Q2 2022 JELD-WEN Holding Inc Earnings Call

Good morning, My name is Dennis and I will be your conference operator today at this time I would like to welcome everyone to the Gelled Wind Holdings, Inc. Second quarter 2022 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question simply press Star then the number one on your telephone keypad to withdraw your question Press Star one again.

I would now like to turn the conference over to Chris teach out director of Investor Relations. Please go ahead.

Thank you good morning, everyone. We issued our earnings press release, this morning, and posted a slide presentation to the Investor relations portion of our website, which we will be referencing during this call.

I'm joined today by Gary Michel Chair and CEO .

And David <unk> Executive Vice President.

Before we begin I would like to remind everyone that during this call. We will make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our forms 10-K, and 10-Q filed with the SEC.

<unk> does not undertake any duty to update forward looking statements, including the guidance, we are providing with respect to certain expectations for future results.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A reconciliation.

Filiation to these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation.

I would now like to turn the call over to Gary.

Okay.

Thanks, Chris Good morning, everyone and thank you for joining us.

At <unk>, we're in the midst of a multi year journey transforming the business to deliver consistent profitable growth expand margins and further enhance shareholder value through effective capital deployment.

This year has been particularly challenging to deliver on our financial targets given the macroeconomic environment.

To succeed companies must adapt how they do business to overcome ever changing headwinds.

Our execution did not meet those requirements nor was it indicative of the performance driven culture and expectations, we have at <unk>.

As the earnings release stated this morning results came in below expectations for the quarter and we've adjusted our full year outlook to reflect first half performance and a continued challenging operating environment for the remainder of 2022.

We know we have the right strategy long term macroeconomic fundamentals remained strong and our productivity initiatives are yielding benefits.

We must execute better and consistently deliver on our promises.

As I'll describe in a few minutes, we have already taken significant actions to reduce cost and to help mitigate the earnings headwinds of the current operating environment and we're reviewing additional actions that will have a positive impact on our top and bottom lines.

Before I provide that color, let me provide some context on this quarter's performance.

Continued significant cost inflation and softening demand in certain geographies and channels impacted second quarter results more significantly than we anticipated.

Cost inflation, which totaled more than $30 million net of price actions continued to be the primary driver of adjusted EBITDA and margin weakness relative to prior year and our expectations.

Demand in this quarter was mixed with total Bayou next down slightly from last year.

We experienced particular softness within the North America, and Europe retail channels and from lower volume mix in Australasia, primarily due to builder labor challenges and higher absenteeism from COVID-19 and influenza.

However, we have many products and channels that are performing well where lead times are advantaged orders are solid and backlogs are growing in <unk>.

North America, we continue to experience strong order rates and revenue growth in the traditional channel, which primarily serves the residential new construction market. Despite some customers adjusting inventory to account for more normal manufacturing lead times.

Pockets of strength included both interior and exterior doors and windows.

Additionally, we had the highest ever backlog in our epi multifamily window business due to continued strength in multifamily and the continued ramp of our new manufacturing site in Statesville, North Carolina, Canada.

Canada and company owned distribution performed exceptionally well, both posting strong growth above expectations.

We continue to experience strength in certain European markets, including France, and Central Europe that are delivering sequential and year over year improvement for the segment as well as in Australasia, where demand remains strong within both residential new construction and repair and remodel markets.

Please turn to page four as I share a few highlights from the second quarter.

Second quarter revenue increased nearly 7% to $1 $3 billion, including an 11% increase in core revenue, partially offset by foreign exchange.

Core revenue growth remained positive for the eighth consecutive quarter and within each of our segments.

Adjusted EBITDA of $126 million represents a 15% decrease versus last year, resulting in adjusted EBITDA margin of nine 5%.

This decline is a result of significant cost inflation and a strong margin performance last year.

While the long term fundamentals of our business remains strong the factors that impacted second quarter results, including elevated input costs and softening demand are unlikely to abate before year end and are reflected in our revised full year outlook.

Please turn to page five.

For the full year, we now expect revenue growth to be in the range of 4% to 6% and adjusted EBITDA to be between $430 and $450 million.

Our updated revenue outlook assumes continued core revenue growth of approximately 10%, but with a greater contribution from the increased pricing and lower volume mix.

The lower sales guidance reflects the negative impact of foreign exchange of 4% to 6% due to the stronger U S. Dollar.

The revised EBITDA guidance is mostly driven by lower volume mix, which we now expect to be flat to slightly down year over year. In addition, we assume an improved price cost relationship in the second half of this year, but we continue to expect some negative impact from inflation and productivity.

<unk> pressures in our global operations.

Please turn to page six.

This updated outlook includes the cost actions, we have already taken and we have additional initiatives in process. These actions include optimizing our operations network to reduce fixed costs aligned demand to labor productivity and consolidate our footprint improving customer and product mix.

The focus on higher margin growth.

Categories and channels and investing in innovative products and services to deliver more profitable growth in 2022 and beyond.

