Q2 2022 Bluelinx Holdings Inc Earnings Call
Greetings and welcome to the Bluelinx Holdings second quarter 2022 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Ryan Taylor, Vice President of Investor Relations. Thank you you may begin.
Thank you operator and good.
Everyone and welcome to the Bluelinx Holdings second quarter 2022 earnings call.
Presenting today are Dwight Gibson, President and CEO of Blue links and Kelly Johnson, our Chief Financial Officer.
Our second quarter news release and Form 10-Q were issued yesterday after the close of the market along with our webcast presentation.
These items are available in the investors section of our website links Seo Dot com.
We encourage you to follow along with the detailed information on the slides during our webcast.
Today's discussion contains forward looking statements actual results may differ significantly from those forward looking statements due to various risks and uncertainties, including the risks described in our most recent SEC filings.
Today's presentation includes certain non-GAAP and adjusted financial measures that we believe provide helpful context for investors evaluating our business.
Reconciliations to the closest GAAP financial measure can be found in the appendix of our presentation.
At the conclusion of our prepared remarks, we will open the line for questions.
With that I'll turn the call over to Dwight.
Thanks, Ryan and good morning, everyone. Thank you for joining us on the call today.
Before I get started I want to acknowledge Leroy digs in material handler at our Richmond branch and <unk>.
Congratulation to him and celebrating 50 years of outstanding service to Bluelinx.
Leroy exemplifies our core values teamwork and we thank him for his commitment and dedication to the company.
It is people like Leroy who make bluelinx a great place to work.
It continues to be an exciting time at Bluelinx in a dynamic period for the U S housing industry.
Our first half financial results are the best combination of first half results in our company's history.
We delivered $2 $5 billion of sales $314 million for adjusted EBITDA and $97 million or free cash flow.
As compared to the first half of 2021, a period of historically strong demand, we grew sales by 9% and <unk>.
Adjusted EBITDA by 15%.
While generating operating cash about five times greater than the prior year period.
This represents our most profitable first half ever.
In Q2, we delivered our third highest quarter ever and three key metrics with diluted EPS of $7 48 per share adjusted EBITDA of $112 million and $101 million operating cash.
We delivered this strong level of profitability and cash generation, despite greater than 50% deflation in wood based commodities and increased market uncertainty due to rapidly rising interest rates.
Following two years of strong growth and the building products industry.
Underpinned by low housing supply and fueled by the global pandemic.
The first half of 2020 to Mark a turning point there are several key indicators are pointing towards a slowdown.
Moderation from the high demand, we experienced since the onset of the pandemic could lead to an easing of supply chain.
And a more stable environment in which to operate our business.
We are closely monitoring the end market environment and analyzing a variety of potential scenarios. So that we are prepared to capitalize on any opportunities.
I am confident bluelinx is well positioned to drive profitable growth based on the improved execution, we've demonstrated and the strategy we outlined at our Investor day in June .
We believe the operating improvements we've made to this point are enduring and that we have ample opportunity to further improve our performance.
We're still early in our journey to transform bluelinx into North America's preeminent building products distributor.
Our strategy is focused on accelerating growth in our specialty products.
Optimizing productivity and driving World class performance.
And our balance sheet is as strong as it has ever been given us the financial flexibility to accelerate our strategy in a disciplined manner.
We are well positioned to take advantage of attractive investment opportunities as we execute our growth strategy.
We are confident that this strategy along with the talented team we have assembled and the performance based culture. We are establishing provides us a significant opportunity to deliver compelling value to our stakeholders.
Looking specifically at Q2 2022.
During the second quarter, we successfully navigated a dynamic macroeconomic environment and rapid deflation in wood based commodity prices, while continuing to prioritize.
Growth in our higher value specialty products.
Progress on our productivity initiatives and.
And strategic investments to build our team and capabilities.
Our second quarter performance is a testament to our team's focus.
European and execution.
We delivered $1 $2 billion of sales.
$201 million of gross profit and.
And $112 million for adjusted EBITDA, The third highest adjusted EBITDA, we have delivered in any single quarter.
Yeah.
Q2, 2022 sales and adjusted EBITDA were only exceeded in Q1 of this year and Q2 of 2021.
Two periods with very strong demand for building products and significant inflation in wood based commodity prices.
