Q2 2023 JELD-WEN Holding Inc Earnings Call
Thank you for standing by.
My name is Maria and I'll be a conference operator today at this time I would like to welcome everyone to the gel one holding Inc. Second quarter 2023 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 during this time.
Please press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you I would now like to turn the call over.
To Mr. James Armstrong, Vice President of Investor Relations. Mr. Armstrong. Please go ahead. Thank.
Thank you and good morning, we issued our second quarter 2023 earnings release last night and posted a slide presentation to the Investor relations portion of our website, which can be found at investor Dot <unk> Dot com, we will be referencing this presentation during our call.
Today I'm joined by Bill Christiansen, Chief Executive Officer, and Julie Albrecht Chief Financial Officer, before I turn it over to Bill I would like to remind everyone that during this call. We will make statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
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 of these non-GAAP measures to their most directly comparable financial measures calculated under GAAP can be found in our earnings release and in the appendix of our earnings presentation.
With that I'd like to now turn the call over to bill. Thank.
Thank you James and thank you everyone for joining our call today.
I'm pleased to report that our second quarter came in better than we expected and we continue to make progress against our short term goals to strengthen the foundation of gel one.
First I want to take a moment to thank all of our associates around the world.
Due to their continued hard work.
We're delivering on our commitments, including solid financial results in the first half of this year despite continued challenging market conditions.
Let's begin with our second quarter highlights on slide number four.
While sales were in line with our expectations earnings were above our forecast due mostly to continued solid price cost results.
In addition, we are generating strong cash flows driven by earnings and working capital improvements.
I'm also pleased that we are delivering on important commitments, including reducing our cost structure.
Improving our customer service with a focus on on time in full metrics, both in retail and traditional.
As well as completing the sale of our Australia, Asia business, which I'll speak to in more detail shortly.
Julie will also be covering our financial performance in more depth during her comments.
Turning to slide five as.
As you have heard me say before.
We continue to implement a two pronged approach to improve gelled win for all stakeholders paying close attention to both the short as well as the long term with.
With a framework structured around people performance and strategy.
We are making good progress on strengthening the foundation of our business.
One important focus area is our cost structure and we are taking a disciplined approach to this opportunity.
We are right sizing our workforce across the business optimizing our footprint.
Addressing procurement opportunities as well as analyzing many other operating expenses.
As an example, we're in the final stage of closing, our Atlanta facility and expect to achieve full run rate savings from the closure by the end of the third quarter.
Such measures will support delivery of the approximately $100 million of cost savings this year and.
And we are still in the early stages of engaging all associates to identify as well as implement ways to make <unk>, a more effective and efficient business.
Additionally, we continue to focus on improving operating cash flow to fund the projects that will support our margin improvement and drive higher returns on invested capital.
Now turning to the long term part of our two pronged approach we are focused on developing a strategy that deliver sustainable and profitable growth.
First focusing on people, we strongly believed that culture and capabilities will be a critical foundation for our success.
I have visited more than 15 of our manufacturing sites. During the last six months and have been listening to our frontline associates to get their perspective on what is working well and where we can improve.
In addition, we recently completed an employee survey and collected feedback from over 80% of our global associates to gain insights about how well our organization is aligned and suited to adopt and sustain a higher level of performance.
We see significant opportunities and in the coming months, we'll dig deeper into our culture opportunity as part of our journey to improve <unk> for all stakeholders.
Second we are focused on driving improved performance and have intensified the transformation program that we started last year.
We are close to completing a thorough due diligence process in which a broad set of opportunities have been identified and we are now validating significant potential benefits both in operations and on the commercial side.
As the next step.
We move into our bottoms up planning process focused on developing actions that detail specific steps and resources required to deliver the respective improvements.
As we move forward, we are putting a greater focus on transparency accountability and governance of our transformation activities I look forward to giving you more detail around these opportunities over the next few quarters.
Moving to slide number six.
On July 2nd we completed the important strategic action of selling our Australia Asia segment generating approximately $446 million of net proceeds.
Allowing us to both simplify our business and focus on our two remaining largest core segments, both North America and Europe .
We then acted promptly to delever, our balance sheet and last week on August 3rd.
We repaid 450 million of senior notes and expect an annual interest expense reduction of approximately $25 million.
Our net leverage is now below three times net debt to adjusted EBITDA on a trailing 12 month basis, and we expect further improvements before year end.
Turning now to slide number seven and.
And as you can tell from this year's result, we're making progress to become a stronger more efficient company.
