Q2 2020 Masonite International Corp Earnings Call
The nascent <unk> second quarter 2020, <unk> earnings conference call.
HM Okay, then well be any listen only mode.
After managements prepared remarks investors are invited to participate in a question and answer session.
Well you know this conference call is being recorded I would now turn the call over to Joanne Freiberger, Vice President and Treasurer. Thank you you may begin.
Thank you Michelle and good morning, everyone. We appreciate you joining us today.
With me on the call Tonight, or how are you don't get me like President and Chief Executive Officer, and teach him up maybe my executive Vice President and Chief Financial Officer, and we have Tony here.
Global residential joining us for acuity.
We issued a press release and Webex presentation. After market closed yesterday sharing our second quarter 2020 results. These documents are available on our website at me My dotcom.
Before we begin I'd like to remind you that this call will include forward looking statement. Each forward looking statements contained in this call subject to Brent.
Uncertainties that could cause actual results could differ materially from those projected in such statements.
Additional information regarding these factors appears in the section titled forward looking statement.
Hi freely.
And for me additional information about risks can be found under the heading risk factors and made my most recently filed annual report on form 10-K, and our subsequent form 10-Q, which are available I think the doctor loud and made Tonight Dot com.
Forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these days.
Our earnings release, and today's discussion includes certain non-GAAP financial measure.
Please refer to the reconciliation, which are in the press release in the appendix of the Webex presentation.
Our agenda for today's call include a business overview from Howard, including an update on the impacts of Kogan 19, followed by a review of the second quarter results from Roth along with some additional color on how who've been 19 may impact in the back half 2020, and then closing remarks from Howard with acute.
And with that let me turn the call over tower.
Thanks, Joanne good morning, and welcome everyone. It's good to be joining you again and what we're still fortunately distance tier in Tampa I'd like to mention that this is the first time, we're hosting an earnings call from our new corporate headquarters located in the Ebor City neighborhood of tangible.
Proud to be part of this historic area of the city and its revitalization.
Now, let's move on to some other good news.
I'm pleased to say that despite the impact of Cobot 19, we performed exceptionally well the second quarter 2020.
Well net sales decreased 11% year on year. This included the estimated impact of roughly $100 million of lost revenue koeppen dissecting it in the quarter.
This impact was the result of both weaker end market demand due to the pandemic and our own production capacity.
Even on lower sales, we benefited from the continued success from our previously implemented North American pricing strategy.
This coupled with the benefits of prior restructuring actions and the covert 19 cost savings we implemented late in the first quarter propelled us to adjusted EBITDA of $92 million going to second quarter, our highest reported since we listed on the New York stock exchange in 2013.
This also marked the sixth consecutive quarter of year on year adjusted EBITDA margin expansion.
It's encouraging to see the strategies, we've implemented contributing to the success of the company even in times of challenging topline performance.
I would like team had a significant impact on our revenue. However, following the nearly 25% decline in April we saw the man strengthens sequentially throughout the remainder of the quarter.
Due to this resiliency, we not only curtail some of the cobot like cheese cost reductions. We implemented we also resumed investments in key areas of the best love to allow us to quickly regained the topline momentum we had in the first quarter of the year.
Shifting to the right of the slide let's cover some business and operational highlights.
Opened 19 impacted our capacity in the quarter with the largest impact to be felt from the closures of the UK and higher when facilities.
Enclosures capacity was also impacted by higher absenteeism and reduced overtime in the quarter.
Speak about this in a little more detail on the next slide.
Aside from the capacity impact we experience, we're pleased to say that our operations are running well aided by the continuous improvement team. The organization held 30% more came down a bounce in the second quarter of 40 point compared to the same period last year.
We were able to accomplish this despite the current pandemic because the organization has embraced the m. vantage operating system.
Local level aided by the fact that most of our continuous improvement team members are located at the plant embedded in our operations for work more closely with factory floor employees.
For those facilities, but do not have the benefit local see I resource there prior crane, along with virtual support and centralized online tools have equip them to continue deploying the m. vantage operating system.
Again, great work done by that group and the organization overall of leveraging M. vantage to drive a culture of continuous improvements in productivity, even when travel is restricted and remote work is a reality.
The sourcing organization also continued to perform well we're pleased to say that due to their efforts our supply chain was largely uninterrupted.
