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Cornerstone Building Brands, Inc. (NYSE:CNR)
Q4 2019 Earnings Call
Mar 4, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Cornerstone Building Brands Fourth Quarter 2019 Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Tina Beskid, Vice President of Finance and Investor Relations. Thank you. You may begin.

Tina Beskid -- Vice President of Finance and Investor Relations

Good morning, and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer and Jeff Lee, Executive Vice President and Chief Financial Officer.

Please be reminded that comments regarding the company's results and projections may include forward-looking statements that are subject to risks and uncertainties. These risks are described in detail in the company's SEC filings, earnings release and our investor presentation. The company's actual results may differ materially from the anticipated performance or results expressed or implied by these forward-looking statements. In addition, management will refer to certain non-GAAP financial measures. You will find a reconciliation of these non-GAAP financial measures and other related information in the earnings release and investor presentation located in the Investors section of our website. Please note, we will be referencing our investor presentation throughout today's call.

Today's call is copyrighted by Cornerstone Building Brands. We prohibit any use, recording or transmission of any portion of the call without our expressed advance written consent.

Throughout this presentation management may also refer to pro forma financial results. Such pro forma results give effect to both the change in the Company's fiscal calendar as well as the recently completed acquisitions of Ply Gem and Environmental Stoneworks, including Ply Gems acquisition of Silver Line, as if such acquisitions were consummated prior to the periods presented. This morning, Jim will provide an overview of our consolidated results and discuss key market trends. Then Jeff will provide a detailed discussion of our consolidated and segment results as well as guidance for the first quarter of 2020. Questions will be taken at the end of the prepared remarks.

With that, I would like to turn the call over to Jim.

James S. Metcalf -- Chairman & Chief Executive Officer

Thank you, Tina, and good morning. And I appreciate everyone joining us this morning. 2019 was a solid year for Cornerstone Building Brands. We performed well, both operationally and financially to a disciplined focus on delivering results for our shareholders and our customers. Our team not only maintained a sharp focus on financial and operating performance, they did it while addressing the changing market conditions during the year. In our first year, as the leading exterior building products company in North America, we are uniquely positioned to serve the residential, commercial and repair and remodel markets. We set up the company in a very purposeful way, knowing that the important role that are building solutions play in the growth and prosperity of the communities and the customers we serve.

We made significant progress on key initiatives throughout the year. As a core competency, the company established price discipline to offset inflationary pressures in material, labor and freight. Leveraging our continuous improvement culture, our team was able to deliver $110 million in synergies and cost savings, $10 million more than the target we set for the year. Including the merger certainties from last year, we have permanently lowered the operating cost structure of our business by over $135 million. Overall, we've improved our profitability. We delivered 130 basis points of adjusted EBITDA margin expansion over 2018 pro forma results with margin expansion in each of our business segments despite sluggish year-over-year market demand, particularly in the first part of the year.

We have successfully integrated the Silver Line, Atrium and Environmental Stoneworks acquisitions. These acquisitions were value-enhancing for us, reinforcing our leadership position in Windows and providing the company with a significant share in the fast-growing cladding market through stone veneer. We gained manufacturing scale, broaden our distribution network, and provided our customers with another exterior building product solution. Our customers have expectations from their business partners to provide a broad set of building solutions and we plan to leverage our comprehensive product offering, our product innovation and our strong brands to exceed those expectations.

Reducing leverage is an important priority for the company. In 2019, we made progress toward that goal, ending the year with net debt to pro forma adjusted EBITDA of 5.4 times. This is about a quarter turn better than our third quarter guidance we gave to you.

Turning to fourth quarter results. Consolidated net sales were approximately $1.2 billion. We delivered gross profit of $288 million or 23% of sales and adjusted EBITDA of approximately $159 million, which exceeded the top end of our guidance range. Our Windows and Siding segments benefited from the rebound in US homebuilding, while the commercial markets began to show improvements during the quarter, as demonstrated by the significant increase in the tonnage backlog. Additionally, our ongoing commitment to automation investments and lean manufacturing is lowering our cost base and driving operational excellence across our entire organization.