We have shifted our priorities with a focus on driving accountability and engagement as well as improved profitability and return on invested capital rather than just getting bigger.
During this challenging market environment.
We are implementing identified self help opportunities and are working diligently to find more opportunities and then sequence their execution.
These actions combined with our focus on developing culture and capability will create a solid foundation for future performance.
On capital allocation, we remain committed to a healthy balance sheet and investing in ourselves through strong payback projects to further improve profitability.
As we reduce leverage we are also reviewing our portfolio to assess further actions to better position ourselves for returns above our cost of capital.
We are well underway in developing our short medium and long term goals within each region.
I am very optimistic about the significant opportunities we have to improve gelled win in the quarters and years to come.
However, we still have work to do both in terms of due diligence scoping and developing a clear roadmap to achieve our goals, including resourcing and related cost to achieve.
I continue to give you my commitment to share more information when appropriate and for providing milestones. So that you can evaluate our progress along the way.
I'll now hand, it over to Julie to discuss our detailed financial results.
Thanks, Dale turning to slide nine you see our consolidated results for the second quarter of 2023.
As a reminder, all of our financial results for the periods presented exclude Australasia unless otherwise noted.
We move to the segment to discontinued operations. After we signed the related agreement on April 17th.
Further since we completed the divestiture in our fiscal third quarter. The final impacts of all related activity will be reported in Q3.
Our second quarter revenue was approximately $1 $1 billion down four 5% from year ago levels, driven by a reduction in our core revenue.
Our adjusted EBITDA was approximately $109 million in the quarter, leading to an adjusted EBITDA margin of nine 7%.
This margin improvement year over year and sequentially reflects our solid execution across the business in this challenging macro environment.
On Slide 10, you see that our second quarter revenue decline was driven by lower volume of 11%, which was partially offset by 8% of price realization that primarily reflects our price increases in the second half of last year to offset cost inflation.
Youll find our revenue walk including segment details for the second quarter.
And first half of this year in the appendix of our earnings presentation.
On slide 11, you see that year over year, our adjusted EBITDA improved by approximately $1 million as a solid price cost benefits and improved productivity were mostly offset by the impact of lower volume mix and a reduction in other income.
Related to price cost compared to the first quarter, we are experiencing a lower rate of inflation, though most cost do continue to increase.
During the second quarter of this year, we recognized an increase of approximately $20 million in total cost inflation compared to the prior year.
Of this approximately 60% was driven by raw materials with the remainder driven by labor.
Moving to other income as I've mentioned before we have a full year headwind of approximately $40 million from unique items in 2022, and almost half of that impact was in the second quarter.
Additionally, as Bill has mentioned we are on track to achieve approximately $100 million in cost savings this year.
In the second quarter, we realized approximately $20 million of these savings that are reflected on our EBITDA bridge and productivity and SG&A.
In the first half of this year the cost savings benefit was approximately $40 million, leaving $60 million to deliver in the second half.
Our run rate is increasing due to the timing of actions that have been started earlier this year or that will be initiated in the third quarter.
Moving to our segment results on slide 12 in the second quarter, Our North America segment generated $817 million in sales down approximately 3% from year ago levels.
This was driven by our core revenue decline of 2% due to lower volume mix of 8% with a positive impact from pricing of 6%.
North America had adjusted EBITDA of $109 million up 16% year over year, while margins increased a solid 220 basis points to 13, 3% driven by strong price cost results.
Our demand weakness in North America was spread across most of our products, but I want to highlight the continued strong volume in our Canadian and multifamily VPI businesses, specifically, our VPI business has grown 50% year over year following our.
<unk> expansion in Statesville, North Carolina last year.
We continue to deliver a number of operational efficiency improvements in North America.
These include driving a 4% year over year improvement in units per labor hour, while also improving our on time and in full delivery metrics.
We're especially pleased with these results considering this year's reduction in inventory balances, which is helping drive our strong year to date cash flows.
Europe generated $309 million in revenue and $24 million and adjusted EBITDA.
Core revenues decreased by 9% in the quarter driven by lower volume mix of 17%, which was partially offset by higher price realization of 8%.
Adjusted EBITDA was 19% higher year over year, leading to 180 basis points of margin improvement to seven 7%.
This improvement was due mostly to a positive price cost results with the benefit of market and product specific price increases combined with slowing material cost inflation.
Also our European team has continued to capture market share as certain suppliers have struggled to serve customers and they have been successful in delivering productivity improvements.
Now turning to the market outlook on slide 13.