Our strategy of dual sourcing is working and allows us to shift the source of supply what potential concerns arise due to covert 19, well. This many times drive higher cost. The team continues to do an excellent job identifying offsetting savings projects.
The more positive news on the North American residential front at quarter end, we entered into an agreement with Lowe's to buy the assets of their door fabrication facility located in Janesville, Wisconsin.
This transaction is expected to close later this year thing includes the multi year supply agreement.
We're pleased to say that we're planning to retain existing workforce the facility and we look forward to welcoming those individuals to the Mason like team.
Lastly, I'd like to highlight another addition to the team the appointment of Jennifer know as Masonites Chief Marketing Officer. Most recently, Jennifer was the vice president or marketing that burden.
A leader in critical infrastructure for data centers.
Part of that she held a variety of marketing leadership roles at companies such as Oracle and Microsoft Jennifer has a proven track record of driving growth for global brands for digital and content acumen lead generation expertise and strong analytical background will help us effectively position may slow as we focused on growing our bill.
Yes.
Now, let's move to slide five where I'll provide some more details on the impact of cobot 19 of the second quarter and how we're managing through these uncertain times.
Nearly one half of the estimated lost volume was in the Europe segment, largely due to the UK and Ireland operations being shut down for approximately half the quarter.
It was operations reopened in mid May but market demand in the UK. Unlike the U.S. remained sluggish throughout the quarter.
Another significant driver of cobot related revenue decline was reduced production output in our North American residential segment, particularly within our interior door business.
We also experienced lower demand within our architectural segment, primarily due to slower commercial job site activity.
Well our operations are generally running efficiently output is not back to pre cobot levels. During the quarter, we experienced a number of temporary shutdowns in North America for varying lengths of time ranging from less than a week two as long as six weeks no. One single facility shutdown had a material impact on production.
But in total these were a meaningful headwinds.
In addition to facilities would shut down in the quarter, we had higher absenteeism as well as lower overtime within our North American residential segment.
In April during the onset of the pandemic, we saw absenteeism Spike and then decline yet remain at a higher than normal level throughout the quarter.
We believe the initial spike was caused by employees adapting to personal changes such as school cancellations caused by the pandemic.
It's for this reason, we're considering what impacts the upcoming school year might present for our employees and ultimately the business.
The various approaches by different localities present, a challenging landscape that we need to monitor along with its potential ramifications for our employees.
The uncertainty surrounding the impending return to school is one of several possible triggers for localized spikes that absenteeism.
Well, we are taking extra caution to prevent the spread of virus in our facilities, we may be impacted by events in the broader communities in which we operate.
As discussed on the first quarter earnings call, we implemented a swift cost productions helped mitigate the impact of covert 19, such as halting all travel and non essential training limiting hiring the two critical open positions and implementing temporary wage reductions and Merritt deferrals for salaried employees.
Inclusive of the savings from these actions we estimate the negative impact of Cobot 19 on adjusted EBITDA was just under $20 million in the second quarter.
We saw the man stabilize as the second quarter progressed, which gave us the confidence to begin relaxing certain cost reductions we implemented annual merit increases going into the third quarter. He is hiring restrictions and begin to allow limited travel.
Well the uncertainty around the pandemic has not anticipated given the resiliency of our business. We felt it was appropriate tourism customary spending for the health of the business.
If you recall as part of our North American pricing strategy, we announced our attention of investing an incremental $100 million over five years in servicing quality product innovation and down channel marketing, which we're now referring to was the North American investment plan and we continue to invest in this during the second quarter further.
A more our growth and momentum team remains focused on potential emerging housing trends caused by the pandemic a potential shifting preferences for urbanization to suburbanization from open concept to more separation and from smaller to larger square footage could all be structural tailwinds for our business over the long term.
With that said, we're keenly focused on near term extrication execution to help offset any potential challenges due to the pandemic.
With that I'll turn the call over to Ross to provide more details on our financials Ross.
Thanks, Howard and good morning, everyone, let's move to slide seven for a summary of our second quarter financial result.
We reported net sales of $500 billion down 11% as compared to the second quarter of 2019.
The decline was due to 15% lower volumes as opened 19 resulted in both weaker end market demand and production capacity limitations.
That impact of a divestiture and an acquisition lower sales of components and the impact of foreign exchange contributed an additional 1% each to the year on year decline.