As we look to 2020 on Slide 4, we see the momentum continuing as the market fundamentals are positive. Residential market indicators show growth opportunities for both our Windows and Siding segments. Single-family housing starts are expected to grow approximately 4% to 6% this year. We believe that growth in housing starts coupled with modest home price appreciation will also be beneficial for our repair and remodel activity.

For the Windows and Siding segments, about 50% of our sales are driven by single-family starts with the other 50% coming from repair and remodel. Also, our Sidings and Windows products typically are installed on a [Phonetic] home 90 days to 120 days, following the start of new construction.

We are also encouraged by the positive indicators for our Commercial segment after soft demand in 2019. Our products in building solutions are used across a variety of building types within the low-rise non-residential building space. Some projects often involve architectural and engineering design that occurs approximately nine months to 14 months prior to construction starts.

Architectural activity was positive throughout most of 2019, giving us confidence that we will see growth in 2020. As you know, steel was an important raw material for us and we believe steel cost will be relatively stable, which should help minimize material pricing volatility. As a result, we expect the low-rise, non-residential market will improve approximately 1% to 2% over 2019.

Now turning to Slide 5. It has been a remarkable journey over the last 12 months building the company we are today, a company focused on creating a long-term value for our shareholders, our customers, employees and the communities where people live, work and play.

We see great opportunity to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each channel. We have a broad portfolio of complementary products that we will continue to expand through innovation, product line extension and strategic acquisitions. We are keenly focused on operating with excellence across the enterprise. With the continued tightness in the labor markets, we are investing in manufacturing automation, transforming the way work gets done and optimizing our capital deployment to create long-term shareholder value. Additionally, we see an opportunity to leverage and improve our combined working capital utilization, which will further enhance our free cash flow generation and help delever the balance sheet.

Now I'd like to turn the call over to Jeff, who's going to walk through some of our financials. Jeff?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Thank you, Jim. Good morning to all. The fourth quarter results exceeded our guidance and the actions taken through 2019 that Jim just discussed, coupled with improving market sentiment have a set up for an improved 2020.

Starting on Slide 7, net sales for the fourth quarter of $1.2 billion, down 1.8% from pro forma 2018. New construction starts began to improve in the second half of 2018 and as expected, the improvement benefited Windows volume in the US during the fourth quarter. Price and mix were favorable by $22 million over the pro forma fourth quarter 2018. Offsetting the residential market favorability, the commercial segment recorded 9.7% lower net sales to the same quarter last year, which was below our expectations. However, overall market demand for components declined late in the quarter and the insulated metal panels division experienced project delays from weather and other factors related to job site readiness.

Compared to the third quarter of 2019, the Commercial segment net sales increased 2.8% due to strong order rates and increased backlog as low-rise commercial construction market continues to improve. For the year, pro forma net sales were $4.9 billion, down 4.2% from pro forma prior year, with most of the declines coming from softer addressable markets for low-rise commercial construction. We were able to capture $187 million of favorable price and mix across all segments, as we continue to position Cornerstone Building Brands as both the market and industry leader in the exterior building products.

Looking forward, we expect first quarter 2020 net sales to be about 1% to 2% higher than pro forma first quarter 2019, with most of the increase coming from volumes in the Windows segment. We plan to remain disciplined around price. We have already announced price increases for our Windows and Siding products to offset inflationary impacts. Within the Commercial segment, we price to capture the value we bring [Phonetic] to the market as well as pass-through volatility for steel costs. The average cost of steel was lower in the second half of '19 as compared to the first half and has stabilized into the first quarter of 2020. This dynamic will have an unfavorable price effect year-over-year. As such, we expect the average selling price per ton to be approximately 2% lower than first quarter 2019, offsetting the favorable impact of improved volume.

On the right hand side of the slide, we outlined net sales by end market and product. As you can see, sales in the residential end markets through our Windows and Siding segments were 62% of total pro forma 2019 net sales, where [Phonetic] the mix between new construction and repair and remodel is about equally split.