While our North America full year demand outlook is still a low double digit decline in volume, we've lowered our outlook for Europe due to weakening demand and their residential housing market.
Specific to North America higher interest rates continued to impact single family housing starts and permits and our outlook is unchanged with new home construction declining 15% to 20% year over year.
For our repair and remodel markets, we still anticipate lower demand at a high single digit rate.
North America volume and mix was better than we expected in the first half of this year, partially driven by backlog from 2022 and strong mix, we expect increased declines in the second half taking.
Taking all of this into account we do continue to expect a low double digit reduction in full year volume for our North America business.
In Europe , we now anticipate that demand will be down by low double digits as the market weakens due to the regions ongoing macroeconomic challenges.
Our European volume mix was down by 12% in the first half of this year and we expect a similar decline in the second half.
On the residential side, we see sharper declines of 15% to 40% in new residential construction starts depending on the country.
In some specific markets residential construction demand is down by as much as 80%.
In the commercial construction market volumes are expected to be flat in the near term construction.
Construction on current projects has continued but there is evidence that new projects are being delayed and a number of markets, which may impact demand into 2024.
On slide 14, we provide our updated full year 2023 outlook for revenue and adjusted EBITDA.
While we remain cautious as we start the second half of this year due to the continued uncertain macro environment, we are tightening the ranges and raising the midpoint of our revenue and adjusted EBITDA guidance.
We now expect full year 2023 revenues to be between $4, two and $4 $4 billion and full year adjusted EBITDA to be between 315 and $370 million.
Our updated outlook accounts for our stronger than anticipated second quarter results as well as our expectation for demand headwinds in the second half of this year and our ongoing cost reduction activities.
Specific to our outlook for this year's core revenues, our first half core revenues were basically flat to the prior year as carryforward price increases offset lower volume mix.
In the second half of this year, we expect a low double digit decline in our core revenues due to the reduced volumes that I've just discussed with less benefit from year over year price increases.
All of this combines to support our full year outlook for core revenues being down 4% to 8%.
Now turning to slide 15, you can see how our first half results combined with our outlook for the remainder of this year to result in our updated full year guidance.
As I've described in my comments. This morning, our first half results for North America volume mix and global price cost were better than our expectations. While we are delivering on our cost reduction targets.
In the second half of this year and despite weaker demand our earnings outlook is generally unchanged as we deliver cost savings that mitigate the impact from lower volumes.
In closing we remain keenly focused on generating strong cash flows to further strengthen our balance sheet and invest in ourselves.
We expect to continue delivering high quality earnings and reductions in our working capital.
Bill mentioned earlier, we're also committed to approving gelled wins return on invested capital through our various actions focused on operational and commercial improvements.
Now I'll turn it over to James to move to Q&A.
Thanks, Julie operator, we're now ready to begin Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Our first question comes from the line of Susan Mcclary Goldman Sachs. Please.
Please go ahead.
Thank you good morning, everyone and thanks for taking the question.
Thanks, Susan.
My first question is you know you talk a little bit of you talked about.
Seeing some incremental weakness as you think about the second half of the year understanding part of that is driven by Europe , but I guess when you consider the housing outlook, especially within the U S. In North America. Some of the improving dynamics that are coming through on the new construction side.
Do you think that there's an element of conservatism in there. If you are thinking about some of those different factors, perhaps make together in the next few quarters.
Hey, Susan Thanks for the question. So I would say, it's a very dynamic market and were cautious if.
If we start to see some of the things that we're tracking especially in Q2, if we look at some of the some of the retail softness.
We felt we kind of exited Q2 at the run rate that we're expecting for the rest of the year as Julie said in our prepared remarks, Q4 was a pretty big overhang that dropped into Q1 retail has obviously built through that and now into the second quarter, we see and we hear also from customers that.
Tories are very tight across retail locations in North America.
And sales to stock below 98% mean, some customers are not getting what they want so we feel we're close to or at the bottom of the retail Valley and North America.
But obviously consumer sentiment is guarded and so we remain cautious, especially when you look at bigger ticket so doors and windows are tracking obviously at different rates both down patio doors for example are significantly worse.
In doors, so we see people remaining cautious traditional still in kind of that 15% to 20% pocket a little better than we had expected.
But as as everyone is re marketing in the second quarter results, we remain cautious and I don't think that our view has changed versus the end of Q1 were firming up a bit where we see the range Europe remains a challenge.
There is significant macro uncertainty Julie commented on some of the markets that are down it really is a very tough market reality and.
And something that we're very cautious and expect also that this softness will drag into 2024, so thats why.