On a standalone basis, our Q2 results demonstrate our disciplined approach to structural inventory management, and the strength and stability for our specialty products business, which comprised 64% of sales and more than 85%.
Gross profit.
Specialty product sales grew 17% year over year to $788 million with gross profit up 9% year over year and gross margin of 23%.
The growth in specialty products was driven by continued focus on strategic value based pricing, which more than offset a modest decline in volume.
And from a product line perspective, our specialty growth was led by engineered wood.
Millwork siding and industrial products, which is consistent with our growth strategy.
In contrast sales of structural products declined 29% year over year, largely due to the dramatic decline in wood based commodity prices.
Sequentially composite lumber and panel prices dropped, 57% and 52% respectively from peaks in mid March to loans in late June .
Despite this headwind we achieved a respectable structural product gross margin for about 7% before considering a $9 8 million dollar lower of cost or market adjustment, which resulted in a reported gross margin for approximately 5%.
Kelly will provide more details on that later in the call.
We generated $101 million of operating cash in the second quarter, our third highest level on record.
And free cash flow with $97 million, which is 86% conversion of adjusted EBITDA.
Our cash generation strengthened our financial position, we ended the quarter with net leverage below one turn and available liquidity of just over $450 million, our highest level ever.
During the quarter as previously announced we also increased our share repurchase authorization to $100 million.
Entered into a $60 million accelerated share repurchase program.
With our share repurchase actions through the first half we are on track to repurchase approximately 9% for outstanding shares this year.
Based on the future cash and adjusted EBITDA profile of our business even in a slowing economic environment. We believe bluelinx is an incredibly compelling investment.
Our share repurchases demonstrate confidence in our long term growth strategy continued improvement in our execution and a commitment to delivering shareholder value through disciplined capital allocation.
Taking a closer look at the U S housing industry.
Following two years, where demand has outpaced supply and fueled explosive growth, we're starting to see a softening in the market.
During the first half of 2022 broad based inflation the rapid rise in mortgage rates and home price appreciation have reduced home affordability for many buyers and slowed new home starts.
While these developments did not have an immediate impact on demand in our business. We anticipate they will lead to a slowdown in the U S housing industry over the coming quarters.
That said, we believe the under supply of homes demographic shifts repair and remodel activity and high levels of home equity will continue to support demand in the second half of 2022 and beyond.
Other factor supporting long term housing demand include low unemployment and wage growth.
Additionally, double digit increases in rental rates over the past year main fluence renters consider home purchases, even with higher mortgage rates.
And the repair and remodel market, we believe that high levels of home equity housing turnover and age housing stock will continue to support growth.
The most recent estimate from the joint Center for housing studies supports this view with remodeling activity expected to maintain a double digit growth rate over the next four quarters.
As a point of reference we estimate 45% of our annual sales are tied to the repair and remodel market with 40% tied to residential new home construction.
15% related to the commercial industry.
Given our assessment of the demand outlook, we continue to invest in our business and execute our strategy.
Our key strategic priorities include.
Shifting our sales mix over time to our goal of 80 plus percent specialty product sales.
Accomplish this we are prioritizing growth in five key specialty product categories, and partnering with strategic suppliers and national account customers.
From an operations perspective, we are driving procurement excellence and focusing on optimizing productivity throughout our distribution centers.
We also continue to rigorously manage our working capital.
From a people perspective, we are infusing high caliber capabilities into organization and driving a performance based culture.
We're confident that this strategy along with our disciplined approach to capital allocation provides us a significant opportunity to create compelling value for shareholders.
Our strong balance sheet enables us to continue to invest in growth, while maintaining a prudent financial position.
We will continue to proactively evaluate investment opportunities that will drive profitable growth and generate attractive returns on invested capital.
Yeah.
To summarize our record first half and strong second quarter performance is a testament to our team's focus discipline and quality execution.
We delivered historically strong financial results in a volatile environment and made good progress in our long term strategy.
I am proud of the entire bluelinx team for their efforts and contributions to the quarter.
Okay.
That concludes my opening remarks at this time I'll turn the call over to Kelly for a more detailed discussion of our financial results and capital structure.
Following that I'll provide closing remarks before we take your questions.
Kelly.
Thanks, Leigh and good morning, everyone.