I'd like to focus on a few specific actions we took in the second quarter.

For the past several years, we have been focused on the deployment of our business operating system. The <unk> excellence model or Jem, which has enabled us to increase capacity improve throughput and accelerate productivity across our manufacturing facilities, which allows us to further optimize the opera.

<unk> network.

In North America, we flex manufacturing to current demand and are directing production volumes to the lowest cost facilities.

We announced two plant closures in North America, and recently shared that we will exit the non core UK stairs and windows operations and close our manufacturing facility in Melton UK. These.

These actions reduce our footprint and fixed cost without impacting throughput, which will yield immediate cost savings and a sustainable improvement to margins going forward.

We are also in source certain functions, including portions of our logistics network that will yield additional savings during the second half of this year and into 2023.

So the cost actions, we've undertaken only modestly affected our Q2 results, we expect to be at full run rate starting in the third quarter.

We are also focused on improving customer and product mix, while investing in innovative products and services to drive growth and margin improvement in 2022 and beyond.

This includes the VPI multifamily windows business, which has been growing as we have nationalize the business and secured new partnerships with multifamily and commercial customers.

Not only are we growing the VPI quality Windows line cross selling opportunities are expanding growth of other gel when offerings into the space.

Our new Statesville, North Carolina facility continues to grow our reach on the East coast, we're adding additional resources to accelerate the conversion of backlog to revenue and adding new production equipment that is expected to come online in 2023 to meet growing customer demand.

The exterior fiberglass door business in North America brought additional capacity online during the quarter, which helped drive industry, leading lead times at mid teens revenue growth.

We expect further improvement in throughput as this capacity ramps to full production.

In Australasia, we are accelerating new product introductions in energy efficient windows and doors to capture growth opportunities within the luxury residential and commercial segments. Additionally.

Additionally, investment in new showrooms and other initiatives geared toward increasing penetration within the Australian R&R market helped drive low double digit growth in R&R activity through the quarter.

We also began shipping our new or align composite window and door products this quarter to customers in North America or aligned as one of the most significant product lines. The company has introduced in recent years addressing the rapidly growing demand for products that are designed focused energy efficient and so.

Sustainably sourced with a high degree of recycled content.

We have been pleased with market adoption and we saw a meaningful acceleration in orders in July as planned we will introduce additional oral line products in the second half that will further expand the addressable market.

Please turn to page seven.

We are making progress on environmental social and governance efforts next week, we will publish our second ESG report, which will outline <unk> long term sustainability goals.

We are deeply committed to significantly reducing our environmental impact through our operations and to increasing our energy efficient product portfolio to help customers reduce their own footprint.

This past quarter, our Canadian team was awarded the 2022 energy star manufacturer of the year for the ninth time.

And Newsweek recently named <unk> to its inaugural list of America's most trustworthy companies as the only building products company on the list. It is a true testament to the values driven culture at <unk> and the importance we place on building trust with all stakeholders.

Please turn to page eight.

I am pleased to welcome our new executive Vice President and CFO , Julie Albrecht Who's appointment, we announced in June .

Truly is a seasoned finance executive who most recently served as CFO of Sunoco one of the largest global sustainable packaging companies.

Julie's broad financial acumen proven leadership and expertise in driving improvement in financial results and processes make her an ideal fit for our organization. Julie has been actively engaged with our team and the board of directors and preparation for our earnings release, but it is not on today's call due to a person.

<unk> obligation this week I.

I am excited for you to get to know Julie over the coming weeks and months.

I'll now hand, it over to David for a discussion of second quarter financial performance.

Thank you Gary and good morning, everyone I'll begin with a review of our consolidated results for the second quarter. Please turn to page 10.

In the second quarter, we generated net revenue of $1 3 billion, an increase of six 8%, primarily driven by 11% core revenue growth.

The increase in core revenue was due to a 12% positive price realization and 1% volume mix headwind.

Second quarter, adjusted EBITDA decreased 15, 1% to $125 8 million.

Adjusted EBITDA margin decreased 240 basis points with cost inflation from raw material freight labor and energy negatively impacting margins by approximately 380 basis points, partially offset by positive productivity.

Earnings per share and adjusted EPS were <unk>, 52, and 57, respectively compared to EPS and adjusted EPS of <unk> 60, 59 cents a year ago.

On slide 11, Youll see a detailed breakdown of key drivers of revenue growth in the second quarter.

Once again price realization was strongest in North America at 14%.

Followed by Europe at 11%, while Australasia increased 8% an acceleration compared to the first quarter.

As Gary mentioned previously we took additional price measures in each of our segments that will be fully realized during the third quarter.

Volume mix decreased 1%.

North America volume mix was flat in Q2, while Europe , and Australasia decreased 2% and 4% respectively.

Please turn to page 12, which shows the substantial raw material and freight inflation, we've faced over the past four quarters and the price increases we implemented to help offset the impacts.