Windows sales made up almost 40% of our total pro forma 2019 sales with vinyl siding and buildings contributing 20% and 15% respectively. We are proud of the leadership position Cornerstone holds in these markets and believe it is a testament to the quality products we produce, the service we provide and the relationships we have with our customers.

As you turn to Slide 8, fourth quarter adjusted EBITDA was approximately $159 million or 12.8% of net sales, which was $9 million or 7% more than the top end of the guidance range. We delivered 270 basis points of adjusted EBITDA margin improvement. Our disciplined approach around continuous improvement and lowering our overall cost structure generated approximately $38 million of synergies and savings, which more than offset the effects of lower volume and higher SG&A costs. Favorable price and mix in the Windows and Siding segment, coupled with favorable spread per ton in the Commercial segment generated $26 million of price and mix, net of inflation.

For the pro forma full year, we generated $582 million of adjusted EBITDA or 11.9% over pro forma 2018, a margin improvement of 130 basis points. We delivered synergies and cost savings of approximately $110 million throughout 2019, $10 million more than targeted. We believe about $25 million of these savings initiatives will carry over into 2020. We reduced cost in many areas of the business including material sourcing, plant and back office rationalizations, process and labor savings from automation and many others.

Going forward, we will report savings net of cost, as we continue to embed continuous improvement into our culture. We are committed to delivering an additional $60 million of savings in 2020 from similar initiatives, achieving a total of $195 million over the cumulative three-year period beginning in 2018.

Now let's look at our business segment results. Starting with Windows on Slide 10. For the fourth quarter, Windows net sales were $496 million, up 5% from pro forma fourth quarter 2018. The increase was primarily driven by favorable selling prices and mix across the US and Canada. Higher volumes in the US were offset by declines in the single-family housing starts in Canada.

Windows gross margin for the fourth quarter of 2019 was 19%, up 200 basis points on a pro forma basis as a result of price discipline, favorable product mix net of inflation and realized cost savings. We are excited about our commitment toward automation within this segment. During 2019, we started projects in our North Brunswick, Lithia Springs and Toledo plants, investing over $16.5 million with a payback of about two years.

Additionally, the Calgary [Phonetic] Windows manufacturing team achieved a score of 98% on its certificate of recognition safety audit. Overall injuries reduced 37% in 2019 compared to the prior year. Warranty costs were down 62% in 2019 versus 2018 and down 82% versus 2017. These are just a few examples of how we are delivering on our commitment to operational excellence.

Turning to Slide 11. Siding segment net sales for the fourth quarter were approximately $271 million, 1.4% higher than pro forma prior year, which was equally driven by volume, price and mix. Favorable US demand for Siding products was offset by declining market conditions in Canada. We are proud to announce that our Mitten product was named Supplier of the Year in our first year partnership with Groupe BMR. Gross profit margin for the fourth quarter was 25.4%, up 110 basis points compared to the pro forma prior year, primarily as a result of benefits from cost initiatives. Cornerstone's commitment to quality was evidenced in our US Siding business, where 2019 warranty claims were down 11% compared to 2018, representing the lowest claims rate in the past five years.

We are very excited about the recently announced Kleary acquisition. We expect the acquisition will enhance our overall pro forma adjusted EBITDA margins as a company and will contribute to lowering our net debt leverage.

Moving on to the Commercial segment on Slide 12. Net sales in the fourth quarter of 2019 were $478 million, a decrease from approximately $529 million in the pro forma fourth quarter of 2018. The decrease was primarily driven by lower tonnage volume on overall softer addressable markets for low-rise commercial construction and steel cost impacts. Although 2019 was a difficult year in the addressable market, industry data supports that we maintained and strengthened our market share position.

For the quarter, gross profit margins were 26.2%, up 380 basis points from pro forma year-over-year driven by favorable spread, combined with cost savings. In both tons and dollars, backlog in Commercial segment increased year-over-year by 25% and 15% respectively.