As Greg just mentioned historically speaking our financial results for the second quarter of 2022, Mike one of our strongest performances on record despite significant headwinds from the wood based commodity deflation.
Net sales were 1.2 billion down 5% year every year in total.
Specialty products sales grew 17% over the prior year. This growth was offset by a 29% reduction in structural product sales, which was primarily caused by the steep declines in wood based commodity prices during the period.
Gross profit was $201 million and gross margin was 16, 3% for the quarter and over eight over 85% of our gross profit less from specialty product sales.
Taking a closer look at especially products for the second quarter net.
Net sales were $788 million up 17% or $113 million year over year. This growth was primarily driven by our disciplined value based pricing.
Set partially by a modest decline in volume as compared to the second quarter of 2021, which is a difficult comparison, given the exceptionally strong demand for building products the industry experienced during this period last year.
The modest decline in volume was primarily related to specialty treated lumber and panels and within that however, with a nice increase in fighting volume.
On a sequential basis sales of specialty products increased 3%, including 1% volume growth.
Gross profit on specialty product sales with $180 million.
$15 million or 9% year over year.
Especially on the gross margin was 22, 9% a strong margin from a historical perspective, but down 150 basis points from 24, 4% in Q2 of last year, which was an all time high.
Through July specialty products gross margin was in the range of 22% to 23% and sales volumes were consistent with Q2 levels.
Now moving on to structural products net sales were $452 million or 29% decrease compared to the prior year period.
This decrease was primarily attributable to deflation in lumber and panel pricing with structural product volume down modestly year over year.
Her random length, the average price in the second quarter of 2022 for framing lumber was $797 per thousand board foot down 36% year every year and.
And the average price for panels with $874 per thousand square foot down 44%.
Gross profit was $21 million down 65 million or 75% year over year and gross margin was four 7%.
In June when the prices fell to around $600 per thousand board foot and panel prices to that 650.
Dollars per thousand square foot compared to much higher prices earlier in the quarter.
Given this we recorded a $9 8 million dollar level of cost or net realizable value reserve to adjust our structural inventory value to reflect the reduction in market pricing as of the end of the quarter.
This is the same methodology, we used in Q2 of 2021, when we recorded a similar adjustment of $16 $7 million.
Based on the pace at which we cycled out of structural inventory and the increase in my brain camera pricing through July we anticipate the full value of the lower of cost our net realizable value reserve booked in Q2 to reverse in the third quarter and we have reflected that in our month to date July structural margin ranges.
However, we will continue to monitor commodity pricing and evaluate whether future adjustments are required.
Excluding this reserve the structural gross margin for Q2 was six 9% a solid result, given the rapid and steep decline in commodity prices during the quarter.
Our team continues to do an exceptional job managing structural inventory through leveraging confinement and utilizing centralized purchasing and pricing decision to keep structural inventory levels low and mitigate risk.
Thus far in the third quarter through the first four weeks of July daily volumes for structural products were trending up slightly higher than second quarter level and structural gross margin was in the range of 18% to 19%. However, this includes about 900 basis points of benefit from the.
<unk> reversed all of them.
Reserve I just mentioned.
We will continue to evaluate market pricing for wood based commodities and adjust accordingly at the end of each period.
SG&A was $91 million, which is flat to the first quarter of 2022.
On a year over year basis, SG&A increased approximately 5% due mostly to higher delivery cost along with strategic investments in our workforce.
These increases in SG&A were partially offset by a lower level of variable incentive compensation, which include sales commissions and incentives.
As a percent of sales SG&A was seven 4% in Q2 of 2020 to a very good outcome given the inflationary environment.
And net income was $71 million and diluted EPS was $7 48 per share.
Diluted shares outstanding were $9 5 million down from 9.8 in the prior year period.
Lower share count reflects the shares we have repurchased in the first half of 2022 which resulted in a 33 cent benefit to diluted EPS in the quarter.
Our tax rate for the quarter was 23, 1% in line with our expectations.
For Q3, we anticipate our tax rate to be slightly higher in the range of 24% to 28%.
Adjusted EBITDA for the second quarter of 2022 was $112 million or nine 1% of net sales.
And that's why it mentioned this is the third highest level of adjusted EBITDA, we delivered in any quarter.
Okay.
Turning now to cash flow and working capital during the second quarter, we generated operating and free cash flow of 101 billion a $97 million respectively.