These declines were offset by continued growth in average unit price, which increased by 7% year on year in the second quarter.
The U.P. growth was primarily driven by the continued success of our North American pricing strategy, which went into effect during the first quarter 2020.
Gross profit increased 6% to $136 million driven by higher NBP, along with the benefit of cost savings from our previous restructuring.
This was partially offset by the impact of lower volume and higher manufacturing wages and benefits.
Gross margin expanded 440 basis points versus the second quarter, 2019% to 27.3%.
Yes, you are they spending was down $5 million or 6% compared to the prior year. This decrease was primarily driven by the koeppen 19 related cost reduction we implemented late in the first quarter Alderson. Although this was partially offset by higher legal costs.
As Howard mentioned earlier, given the resiliency of our business. After a brief pause we resumed spending on our North American investment plan.
Some of the spending will impact us to that which in combination with the fact, we began to curtail our corporate cost reductions as we near the end of the quarter would lead us to expect higher estuary spent in future periods.
Net income for the second quarter was $34 million as compared to $24 million in the second quarter 2019.
Diluted earnings per share increased to $1.38 cents from 96 cents in the second quarter last year.
Adjusted diluted earnings per share were $1.50 cents, which excludes 3 million to charges related to the loss on disposal of a subsidiary and our previously announced restructuring plans.
This compares to $1.90 cents adjusted diluted earnings per share in the second quarter, 2019, which excluded the impact of $3 million in charges related to restructuring and the UK divestitures.
Adjusted EBITDA increased 15% to approximately $92 million as Howard mentioned this marks the highest adjusted EBITDA, we've reported in any quarter since becoming an NYSE listed company in 2013.
Adjusted EBITDA margin expanded 420 basis points to 18.4%.
On the right hand side in the slide we've outlined the key drivers of this exceptional performance.
I just spoke about the benefit of our tight cost controls and lowering sq name the second quarter. The P. was even greater contributor.
Well volume was a headwind in the quarter it was more than offset by higher price as well as slightly favorable mix.
Material costs were flat in the second quarter compared to the prior year, despite increased costs related to utilizing some higher grade components as part of our focus on quality.
Our global sourcing team delivered another strong quarter, a material cost savings project.
In total these offset the impact of the quality investments as well as terrorists and commodity inflation, which both continue to run largely in line with our original expectations for the year.
Factory costs were slightly higher in the second quarter, primarily due to wage and benefit inflation and spending on our investment initiatives some of which involve additional factory resources to improve service and quality.
These higher costs were largely offset by labor productivity and savings from our previously implemented restructuring initiatives, although a modest residual EBITDA headwind remain.
Distribution costs were flat year on year, that's the benefits of lower shipping volumes were roughly offset by shipping lane changes in response to temporary plant closures and capacity constraints throughout North America.
While we were able to shift production throughout our manufacturing network to continue serving our customers. This flexibility came with some additional logistics costs.
Overall exceptionally strong quarter from an adjusted EBITDA standpoint.
Turning to slide eight at our North American residential segment.
Net sales were flat compared to the prior year as a 9% increase if you see was offset by an 8% decrease in base volume and a 1% negative impact from foreign exchange.
As I mentioned earlier, we continue to see the effectiveness of our North American residential pricing strategy in the second quarter.
We saw a significant step up in the year on year growth of the P. in the second quarter as compared to the first quarter due the benefit of higher price for the full quarter.
Good night team was the primary driver of base volume declines.
Early in the quarter, we saw end market demand weekend with year on year sales declines in the low teens for the month of April.
As the quarter progress, we saw demand strengthen in both the wholesale and retail channels returning to high single digit growth in June.
Given the impacts of the increase absenteeism.
Reduced overtime and temporary plant disruptions, we were challenged to keep up with demand in the quarter.
As we sit here in the first week of August I'm pleased to see that we continue to make progress toward achieving pre coking capacity levels.
Adjusted EBITDA in the North American residential segment was $91 million in the quarter, the 44% increase over the same period last year.
Adjusted EBITDA margin expanded 720 basis points to 23.9%.
This represents the highest quarterly level for North American residential since adopting this segment reporting structure in 2016.
Margin expansion was primarily due to higher price along with increased restructuring savings and hoping that keen related cost reduction.
Despite the production constraints the segment performed well operationally with factory efficiencies once again to offsetting the impact of wage and benefit inflation in the quarter.