Material and freight inflation was again greater than expected driven primarily by metals, millwork and logs and lumber.

Delayed price implementation within the retail channel impacted our ability to cover all of these costs in the second quarter. However.

However, price increases are now fully implemented and will be reflected in third quarter results.

As a result, we expect price cost to become a tailwind as we move throughout the year.

Moving to page 13, you will see our segment highlights for the second quarter.

Net revenue in North America increased 13, 4% driven by strong price realization, while volume mix was flat compared to prior year.

Order rates and backlog built throughout the quarter with backlogs at quarter end, reaching their highest level of the year and approximately 50% higher than the same period last year.

Adjusted EBITDA margin in North America decreased 450 basis points to 11, 1% due to higher cost for raw materials freight and labor, which accounted for the entire margin decrease year over year.

Continued growth initiatives were funded by positive productivity and other austerity measures.

Europe core revenue increased 9%, but declined two 8% on a reported basis due to the stronger U S. Dollar.

Favorable pricing aided by additional price actions taken in the quarter drove core revenue growth, which was partially offset by negative contribution from volume mix.

We experienced a further softening within residential new construction and R&R activity, particularly in northern Europe , driven primarily by the impact of significant inflation on consumer demand and from general economic uncertainty largely due to the conflict in Ukraine.

Europe , adjusted EBITDA margin decreased 550 basis points to five 9%.

Price improvement year over year was insufficient to cover cost inflation, including raw materials freight labor and energy.

While profitability was also impacted by the deleveraging impact of lower volume mix, partially offset by productivity savings.

Australasia core revenue increased 4%, but declined two 6% on a reported basis due to foreign exchange.

Price contribution increased meaningfully both year on year and sequentially as we implemented additional actions to mitigate the impact of inflation.

Orders and backlog remained healthy reflecting solid demand for new housing our strong market position and strategic focus on expanding our channel presence within the R&R market.

However, better labor shortages, Gary alluded to earlier have impacted volume and mix.

Australasia adjusted EBITDA margin decreased 100 basis points in the second quarter to 10, 5%.

Primarily due to the deleverage impact of lower volumes mix, partially offset by strong price realization and positive productivity.

Please turn to page 14.

Operating cash flow used during the first half was $165 7 million compared to operating cash flow from operations of $40 7 million during the same period a year ago.

We generated positive operating cash flow during the second quarter, but less than seasonality typically indicates.

We remain in a net cash used position due to significantly higher working capital balances primarily from the impact of inflation on the balance sheet and lower earnings.

We expect improved cash flow conversion during the second half of the year as price cost improves and inventory investments convert to revenue and ultimately the cash.

Our balance sheet and liquidity remain in a solid position.

We ended the quarter with total cash and liquidity of $272 5 million and $558 million respectively.

Net debt leverage increased to three eight times from three five times last quarter and two eight times at year end.

This was primarily due to the temporary impact of inflation on our cash flow and from repurchasing $64 3 million of our shares or about 4% of the total shares outstanding during the second quarter, and $105 6 million or 6% of our shares outstanding during the first half.

In July we ceased repurchasing shares under the $400 million plan approved by the board of directors in July of last year.

And this morning announced our board approved a new $200 million open ended share repurchase plan.

And that gives us continued flexibility with our capital allocation actions.

We will take a disciplined approach to repurchasing shares keeping in mind market conditions liquidity and future free cash flow generation financial leverage and returns on alternative uses of cash.

Ultimately, we remain focused on investing in our business and reduce our net financial leverage towards our stated goal of two to two five times adjusted EBITDA.

We expect to make progress on our financial leverage targets as we drive improved growth margin expansion and cash conversion.

We will continue deploying our cash in a disciplined returns focused manner and compounding the returns on that cash over time.

With that I'd like to turn it back to Gary for his closing remarks.

Thank you David.

Before I cover the market outlook I would like to provide an update on the divestiture process for our wood fiber building products business into Wanda, Pennsylvania.

Last year, we decided that pursuing a divestiture was in the best interest of <unk> and our shareholders.

We have and will continue to cooperate with the court and the special Master and his advisors to carry out an orderly sale of Wanda.

Unlike a typical divestiture we are in a legal process that is not concluded and is dictated by the court.

In the meantime to Wanda is operating business as usual.

I am very proud of our fiber products team for putting customers first and operating the business.

As we shared previously we are fully prepared to meet our own door skin needs from other facilities when the divestitures complete.

Please turn to page 16.

In North America heightened mortgage rates and increased economic uncertainty are likely to cause a continued slowdown in both residential new construction and repair and remodel activity in the near term. However, we expect the R&R market remained more resilient over the longer term given the law.

Level of homeowner equity accumulation age of the existing housing stock and homeowners increased focus on their homes. We anticipate continued solid demand within multifamily to provide some offset over the near term.

In Europe high inflation and economic uncertainty stemming largely from the war in Ukraine is impacting residential new construction and R&R activity, while commercial project work remained steady.