We're working hard to make sure our cost structure is appropriately match to that market reality.
Okay. That's helpful. And then you mentioned a lot of the progress that youre, making on the company specific efforts in terms of cost and service levels.
Those initiatives there.
Youre getting to the final stages of closing that Atlanta facility can you talk a little bit about some of the upcoming key milestones or key steps that you are thinking about as you think about it.
Maybe the end of this year and even into 2024.
So we're working on three things.
As we've discussed people performance and strategy on the people side, we're making great progress on really trying to dial in the culture and capabilities that we need as an organization really transform ourselves. So we've done a lot of digging.
With the help of our associates around the world to really benchmark in baseline, where we are today on the performance.
Controlling what we can control and we really feel quite quite.
Quite positive about the work that we've done taken costs out of the business and getting ourselves dial then theres two big buckets that we're really digging deeper into looking really bottom up at all of the opportunities one is operations footprint and making sure we're aligned especially when we look towards the European market outlook in that volume reality.
<unk>.
And the second thing what we're really trying to work through is on the commercial side so to make sure. It's the right offering the service levels are appropriate we have the pricing under control and as we've reported in the past some of the things like managed supply chain et cetera are going to start dropping in the back half of this year. So we'll be back with our next.
Quarterly results with more specifics around some of these cost levers and some of the broader initiatives that we think we will have we also want to share more about the culture journey that will be on at that stage and just let you know how we want to hold ourselves accountable as we look into 2024.
Okay. Thank you for that color and good luck with everything thank you very much.
Yeah.
Our next our next question comes from John Lovallo from UBS.
Please go ahead good.
Good morning, guys. Thank you for taking my question I just wanted to go back on Susan's question for a moment.
What specifically are you guys seeing that makes you think north American volume and mix is going to decelerate. So much sequentially in the second half I mean, it sounded an issue initially like it may have been a timing issue, meaning that the pickup that we're seeing in starts right. Now maybe you have something that flows through in 2024, but bill your most recent comments that.
This softness may continue into 2024.
It leaves a little bit of a question there.
Along the same lines, the 15% to 20% decline in single family starts that you guys are forecasting seems a bit conservative given improving activity in easier comps in the back half, but just curious is that just really out of an abundance of caution or.
Or are you seeing something more specifically that gives you confidence there.
So I would say I would say Europe the comment around Europe was definitely weakness into 2024 that wasn't related to North America, specifically on the North American market. We've done a lot of work with our retail partners and our retail team is doing a great job really to try and figure out.
What's the what's the reality that we're facing.
As I said, we feel that we've exited Q2 at a run rate that is is probably very realistic, but it's a very tight market environment.
So sell in and sell out are very close to each other there is very low channel inventory a lot of the retail partners are really turning the screws down on working capital talking about reducing labor et cetera. So they do also see weak demand.
And as soon as you start seeing stock outs on shelves than you know that it's really touching go. So thats why our expectation is the end of Q2 is very close to what we are expecting at least for Q3 and possibly into Q4, so that gives us I would say.
A limited confidence that we believe our expectations are on the Mark for retail we've been calling it since the first quarter that it's going to be soft and it's a bit tighter than we expected, but we don't feel it can get much worse, just because of the inventory reality in the channel.
And with new starts around 15% to 20% down market and we do have a lag our expectations are that that will stick.
But there's a couple of different dynamics, if we look at different product lines and different materials vinyl windows, which are typically a production builder.
<unk> line they have been soft since the beginning of the year, we see the volumes at that level, but holding steady clearly price is.
As a broader discussion topic now with volume as tight as it is.
Wood Windows for example, which is more of a car.
Custom semi custom builder, that's a more robust H one product line for us and that's now starting to slow down as we see some of these builders pushing starts out. So that's I'd say overall some of the key drivers that we're seeing so.
Cautious in a dynamic environment and expectations for softening in 2004 in Europe U S were talking more back half and not 24.
Okay understood. Thanks for the clarification and then can you guys help us on just the cadence of the third quarter and fourth quarter margins and sort of the expected realization of productivity and cost saves as we move into the back half of the year.
Yes, sure, yes, John I can take that I mean I think.
Obviously satellite Yeah of course Q2 very strong we're very pleased with that we do see margins a little bit pressured as you might imagine from that level in the second half and so.
I think when you look at our typical.
Kind of Q3, Q4 margin Q3 slightly better than Q4, I'd say, we'd expect that to continue.
And in this year as we look forward, so again, while second half margins in our targeting being kind of flattish.