Our cash generation was supported by a receivable collections, which benefited from wood based commodity deflation during the period.
We ended Q2 with $578 million of inventory I wish more than 85% related to specialty products.
Capital expenditures were $4 $4 million in the second quarter and related primarily to upgrades and enhancements at our distribution franchise.
For the full year, we still anticipate investing up to $30 million in capital expenditures with a significant increase expected in the third quarter.
Yeah.
These investments will be focused on continued facility improvements upgrading our fleet of rolling stock and enhancing our digital and technology capabilities.
Looking now at our balance sheet as at the end of the second quarter cash on hand was $105 million total debt was $571 million and net debt was 466 million.
Net leverage with less than one time.
Sequentially and down from one and a half times at the end of the second quarter of 2021.
When considering our cash on hand, and Undrawn revolver capacity of $346 million available liquidity was 451 million the highest level of available liquidity, we have had at any point in our history.
Given this we are in a strong financial position with ample liquidity to invest in strategic growth.
As a reminder of our guiding principles for capital allocation, we intend to maintain a strong balance sheet, which enables us to invest in our business through economic cycles, while maintaining a long term target net leverage of at or around three times.
As we invest for growth, we will evaluate both organic and acquisition opportunities that yield.
Yield a risk adjusted return above our weighted average cost of capital and are consistent with our strategy to increase our mix of specialty products.
We will maintain a disciplined approach to our growth investments comparing those opportunities against the value of returning capital to shareholders.
To summarize we delivered very strong sales net income adjusted EBITDA and operating cash in the second quarter of 2022, which resulted in the first half of 2022 being the best half on record we are on track to repurchase approximately 9% of our outstanding shares this year.
Our balance sheet is in excellent shape with low leverage.
And all time high liquidity.
We are focused on executing our strategy, maintaining a strong financial position and delivering long term value to our shareholders.
At this time I'll turn the call back over to Dwight for closing remarks.
Thanks Kelly.
In closing.
We delivered our best first half with record with two 5 billion in sales and $340 million of adjusted EBITDA, representing 9% sales growth and 15% adjusted EBITDA growth over a very strong first half of 2021.
We continue to grow our specialty products, while driving continuous improvement throughout the business.
Our financial position is as strong as it has ever been and we are investing in our business to drive efficiency and increase our capacity to deliver profitable growth.
We remain laser focused on the things within our control.
Accelerating growth in specialty products.
Optimizing productivity and driving World class performance.
Our aspiration is to be the pre eminent building products distributor in North America, and we believe we have the scale.
Alex and service offerings to continue to expand relationships with our best customers and key suppliers.
We're confident that our strategy will create long term value for all stakeholders and we are steadfastly committed to that goal.
That concludes our prepared remarks at this time, we're happy to answer any questions.
Thank you at this time, we will be conducting our question and answer session.
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Our first question is coming from Greg Palm with Craig Hallum. Please proceed with your question.
Yeah. Thanks I.
I guess a couple of items more strategy wise you know a lot has changed over the last few months and I'm just wondering how that's maybe changed your view of the business whether you are approaching.
Strategic investments any differently capital allocation, just curious if there's any areas of the business, where you're becoming either more conservative or more aggressive just given what's going on in the macro.
Hey, Gregg Hey, good morning. This is Duane thanks for the question, we really like.
Where we are are we feel very confident in the strategy that we communicated and we're focused on driving mix in the right direction building scale in the right markets and we think we're well positioned to lean into that strategy and as always we're going to continue to look for opportunities to make the business more efficient from a process perspective and from a people per spot.
And that doesn't change, but we think there are opportunities, particularly surprises a bit in personal maintenance or trying to take share organically and is always looking at.
If the right opportunities inorganically to accelerate our strategy.
Are you able to shift maybe more focus towards you know, let's say you know the R&R market. If it holds up better than new builds or maybe areas like manufactured housing or even some of the non housing areas like commercial I mean are you able to.
It's just more focus and there's some of that if you know traditional housing continues to slow here.
Yeah, I know if you think about our mix you know 60% of our business is non new home construction driven right. So R&R and those are the areas you mentioned and as we think about the products. We're excited about the park's remaining into they pretty well in those spaces. So we think there's a natural connection in terms of first.