Over the near term the high degree of uncertainty is likely to cause a further slowing of activity, but like North America, we expect and under built market, an aging housing stock to drive increasing activity over the intermediate and longer term.

In Australasia demand for new residential homes and R&R activity is expected to remain strong into 2023 moderated somewhat by builder labor challenges and extended build cycles that continue to impact that market.

Please turn to page 17.

While we see a temporary slowing of the market. We do continue to be encouraged by consumers desire for home ownership and their willingness to invest in their homes.

We recently commissioned an independent study of U S homeowners and found that roughly 40% of them intend to spend a significant portion of discretionary dollars on home improvements and renovations.

This is even higher among younger U S consumers, who cited home improvement as a top priority for their disposable income.

And of those who plan to undertake a home improvement project about half said they plan to install new windows or exterior doors in the next six months.

These dynamics are precisely why we focus our products on two distinct applications, the traditional homebuilding channel and the R&R business.

We have always said that we are positioning <unk> to be successful in any environment and we feel confident that the breadth of our offerings along with significant execution improvements will allow us to capitalize on market opportunities.

As I said earlier, we know we have the right strategy long term macroeconomic fundamentals remained strong and our productivity initiatives are yielding benefits, we must execute better and consistently deliver on our promises.

The significant actions, we have already taken to reduce costs plus those we are working on now to further impact both the top and bottom lines will help mitigate the earnings headwinds of the current operating environment.

With that we will now take your questions.

At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.

And your first question is from the line of John Lovallo with UBS. Please go ahead.

Morning, guys and thank you for taking my questions.

First one is Jim has been in the process now for several years.

Is there anything different in the strategy.

Implemented Skus me in <unk> that could help execution become more consistent or is it sort of just more of the same blocking and tackling.

Good morning, John Thanks for the question.

Yeah, we've been we've been deploying Jem now for several years, we've got a number of model value streams that are definitely showing outsized performance compared to two places where we're not quite as far along so one of the things with Jim is continuing to accelerate our deployment across the entire enterprise.

Using the tools definitely makes a difference in how we perform.

Because of Jim we've been able to increase capacity and throughput at certain sites. Those models site, which has allowed us to accelerate our rationalization and modernization programs taking.

Older legacy plants offline and reducing cost.

Sure.

Reducing our core cost by taking those factories offline and shutting down that capacity in exchange for lower cost more productive capacity elsewhere without Jim I don't think we would be able to do that as quickly.

And through the second quarter and into the second half, we're actually accelerating some of that work, we previously announced a couple of closures.

That Jim really allowed us to do that but the net result is better throughput better cost structure in fewer facilities, which Jim is really providing us that opportunity to do.

Okay. That's helpful. And then are you concerned at all that industry pricing discipline, maybe especially on the interior doors could fade here is volume moderates.

Well, it's been a number of years to get the to get price too.

Two to match value in that marketplace, we clearly are watching that but a lot of.

A lot of what we're seeing is.

Certainly we saw softness in the retail side.

Pricing still continues to hold both there and in the builder channel. Our backlogs are really strong in the traditional and builder channel and a lot of that price is already built into that backlog. So we would expect to see that for the remainder of the year.

Your next question is from the line of Matthew Bouley with Barclays. Please go ahead.

Hey, good morning, everyone and thank you for taking the questions.

Wanted to ask about the assumptions around the revenue guide, but you said you expect volume mix to be flat to slightly down for the year.

I think that assumes trends are relatively consistent with the first half of the year.

I know the comps.

Maybe he's somewhat but.

But at the same time as you mentioned, you've clearly got changes in the market and.

I'm wondering if you could provide a little more color around that outlook in the second half sort of your confidence in continuing at sort of these relatively consistent trends, maybe any detail around June or July would be helpful. There and sort of views on customer inventories I know theres a lot in there, but any color on the volume.

Thank you.

Certainly customer inventory.

Particularly in the traditional channel.

It has been adjusting a bit but the good news for US is that we've got.

Pretty significant backlogs.

Which helps us gauge.

And a pretty accurate way, where we think volumes are going to land in the next 90 days or so so we're looking at that and feel pretty comfortable about that along with.

Some of the consistency that we're seeing from the builder channels. So with all of that in place I think we're in a reasonably good spot, particularly as we lap the.

Third quarter from last year, which was fairly.

Fairly weak quarter for us.

Got it okay understood that's helpful and then.

Secondly on the <unk>.

Cost savings, presumably some of these savings.

Might be permanent I guess, given the closures and exit I don't want to put words into your mouth, but I guess I'm curious if you could number one maybe quantify the savings and number two kind of speak about what might be permanent and what could be temporary and if theres opportunity to even push harder or be more aggressive on some of these cost savings.

If the market ends up weakening further here. Thank you, yes sure Matt.

We've taken some obviously permanent actions and plant closures that we previously announced in really in all three segments in the second quarter. We are continuing as I said earlier to to look at accelerating those rationalization actions.