Turning to Slide 13, I'd like to make some comments about our balance sheet and liquidity. We generated strong operating cash flow of approximately $230 million during the year as a result of higher earnings and improved working capital management. After capital spending, 2019 free cash flow was $109 million. For 2020, our capital spend outlook is expected to be approximately 2% to 2.5% of sales.

We reduced our net debt -- we reduced our net debt to pro forma adjusted EBITDA ratio to 5.4 times, a quarter turn better than our third quarter results. At the end of the year, we had $639 million of liquidity between our available borrowings with the ABL and [Phonetic] cash. We remained focused on deleveraging the balance sheet and expect to improve the net debt leverage ratio annually by three quarters of a turn to one turn, including the accounting for the just announced Kleary acquisition.

Looking ahead to 2020 on Slide 14. We expect consolidated net sales to improve 1% to 2% over pro forma first quarter 2019. Healthy single family starts and positive trends in repair and remodel are expected to drive mid-single-digit volume growth in the Windows and Siding segments. In the Commercial segment, we expect lower steel cost to offset increases in tonnage volume from higher backlog, resulting in a net sales to be flat to prior year. We expect first quarter adjusted EBITDA to be between $75 million and $90 million.

Higher volumes in the Windows and Siding segment, combined with price discipline and cost savings, more than offset material input and employee-related expenses in the quarter. For the Commercial segment, higher volumes combined with favorable spread management and savings initiatives will also offset cost headwinds. We have been monitoring the coronavirus situation closely. We believe our supply chain exposure is limited and do not anticipate major disruption. However, there remains a lot of uncertainty around the direct and indirect impacts it may have.

For the full year 2020, we have outlined some additional guidance on this slide. We anticipate a strong cash flow year as we continue to focus on improving earnings and lowering working capital as a percentage of sales. We expect to continue to build on the success we achieved in 2019. We plan to stay disciplined on price, drive profitable growth and capture additional $60 million of savings. Additionally, we plan to generate $50 million of cash from focus on working capital improvements and improve the net debt to adjusted EBITDA leverage ratio by another three quarters to one turn.

And now I'd like to turn the call back over to Jim.

James S. Metcalf -- Chairman & Chief Executive Officer

Thank you Jeff. And as we wrap up, we'd like to say we're in a much better position from both in earnings and capital structure than we were a year ago. Our improved cost structure and liquidity place us in a good position to take advantage of the improving market conditions in 2020. This includes, making balanced investments in our key growth categories to ensure that we are deploying our capital to the areas where we believe it will drive the greatest long-term returns for our shareholders. As Jeff mentioned, we announced this week the acquisition of Kleary Masonry Incorporated. Kleary is a leading installer of manufactured stone veneer in Northern California. This is an excellent strategic fit for our company, enabling us to strengthen our position in the fast-growing segment of the cladding market.

We are also excited about the opportunity the addition of Kleary brings us for our builder and contractor networks, and particularly the potential to sell our stone cladding and installed services into our commercial buildings business. Cornerstone Building Brands is relentlessly committed to our customers in creating great building solutions. Our disciplined culture is committed to delivering sales growth and margin improvement from a focus on operational excellence every day.

We appreciate your time this morning, and this ends our prepared remarks and I'll turn it over to your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Lee Jagoda with CJS Securities. Please proceed with your question.

Lee Jagoda -- CJS Securities -- Analyst

Hi, good morning.

James S. Metcalf -- Chairman & Chief Executive Officer

Hi, Lee. Good morning.

Lee Jagoda -- CJS Securities -- Analyst

So just starting with the spread dynamics in the Commercial segment, obviously, a lot of progress on the margin side, almost 400 basis points of gross margin. Is there a way to parse out how much of the 380 basis points was a benefit of all the cost savings activities and how much of the 380 basis points was related to the spread activities in Q4?