Leaning into the markets that have still fairly healthy dynamics around it and we're going to continue to kind of focus on that.
Okay, and then last one.
Thinking about the specialty segment and the tailwind from pricing that the business has gotten over the last I don't know 18 months or so how much of that is sticky and a slowing housing environment. You know how much you know how much would need to normalize if housing overall.
Housing demand starts to come in.
Yeah, So I'll start off here and Kelly can add some color. He clearly theres been a supportive pricing environment across the business a little bit more volatile than the structural side, but definitely a little bit more stable on the specialty side that we've been able to take advantage of but let's be clear. The team has also done some intentional.
Things are on our pricing.
Our capabilities from an analytics perspective from an execution perspective, which we believe is going to allow us to enjoy better specialty margins than we've had historically and we are continuing to kind of really emphasize that and lean into that from a governance perspective.
From a margin tourist perspective, all of those things, we think are going to allow us to continue to perform well on the specialty side and we believe there is absolutely more opportunity to continue to do that.
Yeah, I would you know I go do I'd comment and just add to that that we continue to do analysis that supports the numbers that I've mentioned in the past that we think you know that 19% to 20% specialty margin is a good margin to think of a normalized margin and a red.
It's a downturn environment.
You know and which I think is the macro that we're looking at right now.
So I I feel really comfortable with with all the discussion we've had around that previously and we wouldn't change our view on that at this time.
Okay, great well best of luck going forward. Thanks.
Thank you you are.
Our next question is coming from the line of Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Good morning, Kurt Good morning, Kelly I, just wanted to start off in your prepared comments on specialty you noted I think 1% volume growth was that just citing itself or kind of the collective focus growth areas in specialty.
Yeah. So that's kind of within we we generally had a modest decline overall, but we saw we saw some we did see some bright spots such as siding. So that's just kind of indicating the couple of areas, where we saw some growth within that within the overall impact.
Got it okay that makes sense and you know our overlap and that's relative to last year, which was very.
A very strong quarter, so so really.
It's still really it's still up from last from the sequential quarter and I think that's what that was also referring to it that we were up in the sequential quarter.
Yeah, Okay that makes sense.
Over the last couple of quarters, you've talked about some of the material availability challenge and how.
Yes, that's kind of played into the volumes on the specialty side has anything changed there and any categories that gives you confidence you can start seeing I guess.
Improved volume trends on the specialty side, notwithstanding the end markets and what are you focused on in terms of positioning the business to potentially pick up some share into 2023.
Yeah. So.
It's a mixed bag to be honest, we still see some some challenges from a supply perspective on a couple of categories AWP AWP remains constrained some of our industrial products.
Cement siding, but we have seen some easing in other areas around millwork and outdoor living categories.
And from the import products and so we're really focused on just continuing to run our strategy. So our national accounts, we think there's opportunity to continue to grow our wallet share of wallet with them and we're putting together programs and putting in building sale.
Our sales efforts to kind of drive that.
We're also looking at expanding availability of some of these products across our branches and across our network. So we're really excited about that we see some opportunities to do more of that particularly as it relates to outdoor living products, adding products East region, and the west region and parts of the South. So it's again you know how do we drive.
Great service levels for our best customers. So we can earn more of their business. How do we make these products available in more parts of our network and how do we continue to focus on are really executing at a high level and delighting, our customers and continuing to operate as efficiently as we can.
Got it okay. That's helpful. Thanks, Duane and.
You mentioned that commodity volumes were I guess through July running ahead of Q2 levels does that represent any sort of shift in strategy and structural given perhaps a lower level of risk with prices, where they sit today.
No. It really doesn't reflect that we always have ebbs and flows on the commodity volume and I think it just represents a little bit of a.
Just opening up of the markets that as the prices are starting to come up when they go down then people kind of hold back and I think we're just had some increase in demand over the last few weeks as the prices have started to rebound, but no nothing has changed in our strategy. We continue to keep inventory as low as possible and still serve our customers and manage that risk.
So overall, we would still expect volumes to kind of be where they where they have been I as it relates to you know lower.
Slower than what we saw in a couple years ago, Yeah, I'll emphasize that you know we're pretty convicted in our approach and how we're looking to really manage structural business as tightly as we can and really make sure that we have just what we need for our core customers and our emphasis our priorities and where we see and <unk>.