Lastly, as noted earlier, we resumed investing in the business given the strengthening demand trend.
Investments roll implemented in the North American residential segment.
Moving to slide nine and our Europe segment.
Net sales decreased by approximately 63% year on year, driven by 54% decline in base volumes, primarily due to the impact of UK door business, and Ireland components facility being shutdown for approximately half the quarter.
Following the reopening of the UK Ireland facilities, we saw the contract channel recover relatively quickly, whereas a homebuilder channel remains soft.
The U.P. was slightly lower in the quarter following entirely to mix, which is impacted by lower sales of complete interior door sets to the builder channel and weaker product mix and the remodel or channel.
The divestiture of window images in the fourth quarter last year contributed 5% to the decline in sales while reduced sales of components and foreign exchange each contributed a 1% headwind in the second quarter compared to prior year.
Given the breadth and links the closures due to colder 19, Europe segment incurred a slight adjusted EBITDA loss in the quarter.
So could have been worse had not been for the quick work of the European team to minimize losses.
Even as we ramped back up the exercise extreme care and bringing back personnel and layering on costs in line with slowly recovering demand.
Lastly, we are pleased to note that subsequent to the ended the second quarter UK government announced steps intended to stimulate the economy and support investment in both new housing and home renovations.
These stamp duty lab tax holiday is being introduced in an effort to stimulate full buying activity, while the green homes Grant program is designed to subsidize the cost of green upgrades to existing homes.
It remains to be seen what impact. These government actions will have on housing market, but we remain cautiously optimistic that the patient recovery could improve in the second half of 2020.
Turning to slide 10, and the architectural segment.
Net sales decreased by 12% in the second quarter with base volumes down 14% due to slowing activity on commercial job site associated with safety protocols and state and local government orders related to cope with 19.
Some regions such as the northeast and parts of the Midwest for the most stringent on construction limits.
In addition to job site slowdowns, we noticed the significant deceleration in our shorter cycle business as well, particularly within our quick ship and stock were offerings as customers held off on tenant improvement work.
Lower sales of components contributed another 3% to the decline in sales.
Partial offset to these volume declines was continued strength from HBP, which increased 5% in the second quarter compared to the prior year.
The U.P. benefited from roughly equally equal contributions of price due to higher pricing on important projects and mix largely driven by the declines in our stock business, which is generally comprised of lower price products.
Adjusted EBITDA margin expanded by 30 basis points to 13.4%, primarily due to higher you be and material cost savings.
As you May recall last year, we mentioned that we experienced higher cost on purchase mineral for use in certain fire rated doors.
We have subsequently increased our internal production in order to Insource more of this product at alleviate that cost pressure.
The architectural segment also benefited from coping 19 related cost reductions, but those savings were more than offset by higher factory maintenance costs in the quarter.
Lastly, we continue to monitor leading indicators for this business such as the architectural billing index and the Dodge momentum index.
These indicators point to continued softness of the business in the back half of 2020 into 2021.
Accordingly, we are looking at all aspects of the business as we go forward and intend to tightly manage costs as we head into a potentially challenging demand environment.
Slide 11 summarizes our liquidity and cash flow performance for the quarter.
Given uncertainty related to the Copenhagen, Q pandemic preserving liquidity has remained a priority.
Our second quarter results and proactive cash management improve an already strong balance sheet.
Total available liquidity, including unrestricted cash and accounts receivable purchase agreement and our Undrawn ABL facility was $397 million or approximately 19% of our trailing 12 months net sales as of June 28 2020.
Net debt was $594 million and we ended the second quarter with a net debt to adjusted EBITDA leverage ratio of 1.9 times.
Cash flow from operations was $97 million in the quarter up significantly from $70 million in the second quarter last year due to higher net income.
Capital expenditures were approximately $11 billion in the quarter.
Free cash flow conversion continues to be strong and stands at 109% through the first six months of the year.
As a result, our balance sheet and liquidity remains very robust providing us a strong platform. So uncertain business conditions in the near term as well as dry powder for future growth opportunities and return to shareholders.
Now, let's turn to slide 12, and our thoughts on the back half of 2020.
Well, we're extremely pleased with our performance in the second quarter, we continue to operate in a highly uncertain environment due to the endemic.