James S. Metcalf -- Chairman & Chief Executive Officer

Yes, Lee. Good morning. Appreciate the question. So the 380 basis point improvement we saw in the Commercial segment was a result of really three things, right. So we had lower volumes in the quarter itself. We had the margin spread and we had the synergies and cost out benefits. So the cost out and synergy benefits that we receive basically offset the volume component, which left us with the spread. And so, those three things -- those three things or three items combined make up the 380 basis point.

Lee Jagoda -- CJS Securities -- Analyst

Okay. And then, is there a way as it relates to your Q1 guidance to quantify the headwind from higher wages and incentive comp on a year-over-year basis in Q1, that's impacting the Q1 forecast? And then, when that headwind anniversary is [Phonetic] during 2020?

James S. Metcalf -- Chairman & Chief Executive Officer

Yes, great question. As we think about 2020, there are headwinds come again specifically around employee-related expenses. It's mainly coming in from variable compensation as we think about the components around that -- the impact is going to be spread fairly even across the year. And we believe it's about a $30 million impact on the year.

Lee Jagoda -- CJS Securities -- Analyst

Okay. I will -- I'll hop back in queue. Thank you.

Operator

Thank you. Our next question comes from the line of Sam McGovern with Credit Suisse. Please proceed with your question.

Sam McGovern -- Credit Suisse -- Analyst

Hi guys, good morning. Just with regards to the credit, I know that you guys lowered -- sorry, reduced the higher end of the leverage target to 2.5 times from 2 times to 3 times. What changed in terms of your thinking about the leverage that should be on this business? Do you think that there should be less leverage on this business over the course of the cycle or has your outlook improved in terms of the free cash flow and EBITDA that you expect to generate over the next few years?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, good morning, Sam. So good question on the leverage ratio. We do expect that three quarters to one turn inside of 2020 and we're excited that we were actually able to deliver that three quarters turn in 2019. We continue to make that a priority for us as a company as we move into the -- into the future years and we'd like to take that leverage ratio down into that 2 times to 3 times as mentioned. The change is not necessarily a philosophy change, it's much more just thinking through the cycles and the timing and as we get into the difference in cycle itself, we may have a different opinion when it comes to how much leverage we want to carry on this company. Obviously, at the bottom of the cycle you are much more comfortable with the leverage and as you get toward the top of the cycle, you'd want to have less leverage.

And so as we kind of think through those scenarios, we're still very comfortable with that 2 times to 3 times is appropriate for this company and thinking through making sure we have enough liquidity and ability to do the things we'd like to do from a cost out perspective and also from our growth initiatives.

Sam McGovern -- Credit Suisse -- Analyst

Okay, got it. That's helpful. And then with regard to the 2020 guidance that you guys provided, it looks like you will generate substantial free cash flow this coming year. How do you think about the priorities for deployment. What is your M&A pipeline look like, is there opportunities for additional capex beyond the 2% to 2.5% and then any thoughts on debt reduction?

James S. Metcalf -- Chairman & Chief Executive Officer

That's a great question. Our priorities have been very consistent where we've been in the last 12 months. As Jeff just said, we really focused on our leverage -- our debt leverage of that three quarters to one turn a year and we have not given up on that. As we indicated on the Kleary acquisition, we will look at acquisitions that are -- have a strategic fit and make financial sense that Kleary acquisition is a -- hits both of those and is digestible. Obviously capex, our big focus on capex, as we said in the prepared comments, is automation. Those are great projects. For example, on a typical Window line, there is about 30 associates and with minimal capex between $3 million and $4 million of capital we can go from 30 associates to 16 [Phonetic], which not only helps us with labor shortages, but also helps us with quality of service and safety. So the balance sheet, focusing on capex, particularly in that 2% to 2.5% that we talked about with the big focus on automation and then strategic acquisitions that make financial and strategic sense to the company. So that's -- those are our priorities.

Sam McGovern -- Credit Suisse -- Analyst

Okay, great, thanks so much. I'll pass it along.

Operator

Thank you. Our next question comes from the line of Andrew Casella with Deutsche Bank. Please proceed with your question.