If not maybe down a little bit that targeting flattish to first half I would see Q3 being slightly better than Q4.
From a cost savings perspective, I think.
Like we mentioned already this morning.
Recognizing generated about 40% so far this year, what we're expecting and so I think that is ultimately.
Probably a little bit more balanced kind of Q4 over Q3, although we do see that run rate accelerating in Q3 over Q2, and then Q4 slightly over Q3.
Understood. Thank you very much.
Thanks Chuck.
Our next question is from Phil <unk> with Jefferies. Please go ahead.
Guys, congrats on a strong quarter and a pretty dynamic environment.
Thanks, Phil.
Good morning, everyone.
Outside of the inventory Destocking.
On the retail side whats your read on the R&R market, how is that kind of trend in the U S intra quarter through call. It early August and if things do snapback, what's your ability to meet that demand and you called out how youre expecting weakness in.
Europe through 2024 is your view any different on the U S side or do you see some.
Some sort of recovery.
Early next year.
Yes, so I would say that it's definitely choppy market on R&R big tickets are definitely weaker and we're seeing some of our retail partners really focus on turns on lower ticket items, because thats, where they are getting some traction.
We're working with them, obviously as much as we can to make sure that the right mix and balance is across their network. So we can satisfy any demand that exists.
So I would say we remain cautious I, just think fill that theres a lot of consumer uncertainty currently in the market interest rates are high inflation is sticky discretionary spending people are just cautious.
And our belief is that we are really close to the bottom of the inventory in the channel.
And we're doing a lot of work on making sure our delivery metrics and our network is ready for a potential rebound and I think that's the key and one of the things that we're looking at from a bottom up standpoint is what's the right footprint to serve our markets and how do we make sure that we can help them.
Through a rebound post.
The softness that we're seeing that's in North America.
Not calling the North American market right now if it's just a two H 'twenty three softness or if that rolled into 'twenty four clearly with the starts where they are and our products three to six months built in after the starts the softness in the traditional channel will roll into <unk> and potentially into the firm.
Q of next year with that said the good news is there's a lot of pent up demand that's getting bigger every month. So there will be a snapback same goes for Europe I think we're more cautious on Europe , there's a lot of macro uncertainties. The war is still ongoing.
We're rolling into another heating season, with some uncertainty around energy inventories and costs. So there still are a lot of things that are really foreshadowing.
People's decision to buy something new and Julie mentioned the rates.
The newbuild and its pretty significant and severe so theres a lot of work that the industry has to do to make sure. We can get ourselves positioned to kind of ride out the storm, but also get ready for the rebound, which we don't see until into 24 in Europe .
Got you. Okay. That's helpful. And then maybe a question for Julie on the pricing side, certainly very solid through the first half.
Curious from a guidance standpoint are you baking any price erosion in back half and then from a price cost standpoint, how should we think about the second half as you kind of lap some of these previous increases as well.
Yes sure.
Generally speaking kind of year over year pricing in the second half.
Flat to maybe still up just a hair I mean as you noted it really was second half of last year, where we caught up and got in front of price cost.
So that's the comp we're entering into now right in the third quarter. So the first half second half comps this year are quite different.
Obviously, you've seen that in the first half and we're expecting that in the second half so.
Pricing environment is relatively stable I mean, there are puts and takes in the regions.
But again, it's really just about the comp and so again kind of flat to up a little bit and so.
Similarly from a price cost perspective, we are expecting that benefit to narrow a lot in the second half I mean, it's clearly been a real great drivers to our first half earnings slightly better than we expected and we do see that tightening a lot.
In the second half.
And the slightly better than expected on the price cost in the first half Julian has that been more on the price side or it's been.
On the cost side with input costs being maybe a little more favorable.
It's been some of those I will say installation.
In both North America, and especially Europe has been.
Better than expected do you think about coming into the year, what we were expecting with energy costs in Europe .
That clearly was better than we expected again and very much so in the first quarter.
So price has probably been a little more stable than we expected, but a lot of the benefit has been weighted on the.
Less inflation on the cost side, Okay. I appreciate all the great color.
Yes sure Phil.
Yeah.
Our next question comes from Mr. Michael Rehaut Jpmorgan.
Please go ahead.
Hi, everyone. This is Andrew on for Mike.
Morning, and congrats I just wanted to thanks.
Hey.
I just wanted to ask in terms of the drivers of the raised guidance both in terms of sales and EBITDA.
Was it just <unk> or are there any changes to your.
Kind of to Asia in terms of sales or margins.