We see two distinct areas of potential risk for our business as we go into the second half of the year.
We continued uncertainty around our end markets and potential operational challenges associated with running our plants.
We were fortunate to see demand for our North American residential business return to quickly in the second quarter. After an initial deployment.
And we're encouraged to hear positive comments from homebuilders regarding order rates.
With that said, we cannot ignore the downturn from US housing starts in the second quarter.
While there was improvement sequentially in June housing starts for the overall quarter were down 17%.
This would indicate that housing completions could see a downturn in the third quarter and the fourth quarter.
Which could be a headwind to demand for residential stores.
Similarly, leading indicators for demand and nonresidential construction markets last warning signs from the second quarter.
Coupled with the decline we are already face in the short cycle portion of the architectural business, we remain concerned about market demand overall.
The architectural billing index experienced a historic crop of over 20 points from February March.
While the index recovered later in the quarter, it's still suggest contraction in demand for non residential products in the back half year.
And with respect to Europe, as Howard mentioned market demand in the UK for our products remained sluggish in the second quarter.
We're encouraged by recent steps UK government has taken to stimulate housing activity, but the impact that may have on demand for our products. This year.
C.
In the face of market uncertainty, we also acknowledge the challenges of efficiently operating under the overhead of cobot 19.
While we implemented a significant number of safety protocols to prevent the virus is spread in our workplace, we cannot ultimately control what's happening.
A large.
It's counts rise in certain areas in North America localized outbreaks could impact specific facility.
Additionally, as we approach the beginning of the school year in the third quarter uncertainty surrounding return to school policies to various districts could impact some of our employees and further influence attendance at our plants.
Given this backdrop, we don't believe we have sufficient visibility to reinstate our 2020 outlook at this time.
We can instead provide a couple key guard rails to help and think about the second half a year and the third quarter specifically.
The momentum exiting the second quarter has continued through July.
Barring any meaningful production impact that could materialize, we believe net sales in the third quarter could be roughly comparable to the prior year.
Because we have removed many of the cobot 19 cost reductions we expect to see these cost return, albeit more slowly as items like travel spending muted by contingency reserve.
We also plan to increase spending related to our North American investment plan.
This increase spending coupled with our expected topline performance will put pressure on adjusted EBITDA margin sequentially. Although we would still expect solid year on year margin growth in the second half.
Again, barring any meaningful production impact, we believe that our strong operational performance variable cost structure and continued momentum in the north American residential business can allow us to maintain mid teens adjusted EBITDA margins at a consolidated level during the third quarter.
Now I'll turn it back to Howard for closing remarks.
Thanks, Rob in summary, we're extremely pleased with our second quarter performance from the incredible efforts by the makes Tonight team.
Our continued adjusted EBITDA margin expansion, coupled with reporting our highest quarterly adjusted EBITDA since becoming an NYSE listed company in 2013 was a testament to the effectiveness of our strategy and the ability of our employees to excel during challenging times.
With that said the pandemic did impact us in the second quarter as we saw net sales meaningfully decrease year on year due to its effect with volume headwinds more than outweighing the positive impact pricing in North America.
The overall resiliency of our business, let us to resume investing in key growth areas as well as curtail certain cost reductions. However, we remain cautious about continued covered related impacts the demand and the potential for operational disruptions. Accordingly. The team remains keenly focused on managing the near term challenges of operating in a pandemic.
At the same time, we are optimistic about our future growth potential we believe the impact of the pandemic is having on consumer preferences may ultimately play into our favor as we are investing and we are investing in ways to capitalize on the trends.
We believe the home is a winner in this crisis and expect that trend to continue longer term. Our goal is to help make homes and buildings, a safe and comfortable as possible by providing doors that do more.
With that I'd like to open the call the questions operator.
Thank you Mr. I guess, if you would like to register question. Please press star.
If you are using a speaker phone. Please lift your handset before entering your request we ask that you. Please limit yourself to one question and one follow up.
Ladies and gentlemen, as a reminder to register question. Please press star one on your telephone assets.
And with that our first question comes from the line.
With Baird. Please proceed with your question.
Hey, guys nice nice job. Thanks, Thanks for all the details.
Maybe just my first question I'd be curious just as you think about what you've seen in North America.