Andrew Casella -- Deutsche Bank -- Analyst

Hi guys, thanks for taking the question. Just want to review a couple of the synergy numbers. So, when this deal was first originated, I think you guys had total planned synergies of $185 million. So it sounds like you're taking that target up to $195 million. And then, as we think about the $16 million [Phonetic] to be realized in 2020, any view on when that's supposed to come in and if you could break that down between kind of the gross profit line item and kind of overheads and SG&A?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, good morning. So, as we think about cost initiatives, we did take our guidance up to $195 millioin. Again, just reminding everybody $25 million benefit coming in 2018, $110 million realized in 2019 and then the $60 million [Phonetic] coming inside of 2020. We also mentioned in the script, there is about $25 million with the carryover savings coming in from synergies and the remaining is spread basically by quarter throughout the year on projects that were initiated last year in the first and second quarters and projects that we're now just beginning to initiate and that will get some benefit as we go into the third and fourth quarters that will carry obviously into 2021. When it comes to the split between manufacturing and SG&A, it's about a 60/40 [Phonetic] split, 60% is 2019, 60% inside of manufacturing and 40% inside of SG&A. As we move into 2020, it's about 80% in manufacturing and 20% in SG&A.

Andrew Casella -- Deutsche Bank -- Analyst

Got it. That's helpful. And then as we think about 2020, just overall I know you guys are providing first quarter guidance, but just given the first quarter as far as its contribution for the year is relatively low to the other nine -- the nine months, any additional color you can help us up with as far as seasonality or how to think about additional price cost momentum. I know you guys had a big number in this past quarter as we kind of go through the rest of the year.

James S. Metcalf -- Chairman & Chief Executive Officer

Just the seasonality typically as you know, the second and third quarter are the stronger quarters. One thing that will be coming through we talked on the Commercial side, about the backlog that has a nine month to 14 month lag. So if you look at the backlog that we saw starting really in the third quarter of 2019 that will start feathering in as we look at mid-part of the year and then you'll get into the seasonality of the residential business as well.

Andrew Casella -- Deutsche Bank -- Analyst

All right. Great. Thanks so much. I'll get back in the queue.

Operator

Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Matthew Bouley -- Barclays -- Analyst

Good morning. Thank you for taking my questions. I have a two parter on the Windows segment. Number one, you mentioned that there was an expansion of strategic relationships with retail. Can you elaborate a little bit on those retail expansions. And then secondly, just more broadly talking about the automation side of things. We've seen challenges with others some of your competitors around automating Windows given some of the kind of inherent labour component required in that business and kind of a need for accurate demand forecasting and so forth. Can you speak a little bit about why automating in Windows will work for Cornerstone and how you're kind of balancing the required customer service levels there? Thank you.

James S. Metcalf -- Chairman & Chief Executive Officer

Great, thank you. First of all, we're really excited about our Windows business. We just kind of step back and look at where we were a year ago. I mean we have a successfully integrated Silver Line, Atrium and Ply Gem windows. So it was really three acquisitions that as Jeff just alluded to, we got the cost out and synergies, we integrated plants, we put sales forces together and -- and really have that behind us, and I'm really proud of the -- the job that the Windows team has done and really had $40 million of synergies that came out of the business. We're really focused not only on residential, but also repair and remodel. That's a big part of the business and we feel growing that part of the business makes sense with our partners in retail. And we have -- our partners in retail are very key to us, it's about service and you bring that -- you talk about service, we're very focused on -- on time and in full, we've done a really nice job of servicing our retail as well as our other customers. So we're excited about that side of the business. When you talk about automation, these are projects that we're taking bites at it. As Jeff said, we're rolling out in three plants, these are small projects. These are not stopping the line. There are $3 million to $4 million of capital. It's proven technology. We've seen where mistakes have been made in the industry, and we've done a lot of research. It takes engineering upfront having a focus group and the key is, we could roll this out probably on paper faster, but we're going to go slow to go fast to make sure we don't have any service issues and a lot of it is timing. We had to pause some of the projects because we don't want to be putting automation and when we come up to seasonality that we talked about in the earlier call. So it is a go slow to go fast. The key is servicing our customers, all of our customers and we believe as we go forward we can roll this out over the next three years with no disruptions.