With additional permanent cost out where we can and why that based on the fact that we've been able to increase our throughput or capacity in other plants, where where we've deployed jem and and are seeing great results and expect that to continue.

In addition to that we've taken Swift action on other cost David referred to them as austerity programs, but all of the normal types of costs that we would take out including.

Through and including some personnel, but also.

Other costs debt.

For the short term are discretionary.

We have more in line that we are.

Deploying in in the third quarter and second half and we will continue to do that.

As we're capable of doing that it's a matter of just time and resource to get that done.

A lot of the initiatives that we've put into place from a cost standpoint, we put into place coming out of the first quarter and began to gain some momentum through the second quarter.

And particularly the permanent initiatives will start to gain a bit of steam as we head through the third and the fourth quarter.

Your next question is from the line of Michael Rehaut with Jpmorgan. Please go ahead.

Thanks, Good morning, everyone. Thanks for taking my questions.

First I just wanted to get it.

And I apologize if I missed it before you detailed several actions earlier.

Driven by Jim.

And some.

A couple of plant closures and.

Actions in the U K that I believe you said occurred in the second quarter and you'll see the full run rate of those savings in the third quarter I was hoping just to get a rough sense of.

What those dollar savings were.

Sure.

Should we expect and on an annualized basis, and if you expect to achieve the full run rate of that.

For the entirety of <unk> or by <unk> and.

So so I think what we'll see with regard to that is.

Some of the plant closures for instance, Melton, we'll start to see towards the end of <unk>. When we have final closure.

Some of the other plant adjustments that we've made we will see at the beginning are already seeing the benefits at the beginning of <unk> for sure by the time, we get into <unk>, we will see full run rate against all of those initiatives.

And can you give us a sense of what the dollar savings would be from those actions.

EBITDA.

Yes, so I would say in total.

Kind of the sum total of the initiatives that we've put into place is in the neighborhood of $75 million.

On an annualized basis, so we're actually in Q2.

Analyzed basis, yes, sorry about that on an annualized basis and.

And we'll start to see full run rate against that again halfway through the third quarter and into the fourth quarter.

Great.

Thank you and.

On price cost also just wanted to get a sense that the slide that you posted was very helpful kind of detailing price against cost.

Earlier in the presentation.

It does show kind of a rough offset on a dollar basis, but.

It would appear not on a margin basis.

So when you think about.

Becoming it you'd mentioned that price cost, becoming a tailwind.

<unk> and <unk>.

Just wanted to clarify that you expect that tailwind to be on a margin basis and if so.

Okay.

Just confirming for both quarters.

As well as.

If you have any sense of the degree of magnitude that would be helpful as well.

Yes, so with regard to the margin impact kind of that price cost and <unk> got it tyranny of the math there you get you get all of the revenue in.

And offset 100% by inflation and Thats had about a 100 ish basis point impact on margins for us overall.

We will see that reasonably consistent as we get into the.

The third quarter, and the fourth quarter, except that that price cost.

Dynamic is much closer in the third quarter and the fourth quarter and helps it will help us kind of what the.

100 ish basis point improvement in sequential.

Performance from the second half versus the first half.

So a little bit of both radius will still see the depression from the kind of from the significant impact of that pricing substantially offset by by the inflation although the.

The relationship and that pricing in place and will drive some benefit in the second half versus the first half.

Your next question is from the line of Stanley Elliott with Stifel. Please go ahead.

Good morning, everyone. Thank you all for taking the question could you talk a little bit about how youre thinking about the European exposed manufacturing with concerns over energy utilities over there.

What sort of impact do you see also have you all thought or have they told you. All if you will be quota central manufacturing.

Just trying to get a sense for any sort of disruptions that we potentially could see.

So as we went through Covid we were.

We were considered essential manufacturing I wouldn't see any reason why.

Under energy supply challenge, we wouldn't be considered a central manufacturing so from that standpoint, we feel reasonably comfortable our European leadership tells us that.

He is reasonably comfortable with kind of what's happening from a energy reserve standpoint within Europe and to that end I think we'll be in reasonably good position kind of buck for the cost of that energy.

Over over the.

The foreseeable future, we have been able to take price take price in certain markets. We also have some strength in certain markets as well where.

We continue to see growth, we continue to see strong markets, France Central Europe . For example continue to be strong and contributing in the region. Obviously, we have to offset those utility costs and then inflation and we'll continue to monitor that but just like we mentioned earlier.

Our discussion of rationalization and modernization the deployment of Jem et cetera hits Europe , just like it would anywhere else in the in the network.

And secondly, you pushed out some capital projects I mean, I understand the markets are slowing but.

Any sense or kind of flavor on what's getting pushed out maybe even regionally just trying to look at that versus all of the implementation that youre still working on with some of the Jem initiatives.

Yes, I think it's it's not so much that things are getting pushed out I think it's really just what are.