Is there way to kind of characterize how you how you see both your kind of retail channel as well as your wholesale channel in terms of inventory levels and do you think theres a possible kind of rebuild opportunity in the back half the year. There do you still think you're up your channel partners are going to manage inventory pretty tightly here.
Yes, and good morning, Sony.
Great question, we saw steady progress after we described.
Those teams.
Decline in April we saw progression through the course of the quarter book at retail and wholesale.
Pretty happy with our retail demand as we think we saw people in homes and the size of new projects in their homes can that played through the Pos at retail.
So is it back a little more strongly earlier, we're starting to come back and we're excited about the trend that that honest people start to resume building.
There were opened and you've seen some of the builders, but they're reporting to try to get more aggressive. They go forward relative inventory, we had really good visibility into retail inventory that inventory it during the quarter, but still below prior year. So there's some opportunity or inventory build in retail channel.
And we maintain or retail.
View of inventory with our wholesale partners the largest ones.
And for the most part or they are lower on inventory than they would like piece. So we think theres opportunities built inventory with that as well as we go forward.
Okay. Okay. That's helpful. Thanks, and then you know Russ maybe on the third quarter.
Comment about kind of mid teens adjusted EBITDA margin is that.
I live in a range of scenarios there is that kind of assuming the kind of flat.
Revenue outlook that that should that you mentioned was possible in the quarter.
Good morning, Tim Thanks for the question.
That was generally in the context of this flat revenue picture.
Clearly as we remarks during the prepared portion of the call.
There are some uncertainty relative to what could turn into facility disruptions.
Barring any significant outages that we have in some of our larger plants that would be our viewpoint on revenue and the kind of margin that we could deliver against it and I guess, maybe just to step back and give you a bit more context on how to think about margins over the last couple of years, you'll typically see a 50 to 100 basis points sequential step down anyway from the second half.
Later to the third quarter.
If you look at the Q2 this year in isolation, clearly really pleased with the margin performance at 18.4%.
Well, we had a big impact if you were to adjust out the revenue and profitability impact an add back some of the cost that we expect to now layer back into the business.
Into Q3, you could say, it's kind of circa 100 million EBITDA into surface 600 of revenue that's a high 16% EBITDA margin on kind of a normalized run rate basis, and so from there do you think about them some natural degradation at quarter to quarter and certainly that would be contributed by the cost.
Actions that we have now resumed as the business is proving more recently that we would have anticipated.
Okay. Okay. That's helpful. Thanks for that.
Okay. That's what ahead.
At the color here and good luck in the second half guys.
Okay.
Thank you. Our next question comes from the line of Michael.
Jpmorgan. Please proceed with your question.
Hi, good morning, everyone. Congrats on the results.
I wanted to shift towards the sales side and appreciate the Threeq guidance around you potentially being flat year over year in terms of sales.
I was hoping to get a sense for you mentioned the strength, obviously rebounding throughout the quarter, particularly in North America.
I was hoping to get a sense of July trends if possible.
By.
Segment.
And.
You know where.
You know.
And then, particularly North America, if you feel that on the retail side sell in is equal to.
To Pos at this point.
Yes, Hey, Mike It's Rob let me take that and then the Tony as anything you want the chip in.
Relative to Pos in the retail side specifically.
If you look at July's, we mentioned the momentum that we had ending the quarter do continue into July so.
We actually saw our sales up call it mid single digits in July.
And that was really on the strength of North American residential.
The Europe in architectural segments were still down slightly now it's worth pointing out that in Europe. We did have a divestiture and we have had some FX headwinds. So if you peel those effects out Europe actually would have been up slightly in July so.
General trend continues again in our mind it becomes a matter of what risk lies ahead. In this is more of a north America residential comment with respect to the downturn. We saw in housing starts early in Q2, and when does that read through to potentially weaker completions.
Three in Q4, so let Tony is there anything you wanted to add a retail front I think just as we said before we're pleased that.
That's remains positive and retail channel and we're serving supported that right now.
Okay. That's helpful. Appreciate it and then.
On both the.
Willows transaction.
Yes found that pretty interesting and I was hoping to get a little bit more color on that in terms of number one when you expect to close.
And then if you could help with any type of comments around.
What this might represent a revenue in.
EBITDA perspective.
Yes.
So we're excited about that as well, we don't expect as a close until.
Very late the year right before year end.
After that we'll use the facility to continue to serve stores in the Midwest.