Restaurants over time, it's going to continue to be driving your specialty business and particularly our mix on this phone core categories that we've talked about no change right.
Right right.
I understand that and obviously specialty the specialty strategy is quite important but I mean, if you're looking at 2023, and we do get a much more challenging demand environment.
I guess is there a downside to perhaps leaning more into the structural side, where you've walked away from business and I guess, what would hold you back from doing that.
No you know again I think we spent a lot of time and energy thinking about how do we maximize the value creation of our business and how do we position ourselves in a way that we can.
Continue to be a key partner for our key suppliers and our key customers and we were really convinced that the play we're running is the right play and it was how do we make sure that the things we provide we provide value around it how do we make sure we're connected to the parts of their business, both suppliers and customers that they care about the most and allow them to service their needs the best and we believe that's our specialty.
Business, and we believe that continuing to create capability, they're investing they're supporting an wrapping value around that is the right way to run structural players a role we wanted to make sure we're very clear on that role and it's complementary to what we do.
But it is again an area that we wanted to kind of continue to manage and keep inventory at a really good level and we think even in a softer market environment that will stay home.
Okay, Alright, and then just my last one.
On working capital from where you sit today do you expect that to be a use or source of cash this year.
Yeah, we continue to yeah, we had a great quarter from a cash flow perspective, when you combine the earnings with the working capital.
It was really deflation driven and as well as our focus on working capital and we continue to focus on that and would expect you know at this point, probably some continued deflation through the year and so we're looking towards a oh.
Our cash flow positive for the rest of the year.
Got it okay, well I appreciate all the color and I'll turn it over thanks.
Thank you. Our next question is coming from the line of Reuben Garner with the benchmark Company. Please proceed with your question.
Thank you good morning, everybody.
Good morning, let's see.
So on the specialty side Kelly the appreciate the normalized 19% to 20% I guess.
Question is how volume dependent is that in other words does that 19% to 20% just kind of a normalization in the in the supply chain and things kind of loosening up and so therefore pricing changes or is that normalization, meaning you know going back to the sink.
<unk> family starts we saw kind of pre Covid can you just kind of clarify what that means and what would lead to downside to that level.
Yeah. So.
I don't know if it means really kind of going back to I would say around pre COVID-19 type of levels.
It's really we have we continue to refresh that analysis as we considered the it's really both right our supply chain to open up we would expect that you know volume would be I'm more available to us and that's going to put the demand supply is going to put some pressure on pricing.
That's kind of where we think we'd fall out given that changes that we've done in our strategic pricing approach and I think any downward pressure to that would have to be a really just more of a fundamental shift in the overall macro environment to be worse than I think what we're currently anticipating at this point in time.
So.
I I couldn't totally anticipate what else would be pressure on that you never know is the short story, but I feel pretty confident around that analysis that we've done so far and I think it would have to be you know.
Right now, we don't see that as a potential rents at this point I can always happen but.
That's perfect and then.
Question on SG&A.
And how to think about that kind of in that same normalization you know what.
Lumber prices coming in maybe volume normalizing.
Last couple of quarters, I think north of 90 million pre COVID-19 that was kind of mid seventies, what what was that dollar amount looks like in a kind of normalized environment on a quarterly basis.
Yeah well.
If you remember around the time of Covid, we've we pulled in SG&A very very tightly we did arrest. We we also.
More than all of our discretionary spending and that brought us down into the seventies and since then we've been very targeted around adding certain costs back to invest in our workforce and then we've also had some of the discretionary spend come back for us to be able to serve our customers like teeny and and then.
In addition.
We've seen some inflationary impacts and fuel and third party freight and those types of things are in recent times related to our delivery costs that we mentioned and that is probably the most volume independent types of costs. So as we see cost I mean, sorry volumes increase we would see some SG&A increase probably related to.
That and that would be yeah, not that's not a terrible thing.
But of course, we're being as efficient as we possibly can around those costs.
So we monitor it closely and you know we were at 91 were where we were in the eighties you know last year. So I think we're still doing a great job containing our cost them considering our strategies that we wanted to play going forward and the fact that we've had such a significant increase in profitability.
And the other element I'd add to that as you know we're focused on the efficiency for SG&A and so as we think about it on a relative basis relative to our volume and that's one of the things we think about to make sure that we're getting the right return from our SG&A investment, we feel pretty good about that and Kelly and the broader team are really focused on.