Our ability and capability has been on an ongoing basis.

A lot of the gem projects, particularly in more mature gem deployed facilities don't cost us a lot is kind of.

One of the benefits of doing Jim is at some point you get this virtuous cycle of continuous improvement without incredible without as much.

Investment in capital and obviously, we're not we're not skimping on anything that we've talked about in terms of growth we continue to to to invest in our new products and new category growth that we've been talking about and we talked about that a lot of that being being beneficial here in the second half as well and that <unk>.

News to be true.

So really it's more just about where we are on a year to date run rate on projects and the projects that are before us and the ability to to pull those off in the remainder of the year, but I really wouldn't point to anything in particular that.

Thats, a slowdown or a push out of any of our growth strategies that we've already talked about.

Your next question is from the line of Deepa Raghavan with Wells Fargo Securities. Please go ahead.

Hi, good morning, Thanks for taking my questions.

Can you talk about your backlogs and I'm looking specifically at.

Any potential risk of cancellation given that price increases are ongoing.

I'm, assuming you would have some escalation cautious there, but also the demand environment is softening at the same time.

Relatedly did I hear you say backlogs are up 50% year on year.

Yes, we have backlogs up 50% in the traditional channels in North America.

Yes, So depot, what we saw as we've seen some slowdown in the retail channels.

Sometimes that's.

A little bit of an overreaction in the beginning and then it comes back later as you know.

R&R markets, which tend to be served through through retail tend to be more resilient even in slowdowns.

So we'll be watching that one but as far as the traditional and builder channel we actually saw.

So pretty steady order flow through the quarter, and that's really where our backlog exist and we see that.

Pretty well.

That's what is going to carry us into the second half we've got those backlogs there we've really seen no no order cancellations.

Due to the pricing and as our.

As our lead times have had.

Have really come down to.

To back to normal quite frankly.

We're seeing seeing those shipments happen.

Okay. Thanks, you mentioned investing in new projects products, even now.

With a focus on increasing profitability can you talk about.

Your strategy if your strategy has changed to focus on the lower end of the chain given that we may be going into a slowdown in some of the consumer.

Probably trading down at this point in time, how are you thinking about.

Sure.

Instruments your R&D, your new product innovation et cetera at this time.

Well, we continue to.

First of all we've talked about the second half being.

At the beginning of the pay out of some of the innovation and new products that we've put out there.

First of all on capacity expansion in our VPI multifamily business that continues to go very very well.

We've opened our.

Statesville, North Carolina plant to serve the east coast customers bring that circle nationalizing that product line.

We've had great reception to that and we're continuing to add capacity in statesville to meet what is a strong backlog and continuing order demand. We expect multifamily to continued to be strong for awhile Likewise.

We started commercially shipping or or aligned composite window product in the second quarter.

July orders very very strong for that product and ramping.

And we will continue to enhance our brand new product category for us and one that.

Thats kind of.

It's really a step up product. So we think that thats going to continue to be strong and we're seeing that in the order take up that we're seeing and very very excited about that.

<unk> are our exterior fiberglass product.

While it may be a little bit more geared towards R&R, we're seeing that that capacity expansion being utilized as well with continued growth that we've been talking about for the last several quarters.

So all of those are margin accretive.

To our lineup and any growth areas that we think will continue even through a slowdown theyre not necessarily they are certainly not big.

Big box retail focused and they're in there.

And their positioning that being said, we've got a full breadth of products across the range and we will continue to monitor where the order flows are but right now our traditional builder channels are pretty strong.

Your next question is from the line of Susan Mcclary with Goldman Sachs. Please go ahead.

Thank you good morning, everyone.

Good morning, Susan how are you.

Good. Thanks, Gary My first question is building on the commentary that you just gave in terms of next you'd been seeing an improvement in the mix over the last couple of quarters is it reasonable to assume that the mix is continuing to improve and will continue to come through in the back half.

Yes. There is there is a continued improvement in mix kind of built into our outlook in the back half.

Driven by we've talked about softness in retail offset by some strength in the traditional channels and that would naturally mix up.

Okay Alright.

My question is as we do think about the shift that's happening in the underlying macro and obviously your efforts to continue to put pricing through to offset the inflation are you seeing any changes in elasticity of.

Of demand across either retail or the wholesale traditional channels and maybe anything geographically too as you think about North America in the U S versus Europe .

So we've seen so in the U S. As I mentioned earlier, we saw some retail slowing.

Again.

Maybe as much around adjusting inventories and order flows in as it is what's actually happening on the R&R side on the.

<unk> sell side of.

On the builder side, the traditional channel side, we saw pretty steady order demand through the quarter and we expect that to continue.

Here in North America.

In Europe again, we talked about.

Some some strong markets as well as some some markets that have some uncertainty.

So again, France Central Europe , very strong continued strong on the retail market, they're slowing as well, but we havent seen some some of our commercial business that are fairly steady and then in Australasia really have been on an upswing in terms of order demand.