With basic products and as we get closer to that end to the closing that will give more color in terms of what that meet appreciably in 2021.
Hi, Thank you.
Thank you bye.
Thank you. Our next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
First question just a follow up on those transactions. So is this a is this a fabrication facility that you already supplied.
And did that facility.
As it currently operates is that selling is that 100% Lowe's business that you're looking to.
Kind of continue servicing blow us, but also expand to non most customers are just.
Any other color around that.
Yes, good question.
It is the fabrication facility much like our network of what we call Dorf asset build premium unit supply to retail.
We are not currently supplying product to that.
Bill or facility. So it will be incremental you up and well take that over.
As Howard mentioned excited to have those folks joined the mix I'd family be part of the network. We have supported retail it will support Lowe's stores throughout the Midwest, that's traditionally done but do it what makes type product.
Okay, that's let's let's good to hear.
Yes, as a as a follow up.
Is there.
I know, it's it's early and you said will be later in the year, but.
Is there ultimately any additional cost we should be thinking about related to have any sort of buyout of existing suppliers or anything like that around the.
On the transaction.
I think Mike.
Any type of go through transition there are some capital cost changing displays and doing some things in store. So represents a brand new merchandising and try to help consumers that are in the stores makes us less of the right or solution that.
Theres nothing appreciably different than any other transition that we see in terms of this transaction and changing those stores and that bill workshop over to make Tonight.
Okay, and if I could just squeeze one more and when you're thinking about the north American ready rebound, obviously price price played a big.
Part in Twoq, you and in the more recent trends getting back to positive. When you think about the contribution to three Q you think volumes could could end up you know being flat or in the quarter or would you still expect a.
Volumes to be down modestly, but still getting that strong benefit from price carrying the topline.
Yes, Mike it's Russ.
I think when you look forward to the back half of the year clearly the effectiveness of the North American pricing strategy is providing affirmed tailwind to our revenue.
So its entirely possible that you could see volumes down a little bit and we would still see.
Flat growth now I think I'm going to keep pointing people back to the fact that there is still uncertainty not only with respect to end market conditions as we get into the back half I talked a moment ago about the potential lag effect of Columbia housing starts environment early this quarter, but also theres still a lot on known with respect to how.
Tobey this is going to impact our plans ability to operate once the school year reserves, we saw absenteeism supplies.
Early in the pandemic is before adjusting to children, returning to home and having a word in the virtual environment. We're seeing very a broad array of return to school policies across various districts, particularly in the regions of the country, where there have been more significant slice of late we called it and so we're I think we're taking it prudently cautious approach on how.
Much volume growth, we can support in light of any potential disruptions the manufacturing operations I just want to keep that.
Hey, Mike I'd just add this powered work, we're certainly cautiously optimistic and really pleased with the resiliency of the market so far but as Russ said, we have to be realistic as well because we're certainly not through this pandemic.
And there are inherent risks associated with operating in a during the quarter. So.
We feel good about how the business is running we're running very efficiently.
We've been able to continue to operate generally and so we're pleased with that but but we're just trying to be realistic as well.
Makes sense, thanks, our aggressive.
Thanks, Mike.
Thank you. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.
Hey, good morning, everybody and nice quarter.
Thanks, Kevin.
Can you I was hoping to get a little more color on the costs.
Side of the equation moving sequentially, how much of the costs that werent into Q.
Back in Twoq is I think you said last quarter something in the range of 15 $20 million was the type of cost savings, you're taking out that would impact the second quarter UBS how much of that comes back of the North America investment plan $100 million over five years, So 20 million a year I don't know that 5 million to quarter like how much of that.
<unk> was spent in twoq versus how much more being Threeq you and then also on the raw raw materials.
Some things have moved up like Red and steel still down and I know you've said in the past lumber isn't that a strong correlation to your out your would purchases, but but curious on on that that you. Just curious all the moving pieces as we think the costs sequentially from Twoq to Threeq you, Okay, Kevin It's Russ.
So several pieces in that question, let me try to unpack them first of all with respect to the cost actions, we took and specifically in response to the coal the 19 pandemic last quarter, we estimated that that would be approximately $50 million where the savings.
Now as you've heard US talk about we did relax some of those cost controls as we got deeper into the quarter and saw the demand was holding up better than Weve. Peter just might we still delivered a majority of that $50 million of savings though.