Painting that discipline and a good market and then another down Mark can you. If you look at our SG&A as a percentage of sales I think that's an area that we're going to continue to stay focused on.
Okay, and then last one from me if I could sneak one more in is the M&A pipeline any commentary about maybe how how that's kind of evolved over the last few months or is it increasing the likelihood that you guys are going to find a D.
Will this kind of choppy environment or is it is it making it more difficult and less likely to see something come to fruition.
Yes, so we remain very engaged in evaluating opportunities that fit with our strategy again allow us to serve our core customers better in certain markets and provide opportunities to continue to mix up on the specialty side and things that would kind of accelerate our self.
On our journey.
And.
Interesting time, you've seen particularly as rates come up.
That you know financial sponsors or maybe a little bit more reticent and again, given where we are from a balance sheet perspective, we think we're well positioned to move opportunistically. If we see some good opportunities. So we remain very engaged around.
Waiting things again, leveraging the framework that we shared and talked about to make sure we can create value greater than our risk adjusted cost of capital.
We're continuing to really stay active there and we'll see what happens.
Great Congrats on the strong results and good luck going forward.
Okay. Thanks I appreciate it.
Thank you. Our next question is coming from Jeff Stevenson with loop capital markets. Please proceed with your question.
Hi, Thanks for taking my questions and congrats on the nice quarter.
So Jeff what plan do you still plan to maintain normalized specialty products inventory levels in the back half of the year given the continued supply constraints, you're seeing in a number of categories. There or would you expect at some point the run lower segment inventories due to an uncertain residential outlook moving forward.
Yeah, So hey, listen we want we want to turn our inventory as quickly as we can and we look at the velocity of that is a key element of how we're performing so we're going to continue to really work with the teams our sales teams and our product teams and our purchasing teams to make sure we have the right balance between supply.
<unk> demand.
And so that's an area of focus for us and we've done a really good job of that in the structural side and we're starting to really lean into that as well on the specialty side. So we'll look to continue to drive ins.
Inventory velocity, you know not only the second half this year as we move through 2023.
Okay, Great and then my second question is just some kind of your visibility into new residential volumes at the moment I know you cited you expect things to slow down at some point, but right now there's still elevated new housing backlogs given the dislocation between starts and completions over the past year.
Just wonder how much of a backlog do you are you have right now and how long that could kind of less than two at the end of the year early next.
Yes.
Yeah, So hey, I think you've captured a lot of key elements right allowed the builders and if you listened to their there are earnings in conversations I've had or still.
Have a fair amount of backlog there working through in 2022, and obviously some of our product support that and we're continuing to make sure. We were in a position to do that and you know everyone is expecting to see some pullback in starts in 'twenty three.
That's 40% of our exposure, we continue to manage that fairly tightly and we will be prepared for that and but we also see it as an opportunity to quite honestly as some supply that comes on to really drive some target selling focus in some accounts that we have access to that we think we can do more from potentially some new ones as well. So we feel okay as it relates to 2002.
Turning to second half as it stands today, but we're going to stay flexible and focus to make sure we can adjust in either direction.
Okay, Great and then you talked about before once supply normalizes and specialty that you'll be able to pursue share gains moving forward and you talked about AWP in fiber cement or come in less constrained would you expect to start seeing share gains here in the back half of the year.
Based on your strategic initiatives are or how should we think about that moving forward.
Well, yeah, that's our intent right. That's what the teams are focused on that's what their compensation is aligned to that is what we talk about all the time, obviously, we've got to do that in an environment, that's fairly uncertain and fairly volatile, but our focus is on understanding where the opportunities are.
For share gain making sure our value proposition is strong and leaning into that commercially and operationally and our expectation is over time.
Gains in these categories will be the result or will that happen in the next 90 days or the next 180 days TBD, but that's where we are steadily focused.
Okay, great. Thank you.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back to management for any closing comments.
Alright. Thanks, Jesse this is Ryan Taylor just want to thank everybody for joining us on the call. This morning, we appreciate your interest and the questions from our analysts.
Alexandra and I will be around the rest of the day and throughout the balance of the week if theres any other follow ups. Please feel free to reach out to us.
Thanks for joining US we'll talk to you next time.
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
Okay.
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