It's as much there about.

But a different cycle works as much there about builders being able to have enough labor to build the orders that they have but our backlogs are strong and our order loads of fairly strong there and we expect as as they stabilize out of their COVID-19 absenteeism. They had some flu issues in the quarter as well, we expect that to continue.

To be a bright spot for us.

In the next several quarters.

Your next question is from the line of Mike Dahl with RBC capital markets. Please go ahead.

Good morning, Thanks for taking my questions.

Gary I wanted to ask one.

Question related to to Wanda I know you are still limited in what you can say, but your comment around continuing to.

Have sufficient doors can capacity from your other plants.

I wanted to get a little more clarity on that because obviously to Wanda has been your biggest facility I think at one point it may have been.

Third.

Youre casings.

I know you've had some productivity initiatives at other plants, maybe how much of the ability to service the last.

Skin capacity from to Wanda is coming from true increases at your other plants vs. As you've gotten further along in this process.

Having a more solidified plan for potentially a long term supply agreement with the future owner of Quanta.

While theres always the possibility of future supply agreement with future owner, we don't know who that is or will be at this point or what the terms of that might be but that's always a possibility.

But I will tell you that we've had a lot of time to prepare for this and we've been preparing ourselves with our other internal plans to be in a position to serve ourselves.

Our needs both currently and for any growth that we might see.

<unk>.

We feel like we're in pretty good shape to do that.

Got it okay. Thanks, and then one other my second one is more of a housekeeping item. There was a $21 million of other income line item in the quarter. It looks like that was not backed out of adjusted EBITDA or income can you just.

Give us a little more detail on what that was and whether that's something that we.

We should think about some continued impacts in the second half from yes.

Yes, there was a combination it was a combination of items, we had a real estate sale for some real estate that we had in Mexico.

There was.

Which obviously is nonrecurring, but there was actually some favorability on our FX hedging.

That would reasonably be expected to occur.

The strength of the dollar and the situations that we're in.

Coupled with.

A few onetime cost adjustments.

That we've continued to put we continue to look for opportunities, particularly in the environment that we're in to.

To execute something similar as we would get into the back half of the year.

Your next question is from the line of Josh Chan with Baird. Please go ahead.

Hi, Good morning, Gerry and David Chris Thanks for taking my question.

I guess, if you looked at your new guidance range versus the old guidance range could you just sort of bucket.

Various items that change kind of order of importance I would expect.

Probably have pretty good visibility into pricing, but so whats in place and worse.

The demand environment, and then internal efficiency could you just kind of help us.

Yes, I think the way to look at it.

The majority of the change is really is really volume related.

The rest is continued little a little bit of continued inflation and then some of the costs associated really timing of the costs associated with that.

With that volume coming out.

So if you look at kind of first half second half clearly our margin better in the second half than the first half markedly and.

That's the benefit of the price deployed and the actions that we've taken.

Already on the cost side.

So again, mostly volume some inflation in some of the costs and inefficiencies that.

Or.

Related to that volume takedown.

Alright, Thanks, Gary and then on sort of your macro thoughts in North America, with R&R being more resilient than new construction, maybe being software which makes sense.

Kind of the opposite of what Youre seeing in terms of the channels I guess with traditional even stronger. So just could you just kind of reconcile that and how you see that the channel is kind of playing out as we go forward.

Yes, I think as our.

The.

In the short term we've seen retail.

Retail softness earlier here certainly slowed in the second half.

We tend to see.

Or more.

Quicker reaction in the retail.

And then it kind of climbs back as.

As the inventory and.

The inventories and the lead times kind of settle out so we'll probably see that kind of over the midterm and long term, where R&R will will settle out as being more resilient in a downturn I am right now.

Continue to have strong orders and backlog from our builder channel partners, which tends to be in our traditional channel and again, some some changes there in inventory positions, but but market most of that is.

Is to order. So those backlogs will continue to carry us certainly in the third quarter and through through to the end of the year, we'll obviously be monitoring when we see that slowdown of order rates in the builder channel, but we certainly have not experienced that yet.

Your next question is from the line of Bill <unk> with Jefferies. Please go ahead.

Hey, guys. This.

This is filling.

Gary So it sounds like orders have remained pretty steady, which is a little surprising, especially in Europe . Just curious how much line of sight do you have and you talked about backlogs being pretty extended on the builder side. How extended is that just give us some comfort around that just because I've always thought your business is a little more shorter cycle in nature.

Yes so.

I think just to clear up a little bit we've seen we saw some softness in orders.

In general in Europe , but we have pockets of strength still in France and in <unk>.

In Central Europe , our commercial orders tend to be pretty steady as well that's our project business, where we've seen the weakness has been in retail in Europe .

And in some of the northern Europe markets, where theres, some uncertainty related to primarily to Ukraine.

In North America again, we saw pretty steady order loads in our traditional channel, but softness in retail and then orders in Australasia fairly strong for the builder market and for R&R with.

