the right direction. However, it will take a little bit of time for that to work its way to orders for us and then turn into revenue.

Okay, thank you. Thanks for the detail there. And just lastly, do you expect margins to stay above 10% for the full year still? Or do you expect it to be lower now that you're seeing some weakness in the second half of the year?

Qualitatively, again, because of the higher season in the second and third quarter, we expect as we manage prudently that there will be improved margins that will be realized, and then, typically, in the last quarter during the winter season, we deal with high fixed costs compared to the volume that we will see at that point in time.

Okay, thank you. That's all for me.

The next question is from Andrew Casella with Deutsche Bank. Your line is open.

Hey, guys. Thanks for taking the question. I guess, can you talk us through a bit on how you're thinking about liquidity? So you guys ended the quarter with about $1.4 billion? Obviously, it seems like a very high number more than you need to operate. So just curious if you have an update on how you're thinking about capital allocation that you bought some bounce back in the first quarter. Just curious if that's still a priority. And then, as far as we talked previously about asset sale proceeds and how you were thinking about utilizing those, if you have an update for us.

In the first quarter, we concluded with a liquidity of $1.4 billion. To break it down, $379 million came from cash held on the balance sheet at the end of the quarter, while approximately $1.1 billion is available in the ABL facility. We also have some Letters of Credit, which offsets that amount, bringing us close to $1 billion. This is how we maintain our liquidity. We are in a solid position and will stay conservative regarding cash flow management during uncertain times to ensure we keep investing in the company. We aim to avoid compromising our investments in cost reductions and growth initiatives, preparing ourselves for a future recovery. It's crucial for us to manage both the downturn and the eventual recovery so that we can effectively serve our customers and meet volume expectations as they arise. With some encouraging signs in the new home construction sector, we want to be ready for that. Regarding bonds, we've been strategic, keeping in mind potential asset sell-sweep opportunities from our recent divestitures. If a chance arises to pay back some debt at a discounted rate, we'll take it. However, it seems this opportunity may be diminishing as bond prices have risen in recent months. We'll continue evaluating these options individually. Currently, we don't expect any significant proceeds from asset sales to reduce our debt based on our forecasts and will strive to maintain strong liquidity moving forward. We are open to opportunistic acquisitions, but our current focus is on bolt-on acquisitions that strategically enhance our geographical reach or capabilities. While we wouldn't dismiss the idea of significant acquisitions, our attention right now remains on smaller, strategic bolt-on opportunities.

Got it. And just to confirm. So the takeaway is that the asset sale proceeds, you do not expect there to be a bank debt paydown with those, just to confirm.

Yeah. At this point, based on our projected EBITDA, and there are still a lot of two more quarters to go before we can really put a pin on that. But based on the projections we have, we are not anticipating an asset sweep at the end of the year.

Okay, got it. That's helpful. And then I wanted to go back to your volume comments. So, it sounds like to me you were saying, before you were a little bit more bullish on the second half, and having more of an uptick, and now you're planning on the second half not improving from the first half. So as we think about the second quarter volume declines through the months of April and May. Are those still running at kind of that mid-teens level? Have those improved at all? And then I guess in line with the comments you had made, does that mean you're anticipating mid-teens declines in the second half, or is that going to look more flattish, because I know the comps are a little bit easier.

Yeah. What we're seeing in terms of volume clearly varies. As Jeff was talking about, we are seeing, for example, a noticeable uptick in the incoming in our stone business as one example. Some of the other segments of our businesses, we continue to see a comparable level of headwinds, anywhere from, depending on the segment, I would say, high-single digits down to low-20s down in terms of volume that we're experiencing. Again, as we go into the spring months here, although in absolute terms, we are at lower levels, we do anticipate that it will be somewhat better as people are building more and doing more to their homes and during commercial construction. Our current anticipation is that that little bit of uptick sequentially, will seem the second quarter relative to the first quarter will remain at that level in the third quarter, and then come back. We're still on the first half to second half basis; we are managing our business that it is kind of an overall flat profile.

Okay, got it. And then a final question for me. Thanks, again. Just wanted to go through the cash flow walk for the year. If you could just update us on everything about CapEx. I think you'd given us the cash tax rate previously, I think you would said there would be an opportunity in working capital. So if you could just give us some of those bookings, it'd be helpful for the model.

Yeah, absolutely. So the major drivers as we think about 2023 CapEx, our anticipation right now is about $140 million worth of CapEx for the year. We spent $42 million inside the first quarter. So you can see the run-rate there is on track. The second quarter right now is anticipating that's going to be closer to kind of $36 million. We are tracking to that number and feel good about it. As we think about the cash position and cash taxes, as we look at the full year, and we look at some of the benefits that are in there, we expect it to be about a $20 million use of cash. So there's not a high cash tax expense coming out this year. Cash interest expense is about just under $300 million.

And that's our working capital?

Yeah, working capital may pull up here real quick. We anticipated a benefit of about $50 million to $100 million worth of primary working capital. Specifically, accounts receivables, accounts payables, and inventories. As we think about last year, we also had a nice benefit alongside 2021. We'll continue to benefit inside of working capital for the year. A lot of it is going to depend on the volumes again, particularly for steel costs. Our Shelters business, if you think the first quarter, we realized deflation from steel costs in the P&L. But if you look at the steel index, it was going up. It almost doubled in the first quarter from December till the end of March. Because the long cycle on that business, it does have a use of cash impact, especially since we are experiencing inflation.

Great, thanks so much. I'll get back in the queue.

The next question is from Richard Kus with PGIM. Your line is open.