Andrew Casella -- Deutsche Bank -- Analyst

Got it. Okay, thank you for that Jim. And then secondly on the residential guide, you're talking to 4% to 6% single-family housing growth for the full year. Obviously, some of the data coming through and what you're seeing out of the homebuilders suggests the market growth could be north of that at least over the first half of the year before normalizing. So I guess, the question is, how does that really play into your guide? Are you assuming a potential stronger start to the year or are you guys kind of embedding that 4% to 6% every quarter through 2020? Thank you.

James S. Metcalf -- Chairman & Chief Executive Officer

Well, as we talk, we do have a 90 day to 120 day lag on housing starts for our residential business. But that is -- that's a number that we would rather be fairly conservative. We don't want to have a number that does not come through. We could -- if it is something greater than that, we can be prepared from a service standpoint and a staffing standpoint, but that's -- just looking at a lot of the consensus that is really not our number. That's looking at consensus number that we've been -- we've been saying.

And also if you look at our resi business, only 50% as I mentioned is new residential, and other 50% goes in repair and remodel and the retail business.

Matthew Bouley -- Barclays -- Analyst

Got it. Thank you for the details.

Operator

Thank you. [Operator instructions] Our next question is a follow-up from Lee Jagoda with CJS Securities. Please proceed with your question.

Lee Jagoda -- CJS Securities -- Analyst

Hi, just a couple more here. So can you -- on the siding side of the business, talk about the revenue split between the US and Canadian market and maybe touch on the end market outlooks you're seeing in Canada?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, Lee. I'll handle this question. If you look at our total revenue, this is total Cornerstone revenue, Canada makes up about 6% of our revenue inside the company. Specifically around Siding Windows, it makes up about 10% of revenue in each of their respective segments.

So it is meaningful for us, it's about $300 million in total revenue as a company and to talk a little bit about the Canada market right now, it has been very, very slow, in particular in Western Canada and we saw a lot of that decline excited 2019. We have seen a little bit of life coming back in Canada as of recent, including maybe the last couple of months of 2019, but in particular the first quarter as the team up there feels pretty good about where things are moving forward. So we're cautiously optimistic right now about Canada. And I think as we get more months underneath this, we'll feel a little bit better about the momentum that's there.

Lee Jagoda -- CJS Securities -- Analyst

Okay. And then switching gears to SG&A, is there any -- do you have a view of SG&A as a percent of sales for 2020 and then longer term, where are your goals in terms of a percent of sales that SG&A should get to over time?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes. So 2019 SG&A was about 12.8% of sales and as we move into 2020, as we talked about, there are some of the headwinds in particular around the employee-related expenses. So as we think about 2020, we are going to see that increase, I mentioned it's roughly $30 million coming inside of the SG&A on that variable component cost. And -- the range that we're in today is actually in line at -- even the top tier, if you will, as you look at some of our peer companies that are out there. So we feel good about our proposition around our service model. Now having said that, we are looking at a lot of opportunities within the company to find out how we can optimize and become more efficient as a company. So we don't think that this is the level we'd like to be at, we think there is more opportunity there. But again, I want to emphasize that it's not an area that we're way out of whack on as a company, but we do feel good about real opportunities that are still in front of us to take advantage of those two larger companies, as they come together, how do we become more efficient and more lean as one company and we're in the process of making that happen.

Lee Jagoda -- CJS Securities -- Analyst

And I just want to make sure I get this right, you're expecting SG&A as a percent of sales to increase in 2020 based on some of those costs?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

That is correct, yes.