Yes.
Most of the key driver is the up.
Upside delivery from our expectations for the second quarter and so on.
When we look at the second half I mean again, we've adjusted we've mentioned more weakness in Europe .
However, we've obviously tweaked as well our expectations around cost savings as well as some price cost as well so net net the back half of the year from an EBITDA perspective is generally about what we expected.
As we have reassessed all the moving parts of our forecast and so really that the increase in the guidance range. It is mostly due to our over delivery versus our expectations in the second quarter.
Got it that's helpful and then in terms of the broader portfolio review.
Does that include.
In the North American product portfolio should we expect anything.
In terms of something.
Substantial or is it more just modest tweaks.
Yes, so at a high level just to just.
Set everyone on the on the right trajectory here. So we have three areas of business and we closed the divestment of our Australia Asia segment, two core segments than North America, and Europe , and what we're doing with our original readers leadership is now taking a deeper dive into each of the regions.
Looking at the <unk>.
Market segments that we serve what's core what's non core and where are we on our ability to serve and win in those various markets. So we are in that process now and we.
We feel more comfortable than sharing details as we progress towards the end of the year. So no specifics right now on what we're doing.
But we're looking at everything and it's a dynamic environment. So we are also spending a lot of time, making sure our cost to serve and our delivery metrics are on track.
But more details at the end of the year regarding any portfolio opportunities.
We want to dive deeper into.
Yeah.
Okay. Thank you for that color I'll pass it on alright.
Alright, Thanks, Andrew I have a good day.
Our next call comes from the line of Steve Ramsey with Thompson Research Group. Please go ahead.
Hi, good morning.
Let me just start with just some clarification VPI growth very strong.
Multifamily great backdrop this year for DPI as you look into 2020 for that end market potentially slowing or are you preparing the business operationally for that kind of environment, yet or is it still execute on the opportunity at hand.
Well I think it's a short term long term, obviously, Steve where we're executing and we're doing exceptionally well and we're very happy with the team effort, but obviously, we have to prepare ourselves and theres a couple of things that we're doing obviously volume will soften as we start to look at some of the financing constraints et cetera for some of the.
Emily properties, but we still have a pretty significant backlog and something that's going to serve us well through the back half of this year.
So there is there is no movement expected now outside of us, making sure that we can load the appropriate mix into 'twenty, four and Thats, what our sales organization is working through now, but they've done an exceptional job of building the right portfolio and making sure that we're matched with our <unk>.
Production location, the new one as Julian mentioned on the East Coast.
With the volume that we're selling into here.
Okay.
Great. That's helpful and then kind of zooming out assessing the environment here. This reset period with volumes down some lingering inflation and cost savings being worked out this environment pretty much forces all producers.
These kinds of moves are you seeing anything from channel partners or competitors that you think will change the overall competitive environment when we re enter.
<unk> territory for the market are you seeing anything irrational in the near term debt.
They change what things look like on the other side.
I would remark I would say I think the short answer is no.
I think the longer answer is that there is a lot of things that we can control and we are starting to control that will give us.
Great opportunity when things do rebound. So we're looking at cost structure, we're looking at cost to serve a really dialing in on our on time and full metrics. There clearly is.
A lot of pricing discussion as one would expect when volumes are soft, especially in segments that are typically higher volume lower value.
But these are things that also will help guide us as we look through our portfolio and start making decisions as you know where we want to play and how we want to win.
So.
We feel as comfortable as we can be in a very discomforting volume environment, just because we still have a lot of homework to do and fix our foundation, but I don't see anything.
Exceptionally irrational currently in the market outside of just as expected pricing discussion.
Discussion competitiveness, given kind of the weak volume and an overcapacity in a number of different segments.
Very helpful. Thank you.
Welcome Steve.
Our next question comes from Joe <unk> with Deutsche Bank. Please go ahead.
Thanks, and good morning.
Hey, good morning.
Just curious about your first half results in overall residential new construction, if you kind of combine.
Single family and multifamily.
They are a way to think about that decline.
Yes, well, what I would say is that our multifamily pillar is definitely a lot smaller.
Our residential pillar is so even though were growing at exceptional high double digit rates, it's going to take us a while to get to that scale effect that we're looking for.
So definitely overweight on new raise.
And as a result of that being down as much. It is as it is that's overshadowing. If you look at Europe , It's a little more balanced not quiet, but commercial has a stronger presence in Europe , and thats been helping us because where we're now working through a backlog.
That has existed for a number of months.