Hey, thanks for taking my questions. So just first for me, if we can step back into the Shelter Solutions business, just from a margin standpoint, you kind of talked about what you're seeing in terms of steel. How should we expect the normalization of margin into the mid-teens to progress there, as you think about the remainder of 2023 and look into 2024? What needs to happen here, how much of your prices come down relative to lower steel prices, and then how much of that normalization is going to be driven based upon volume?

So, as the strong margins that we had in the first quarter of over 20% are not sustainable. We have put in strong pipeline management capabilities as a function of the cycle. We have short-cycle and long-cycle businesses. The way we go about adjusting price, relative to steel, and our ability to react quickly has improved significantly because of the tools and processes. In addition, relative to history, we have been optimizing our cost structure and efficiencies in our factories. Having said that, certainly our ability to expand the spread over the price is greater when the steel price is on an upward trajectory. When steel prices are coming down, it compresses the spread. We anticipate a more normalized level for this to be in the mid-teens as we progress throughout the year, which we are already starting to see with steel prices declining.

And Richard, we won't get into a lot of detail around this, but we have the short-cycle and long-cycle businesses that tend to have some offsets. In an inflationary environment, our short-cycle business has a benefit; in a deflationary environment, it has headwinds. The opposite is true for long-cycle businesses. If you look at it by segment, which we don't show, you could see the margin compression and expansion in each of those segments. They've had a tendency to offset because of the inventory and steel buying. But we do manage it very tightly, and that’s a core competency we have.

Got it. And I guess my follow-on is just like, steel price trajectory overall, I know is lower. But you noted yourself have risen over the course of the past quarter. Is your expectation that normalization happens quickly, like within this next quarter? Or is it something that gradually happens as we move through the year?

Right now we believe the peak has been reached, and the curve has turned downwards and is beginning to decline. We anticipate it will start to normalize and continue declining throughout the second and third quarters as well.

Richard, to point out, we have the short-cycle and long-cycle businesses that tend to have some offsets. They also affect margin instability. Every weekly basis, we make sure we have a direct insight into pricing structures, managing inventory etc. We have managed it effectively throughout several years of volatility.

Understood, okay. And then maybe last one for me, just in terms of that $120 million of unrealized synergies and cost savings that you guys are communicating. How much of that becomes realized in 2023?

Yeah, the way we think about that chart in particular: the way we measure our cost savings and synergy savings is that they have to have started and completed within 18 months. So, looking at that, you would say that two-thirds of those will be realized in 2023, while a third may come in 2024.

Got it, understood. Thank you very much.

The next question is from Brian DiRubbio with Baird. Your line is open.

Good morning. A few questions for you, just outside of steel and glass what other raw materials are you experiencing inflationary pressures on lately?

Probably the glass is inflationary, steel was inflationary, now it's reducing. Just about all our other raw materials are either stable, and one of the ones that we have been benefiting from, in terms of deflationary factors is our PVC resin, which is a significant raw material for us. That has reduced in cost and seems to be stabilizing in that reduced state.

And not a raw material input, but our labor cost remains persistent as well. Through the pandemic stretching into 2021 and 2022, we had a considerable labor inflationary impact for the company. We made sure to maintain a stable workforce, and we had a nice increase for the labor workforce this year as well.

Okay, what is labor as a percentage or cost of goods?

That's roughly 10%.

Okay, that's helpful with that. Then switching gears, just from the competitive front, you have some competitors that have expanded capacity. You've got a weakening demand environment. Is the weaker than expected results that you see in the second half of the year due to excess supply hitting the market? Or is it really just the end market is not rebounding as you initially anticipated? Here, in particular, I'm focused on the window segment.

Yeah, I think it's the latter, in our view. The end market, whether it's new construction activity or remodeling, that's driven by new homeowners buying homes and so forth. The current macroeconomic indicators are suggesting that it's not going to be as strong as we would all like. On the demand side, we're experiencing a little more favorable outlook in new construction because the existing home sales are lower than what we anticipated. So overall, for the residential home-building market, I think it's a little bit up and a little bit down at the moment.

Okay. And then as you mentioned about liquidity and potential M&A, I guess, where do you feel comfortable taking liquidity to if an M&A opportunity presents itself?

Well, it's always a difficult question, right? It depends on the market, it depends on where we're at in the cycle. It also depends on our outlook and the certainty around that outlook. To give you a sense of how we look at running the company? We like to target kind of one to two times EBITDA as a good way to think about liquidity. We can certainly go closer to one if we feel good about the outlook, but we'd like to stay closer to two if we have uncertainty in the marketplace, and it largely depends on the acquisition itself and its strategic nature. But it really just boils down to that. We probably need in cash, just to run the company about $100 million to $150 million comfortably on the balance sheet, to ensure we have the working capital and that we have cash needed in different countries, particularly Canada and Mexico, and so just manage it appropriately.

That's helpful. Thank you. And then final question for me, just pertains to the synergies and cost savings. Is there a certain level of volume that you're assuming in order to achieve that? Put another way, if limestone pick up, will those cost savings be achieved, probably in '25 versus '24? Just trying to get a sense of the sensitivity there.

Yeah, it's a good question. The synergy projection is in line with our volume projections right now. As Rose mentioned, we have been experiencing kind of mid-teens to high-teens decreases in volume inside our residential businesses. Our forecast reflects that, and the synergy benefits also reflect that type of volume declines.

Fair enough. Appreciate all the color. Thank you.

That will conclude our Q&A session. I'll turn it over to the presenters for any closing remarks.

Thank you everyone for attending our first quarter call. Thank you also for your continued interest. Have a good day.

This concludes today's conference call. You may now disconnect. Thank you.