A little bit of Choppiness, there still as they are coming out of some of the COVID-19 absenteeism and availability of labor primarily for builders to build the orders that they have.

Got you that's helpful Gary.

I mean, certainly inflation slower growth is out of control by stick in your prepared remarks, you mentioned at some operational challenges not meaning.

Your intended.

Target to Charlie can you expand on those issues how much of that is behind you and if we do have a weaker backdrop call. It in 2023 are there any obvious.

Higher cost footprint that you have where you could take out and see a bigger cost saving coming through perhaps next year, if you needed to.

Yes, I think the real thing there, it's not operational issues or hiccups in our own operations, we were able to meet demand and.

Pretty well really the difference was inflationary cost that.

There were higher than we expected and.

That that we probably could have performed against better we've got some some pretty active.

Supply chain actions underway.

Which will help us both on the cost and.

On the availability side quite frankly, and we're exercising those as far as rationalization goes of our footprint, we've been working on that for a number of years.

In the second quarter, we took some action to take some legacy plants offline thats permanent cost out it really in all three regions. We've got more of that to come and again, it's really a.

Benefit of the work that we've done by deploying jem improving capacity and cost structure in our model plants and being able to take additional plants offline, that's really where we're going to get the best cost savings that structural change I've said, all along I've said this for the last few years in a downturn. These are the types.

Of activities, you would do anyway, and we have the benefit of actually having them teed up and being able to to accelerate that program rather than come up with it from scratch.

Your next question is from the line of Truman Patterson with Wolfe Research. Please go ahead.

Hey, good morning, guys. Thanks for fitting me in here just wanted to follow up on one of John's questions in North America. I think you all had some pretty robust pricing effective in June I'm, just trying to understand if the.

The expected realization of that price hike.

Given some of the retail softness you all mentioned.

Are you still are you expecting it to be as effective as maybe last year's.

Announcements or are we starting to see pricing power wane a little bit.

I think we will see the pricing thats out and deployed is what will.

We'll be seeing in the second benefit of in the second half so that's already in.

There is no additional pricing that we're expecting in the second half guide at this point, it's all been deployed and Thats, what we back so.

Hi.

Obviously there is.

It's a matter of what your volume what the volume is in the amount of the price, but that's built into that guide.

Okay. Okay.

And then.

We've accounted for we've accounted for it kind of.

A reasonable level of competitiveness in terms of the impact on our pricing in the second half, but to Gary's point is.

The outlook in the guide that we've given to all of you at this particular point in time assumes.

Assumes the increases that we have in place right see their way through the back half of the year.

Okay and then.

Free cash flow in the first half I think was about negative $200 million I'm, just hoping you all given the new updated guidance. If you all can give an update of where that might.

And for the full year and I'm really thinking is there any chance to maybe work down the inventory your net working capital levels.

If I heard you correctly in the prepared remarks, it sounds like.

Perhaps near to intermediate term share repo might be put on hold and you all will be focused on leverage going forward.

Thanks, Thank you for asking and answering my question.

Yes.

Working capital is a significant focus.

There is opportunity the way the way I see it in our working capital for about half a turn it's about $200 million.

And indeed, we're going to.

We will continue to be opportunistic from a share repurchase standpoint, but.

At the current time, we have.

Really significant focused on improving the improving the overall leverage.

And that's a big focus for us to focus to get back down to kind of the targeted leverage through the back half of the year and into 2023.

And today's final question is from the line of Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, Good morning wanted to think about Australia R&R market push can you may be share.

Where you are on this journey.

You are now versus one to two years ago and as you scale up.

R&R business.

How does this impact margins for the segment now and in the future.

So thanks for the question.

We've had the strat.

For those who are not familiar our Australasia business had been primarily.

Our focus towards the new construction.

Towards new construction home new construction in in Australia, and one of our strategies was to improve our penetration into the repair and remodel which is a natural extension. If we're in the Newbuild, we should be able to do that we've made some investments over the last several years in and showrooms and.

<unk> capabilities within the R&R channel and we've seen significant improvement in our our mix towards R&R just like in our other markets.

Margin accretive and we expect as this cycle continues in Australia to grow that our growth in R&R will expand so we've definitely made made some improvements there and we will continue to report out on the mix change as we go forward as the cycle improves.

And this does conclude the Q&A session of today's call I will now turn the call to Gary Michel for closing remarks.

So again, thank you for joining us this morning and for all your questions. We look forward to sharing our progress on the third quarter and the second half as our cost and commercial actions yield results our strategy long term macro fundamentals and our rationalization initiatives are yielding benefits are.

<unk> against this backdrop, we will deliver a stronger second half. Thank you again for your interest in <unk> look forward to talking to you all soon.

Ladies and gentlemen, this does conclude the <unk> holding Inc. Second quarter 2022 earnings conference call. Thank you for participating you may now disconnect.

Please wait the conference will begin shortly.

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