But theres also expectations that the backlog will soften and we see it already into 2024. So that's also another reason why we're being cautious on the guide in Europe , especially as we look forward into 'twenty four.
And when you talk about your multifamily business being smaller as a proportion are you just talking about the VPI mid high rise type stuff or is the garden style apartment.
So included in that single factor in that multifamily discussion no I'd say, it's mid mid mid high so a six storey type of units that are going in all over metropolitan areas, especially on the east coast and West Coast.
The area that we're talking about.
Understood. Okay, and then on cash flow Julie is there a way to think about maybe the run rate capex requirement going forward and then just over the next four to six quarters, how should we think about.
Perhaps the amount of deleveraging that you can accomplish over that timeframe.
Yes sure.
I think from a capex spending this year.
Second half could be a little bit more than that.
We did what we did in the first half of the year, but we're still not expecting any I'll call. It dramatic ramp up at this point kind of first half into the second half. So we're kind of sticking with our original guidance that we did for the year. So call. It you know kind.
Around that $100 million range, a third or so of like total capex.
It will be.
Reevaluating the capex kind of needs, let's say of the business as we look at the bottoms up planning that Bill has been talking about this morning, and how do we invest in ourselves to do you think about automation digitization trend in these kinds of things and so.
We'll be firming up plans like that and delivering more guidance as we go forward about kind of the outlook for Capex.
As we go into 2024, and so I'm not going to kind of commit to that yet, but I do think there is potential for increased capex spending in the business.
Clearly, we're looking for those high return on invested capital types of investments that.
That we know are going to really help our EBITDA improvement ultimately cash flow et cetera et cetera over time.
And when I look at really kind of deleveraging and capital allocation and bill can add some of his commentary. We're still you know we're really happy to at this point the just under our three times net leverage that we've been targeting.
And so we're going to be as we look forward really looking hard at capital allocation, we're still very bullish on the cash flow generation of the business the capabilities and so again very happy with what we delivered in the first half.
Still focused on kind of returning to pre 2022 levels of cash flow like I've mentioned before and so again, we're continuing to focus on the balance sheet, but again. However, we also investing in ourselves when are we ready to look at the portfolio from a bolt on acquisition for <unk>.
<unk> et cetera, and so really more to come on that as we move forward, but we're pretty bullish on the cash flow generation and again, what we're going to be able to do with that cash investing back in ourselves.
Alright, it sounds encouraging thanks, a lot I'll turn it back thanks.
Thanks, Joe Thank you.
Our niche.
Question comes from Mr. Keith Hughes the Truest. Please go ahead.
Thank you earlier, you talked about flattish flattish to modestly up price.
In the second half I think you were talking about the U S.
Can you dig down and that is there any areas, where you're actually doing better than that price any products or any that are lagging a little bit as we had in the second half of the year.
Yeah, So Keith.
Morning first.
We typically wouldn't provide that kind of detail I can just tell you theres a couple of things I mean, as Julie said in her prepared remarks. So it still is an inflationary environment, but it's definitely slowing point number two is we have a more robust H 222 price comp. So the bar is getting higher.
When we look at kind of a year over year comp third message is that we've been doing a lot of work on the commercial side of the business, especially in Europe to really make sure that we're priced appropriately in different markets. So it's not a one size fits all approach its more of a fine tuned granular approach and thats something that we've been spending some time.
And we haven't done it well in the past so we're starting to really improve transparency dialing the granularity and make sure that we're appropriately priced in the market. So I think those two levers have been delivering the solid performance that we've seen but again the bar is ratcheted up in the back half of the year.
That's something that you need to be aware of when you think through your model.
Okay.
Apply to Europe , as well as the United States.
Yes, it would yes, it would okay alright. Thank you.
Yes, Youre very welcome.
Okay.
Our next question comes from Matthew Bouley with Barclays. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions Hi, Matt.
So on Europe to the extent residential is soft in commercial could be softer into next year I am curious.
What cost actions may need to be taken.
Incremental to what you have been previously doing.
And would these be permanent or type of more temporary austerity actions I guess, how are you planning to kind of manage this downturn in Europe here.
Yes, so obviously that's top of mind as you can imagine right now it's going to be a mix of both we are already in short work scenarios in different countries based on the local rules and regulations of labor market. So we are utilizing that and have been for a number of months with obviously a double digit down volume.
Second thing is we're taking a hard look at footprint you know time to achieve such projects have a longer gestation phase in Europe . So there's things that we're constantly looking through to try and make sure we're balanced.
With the expectation of the market reality, which remains very dynamic so that is a challenging factor.