Lee Jagoda -- CJS Securities -- Analyst

Okay. And then on the D&A side, it looks like your D&A jumped up in Q4. I assume that's somewhat related to the fact that your capex is running in excess of kind of core depreciation. Is this the new level or should it drop back down in Q1?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

So -- a lot of it comes with the timing, as we deploy capital inside of the operations inside of 2019 in particular as we're getting ready to take advantage of some of the cost savings for 2020, a lot of that capital is -- has begun have got deployed inside of the latter part of the year. I don't know that it's necessarily a new level that we're setting. I think it's more timing in the year for the projects that we're trying to get into place to make sure we get the benefit.

Lee Jagoda -- CJS Securities -- Analyst

Okay. And then just one last one for me, you mentioned your growth rates off of pro forma Q1 revenue which I assume includes the full impact of engineered Stoneworks a year ago. Can you just give us sort of the pro forma Q1 of 2019 revenue that you're basing the forecast off of?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, you're talking about in total revenue dollars?

Lee Jagoda -- CJS Securities -- Analyst

Yes.

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, it's about first quarter of 2018, excuse me '19 was $1.81 billion.

Lee Jagoda -- CJS Securities -- Analyst

$1.81 billion. Perfect. That's it for me.

Operator

Thank you. Our next question comes from the line of Reuben Garner with The Benchmark Company. Please proceed with your question.

Reuben Garner -- The Benchmark Company -- Analyst

Thank you. Good morning, everybody.

James S. Metcalf -- Chairman & Chief Executive Officer

Good morning, Reuben.

Reuben Garner -- The Benchmark Company -- Analyst

Clarification first on the working capital comments, the $50 million source of cash this year. Is that a net number? In other words, net of any uses of working capital you need from the business growing or steel inflation or any other items of $50 million is a net source of cash this year?

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Yes, Reuben. Let me answer that question. So we are about 16%, just a little over 16% of primary working capital, right. So it's -- it's receivables, inventories and payables, as we think about working capital as a percentage of sales. What we intend to do is drop that down a full percentage from 16.3%, if you will, down to 15.3% and so you multiply that times the revenue of $5 billion that's where the $50 million comes into play. If you look at it on a cash flow statement, it's going to be slightly less than that because of just the growth that's required for us to pick up the -- the benefit on receivables being higher as we are getting higher revenue inside the company and that's about $30 million. But from a working capital percentage, it's $50 million.

Reuben Garner -- The Benchmark Company -- Analyst

Perfect. That's very helpful. Thank you. And then the automation benefits that you're talking about in the Windows business, are those, if I guess, correct me if I'm wrong, I think those are outside of the $195 million in kind of cost synergies and savings that you guys have outlined. Are you expecting any benefits this year from those initiatives or is that more of a kind of 2021 and beyond cost effort?

James S. Metcalf -- Chairman & Chief Executive Officer

No, those are -- first of all, those are outside of the $195 million, and you'll see those mostly, Reuben, into 2021. The biggest time lag on that is ordering of equipment, believe it or not, this equipment lead time is anywhere from nine months to 12 months equipment has been ordered where, as Jeff said we're putting in plants now but that impact, as we said, it's about a two-year payback. So majority of that will be next year. But we're going to keep feathering -- we'll keep feathering in automation. As we said on the earlier call, we want to make sure we service our customers, we have the bandwidth to do it and we'll be putting in additional equipment in the back half of the year that will be feathered in later on into 2021.

Reuben Garner -- The Benchmark Company -- Analyst

Great, thank you. Congrats on the end of 2019 and good luck this year.

James S. Metcalf -- Chairman & Chief Executive Officer

Thank you. We appreciate that, Reuben.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Tina Beskid -- Vice President of Finance and Investor Relations

James S. Metcalf -- Chairman & Chief Executive Officer

Jeffrey S. Lee -- Executive Vice President & Chief Financial Officer

Lee Jagoda -- CJS Securities -- Analyst

Sam McGovern -- Credit Suisse -- Analyst

Andrew Casella -- Deutsche Bank -- Analyst

Matthew Bouley -- Barclays -- Analyst

Reuben Garner -- The Benchmark Company -- Analyst

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