But with the action to Howard mentioned earlier now taken to restore salaries and put in merit increases restore hiring some limited traveled to support our customers.
I would not expect those cost savings.
To continue at all as we get into the back half with respect to the reinvestment plan for North America, the $100 million over five years. We've guided previously that majority of that would be on the operating expense side as opposed to capex side and that all else being equal you could think about it is roughly when you're across that five years.
Recognizing could be lumpy here and there depending on delay in uncertain our resources.
During resources people and plans et cetera, we didn't pull back on that late in the first quarter in early in the second quarter given uncertainty, but we started to restore investment if you take a look at what we spend in the second quarter. It was circa $3 million, but we're planning to accelerate spend again as we get to the back half of the year.
We are assuming that.
The business continues to be resilient and we don't see a dramatic pullback in demand going with that and then I think the third piece that you ask about is on the the material cost side, we came into the year expecting to see a point to two points worth of gross commodity inflation.
And that's generally what we're seeing we're running within that range. There are no particular areas, where we've seen specific more significant spikes, we have absorbed a little bit of higher cost as I mentioned on the call in certain areas.
Just to improve the quality of somewhere products.
Okay perfect very helpful. And then second question I've noticed that.
Dork and import seem to be rising here in 2020, albeit from a very low base.
From some foreign players. So curious your take on what's driving that what type of impact if any do you expect that to have on makes tonight or or the market dynamics and and you have a sense for what the delivered cost of door skins are.
You know that are imported versus domestically made.
Yes, all right.
Yes, certainly there have always been imports in to your point is probably have there is an increase in the recent side in terms of the quality of the.
Thank you.
Historically, the styles of business in North America that had been used in Europe and Asia. So there's been some limitations around it I think it's always been a part of our calculus, knowing that that that is out there and thats an element of the market. Our focus is the door skin is an element as you have to provide the words.
The best service provider to the customer and the market and so we feel like given our footprint and what we provide we did I really effectively so it's always been a part of our calculus in our understanding.
I don't see it is substantial wrapping because what we're providing is that sort of over.
Okay perfect. Thank you very much.
Thanks, Kevin Thank you.
Thank you.
Then comes from the line Jay Mccanless with Wedbush. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
First just the commentary you guys gave around the cost thus far this year input costs being in light of what you're expecting just wanted to get some commentary on the lumber Spike we've seen in July and.
Similarly in August.
Our thinking about that if the lumber prices stay at these levels for the rest of the year what type of impacts are going to have them on the EBITDA margins.
Yeah Jays for US good morning, Thanks for the question well remember I'll just remind everyone that.
Were the ones that we use in our supply chain. Our input source is really not invested all to dimensional lumber.
We're typically using saw the chips.
Raw logs in some cases for the production of wood fiber that we used in our door facings and then were in some cases purchasing from third parties stile and rail framing components around what you assemble the door.
So many of the wood products that we would buy from the outside would be more of the off cuts for the mill process not the dimensional lumber itself. So we see very little correlation with dimensional lumber pricing and our cost.
Right.
And then the second question.
Broader about the UK, if demand for especially from building societies doesn't start to come back what's what's kind of the plan b there because it sounds like things got a little bit better, but but not not really fully recovered yet so what what if anything is the longer term plan.
And for that part of the World.
Yeah. Jay This is Howard I think that as we said sequentially demands as improved it was more sluggish than the U.S. certainly.
Coming out of the full closure for six weeks on the interior side seven weeks on the exterior side the ramp was.
Pretty significantly.
Slower however, as Rob said when you look at July.
Takeout, FX and acquisition divestiture or slightly up so I think there is some pent up demand in the UK.
We feel good that the contractor channel has rebounded nicely. So our expedia business is strong.
Certainly the house builders are a bit slower, but again I think that.
Hopefully those as they start swinging hammers again, they'll end up putting doors and so the country essentially shut down.
Much more stringent on the U.S., but I would expect block that demand to.
To pop back here in Q3 in Q4.
Great. Thanks, again for taking my questions.
Thanks Jay.
Thanks, Jay and thank you Michelle and thank you all for joining US today. We appreciate your interest and continued support during these challenging times stay well stay safe and this concludes our call. So operator will you provide replay instructions.
Yes. Thank you for joining Mason <unk> second quarter 2020 earnings Conference call. This conference call.
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