And we're also obviously taking cost out of the business as part of the $100 million that you are seeing are some sites that we've taken offline last year that are having an impact this year.
And on the flip side, we want to stay balanced because some of our competitors are really struggling we've had competitors going out of business, we've had customers coming to us for short term switches of supply base. So we are picking up volumes in select markets, where other customers have or other competitors have been having.
Trouble, so it's balancing a bit picking up where weaker competitors are suffering but at the same time preparing for the longer term right size of the fixed asset base that we need to supply the market. So that's ongoing that we will have more detail at the end of Q3.
And as we said, there's a number of things that we're working through and as soon as we're ready to announce it we will.
Got it okay Super helpful. There.
And secondly back on the topic of <unk>.
Capital deployment.
That Julian was just speaking to so you've now reached that three times leverage goal.
Curious whats what's on the wish list for organic investment versus M&A potentially return to share repurchase and what would the timing be around that is that the type of thing where you want to be more.
Further below three times or just any thoughts there on timing. Thank you.
Yeah. Thanks, Matt So I'm pleased very pleased and want to thank the organization that we're even having this discussion already so that means that we've hit kind of our goal number one of getting below three times and doing that in a pretty rapid fashion.
This year. So if we go through the wishlist Theres kind of three things that are on our list.
And one is definitely investing in ourselves, we still do see a lot of very accretive internal investment opportunities in the transformation process and we expect when we're done with the diligence in the bottom up planning there'll be a lot more so that's the one big bucket second is we're looking at some M&A options and we constantly screen.
The market obviously, it's.
It's an interesting environment right now, but our leverage reality gives us a little more flexibility to look at some non organic opportunities and clearly share repurchase as an option lower priority right now because we think bucket one and two that I just went through.
Have some opportunity here in the mid term. So we'll obviously be back to the market. If we're going to ask on any of those but we'll be coming back in Q3, and just really laying out the investments in ourselves and what we want to do there so it's pretty clear and transparent.
Alright, Thanks, Bill good luck.
Thanks, Matt have a good day.
Yeah.
As a reminder, in order to ask a question Press Star then the number one on your telephone keypad.
Our next question comes from Tim <unk> from.
Bart.
Please go away everybody good morning, Hey, good afternoon everybody.
Yeah.
Maybe just.
We've run through a lot here, but maybe just go back to the global portfolio reviews.
Look through that and maybe just give us a little bit off guard rails or some of the attributes may be that you're looking for to say certain.
Certain businesses should be part of gel win or maybe thats better off somewhere else, where it was two or three things that you're kind of looking forward when you do that.
Well I mean.
Pretty simple the first thing is before we even start that discussion Tim what we want to make sure is that we do our homework and we sweep the corners and fix the foundation. So that's what we're working on right now to make sure that the businesses that we do currently run we have a robust plan with our management as to how we want to improve them. So.
Step number one is I'd say fixed or strengthen the foundation number two it's clearly to define core noncore and how do we really want to grow the core and what are the key questions that we want to ask around non core assets.
And as we've said in prior calls our teams are really doing a good job, we're pushing down the responsibility and authority and getting kind of the business pillars really details.
Within the regions and challenging the leadership of each of those pillars to really come up with a plan on where they are where they need to get to what's the capital that theyre going to be requiring to change and what's the return on that capital that we can expect as an enterprise. So that's a process that's ongoing and it's going to be a sum of the parts discussion.
And so its return on capital ability to win core growth those are the key lever.
That were focusing and my assumption is that the foundation has been strengthened.
And those pillars, and we need to do that first and foremost and Thats. The focus right now and what we've been working on diligently in the last six months.
Okay. Okay. That's great and then maybe just on price cost Julie I think in the first half kind of a $94 million benefit on a year over year basis would.
Would you expect that to kind of step down in the back half just with the lower year on year price and then maybe flipping to see some similar deflation.
Yeah, No we absolutely expect that 94 billion to really.
Really decline regulatory dramatically, we expect to be positive price cost in the second half of the year, but it will be.
Notably less of an implant impact.
First is what we have seen in the first half.
Okay. Okay very helpful. Thanks for the time and good luck in the back half.
Thanks have a good day.
Okay.
Okay.
Operator.
I will now turn the call back over to James Armstrong, Vice President of Investor Relations for closing remarks.
Thank you very much if you have any further questions. Please feel free to reach out.
I'd be happy to answer any follow up this ends our call today and please have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Yeah.
Thank you.
Okay.
Yeah.