JELD-WEN Holding, Inc. (JELD) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the JELD-WEN Holding Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only-mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Thank you. I'd now like to hand the conference over to your speaker for today, Karina Padilla, SVP, Corporate Planning and Analysis. 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, our CEO; and John Linker, our CFO. 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 1995. 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. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we are providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation. Additionally, during this 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 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.

Thanks, Karina. Good morning, everyone. And thank you for joining our call today. As I was considering the discussion today, I reflected on our last conversation concerning first quarter results and the rapidly changing environment due to the COVID-19 pandemic, the rise in virus cases and the effects on communities and businesses around the world. We committed to focusing our attention on the health and safety of associates and business partners, meeting customer needs and ensuring business continuity. At the same time we were adapting stay-at-home and work-from-home directives, our businesses were being deemed essential in many regions around the world. We had to rethink how to safely operate in this new environment. As the pandemic spread late in the first quarter, we quickly developed and acted on a standard pandemic guide. I am proud of how our team applied the JELD-WEN Excellence Model, or JEM toolset, and relied on our values and focused on safety and performance to meet the environmental challenges and deliver for our customers and shareowners. We are confident that we put the right measures in place to protect our people, and we have well-developed plans to adapt to changing conditions. Thankfully, only a small number of JELD-WEN associates have been diagnosed with this virus, and we are grateful that they are returning to full health. In the midst of these new challenges, we remain fully committed to what is within our control, executing our strategy to deliver innovation and value for our customers and delivering growth and margin expansion through the deployment of JEM and accelerating our rationalization and modernization program. As you can see on page 4, through disciplined execution of the strategy and the successful deployment of effective countermeasures to offset the effects of COVID-19, I am pleased to announce that we delivered second quarter financial performance ahead of expectations. While we experienced some demand headwinds due to COVID-19, we achieved profitable share gain in target products and markets and realized improved pricing resulting in second quarter revenue being down only 11% compared to prior year, better than our original expectations. Second quarter core adjusted EBITDA margins of 12.8% increased 140 basis points versus prior year and approximately 500 basis points sequentially. This margin expansion was driven by operational execution and staying focused on our strategy, including benefits from JEM deployment, rationalization and modernization initiatives and pricing. I'll also highlight the quality of how we delivered the margin improvement. While significant SG&A reductions in the quarter certainly helped margins, even excluding the benefit of those savings, strong pricing realization and productivity alone were enough to offset the impact of volume deleverage and the whole margins largely flat to prior year. In addition to the positive productivity realized from JEM and rationalization in the second quarter, we have identified and deployed additional projects that we expect will continue to deliver margin expansion well into the foreseeable future. The cost reduction actions we took during the second quarter resulted in SG&A savings that outperformed our target and we have deployed additional cost actions to ensure continued performance. Price realization accelerated sequentially from the first quarter, demonstrating that the North American price actions are holding and this represents the seventh consecutive quarter of positive price realization. Free cash flow increased $12.4 million versus prior year, a result of our continued quality of earnings improvement and working capital benefits from JEM. We are in great financial position with record high liquidity of $809 million, which gives us flexibility to pursue our strategic initiatives and enables us to withstand future uncertainty if market conditions worsen. Our JEM business model is working. We delivered second quarter results through sustainable improvements in pricing, productivity initiatives and footprint rationalization and modernization benefits, not merely onetime cost out in reaction to COVID-19. We have been driving these efforts over the last several quarters, which are delivering positive results now, and we expect into the future. Our associates are demonstrating the value of JEM and our agility to adapt changing conditions. By understanding the changes in market conditions and communicating regularly with our channel partners and customers, we are able to adjust our operations to align with market demand. Through these partnerships with our customers, we're assuring that we all emerge from this pandemic in a position of strength to aid in the eventual economic recovery. Please turn to page 5 for a discussion of our geographic markets. In North America, housing starts and permits showed sequential strength through the quarter into June. Residential new construction markets are reopening in states that were impacted by stay-at-home orders, and homebuilder traffic and orders are improving. Repair and remodel markets remain resilient. For JELD-WEN specifically, volume was down in the second quarter versus prior year but improved as the quarter progressed. The traditional distribution door business performed well, and we saw a healthy demand for stock door and window products at retail. Regionally, demand was strongest in the Southern and Western United States, offset by weakness in the Northeast. The fundamentals are in place for housing recovery in the second half of the year, providing opportunities for profitable growth and share capture, although near-term visibility remains limited. For Europe, residential construction demand varies by country, with relative strength in Scandinavia and Germany while the UK and France remain impacted by the lingering effects of municipal shutdowns early in the quarter. While the overall economic outlook is softening as unemployment increases, in aggregate, construction activity remains steady in the region. We are seeing an uptick in project RFQs, and we anticipate they will turn into future demand. We are fully operational as all JELD-WEN plants have reopened. The Australian housing market continues to struggle with recovery, now delayed by the effects of COVID-19. Rather than stabilization, new housing construction forecast now showed further decline in the second half of the year. The Australian government has launched a stimulus package designed to incent new residential construction and renovation. All of our plants have reopened in the Australasian region, although Indonesian facilities are operating at mandated reduced capacity. As I mentioned, we are committed to our long-term strategies across all regions and have accelerated cost reductions in line with rationalization and modernization to address short-term market conditions. Please turn to page 6. As we change the way we work internally and with our channel partners and customers, we have learned a great deal about what is critical to sustaining and enduring performance culture that allows us not just to survive these challenging times, but to position ourselves to be stronger and more resilient. Communication within the enterprise and with our suppliers, customers and investors has become more deliberate and focused. We've doubled down on our commitment to our business operating system, JEM, and we're realizing the benefits that JEM tools afford in managing through and beyond the current environment. Our company values continue to be the touchtone for all that we do. All these initiatives have allowed us to keep our operations running safely, which has in turn allowed us to support our customers and our communities. While we often discuss how we serve customers and the financial benefit derived from this enterprise, I'd like to highlight how JELD-WEN associates in every region contributed to the communities in which we operate and serve. While this is an embedded component of the JELD-WEN culture, during this uncertain time, we invested in our communities across the globe through food service and supplies to first responders, hospital workers and others on the frontline battling the pandemic. Despite the circumstances, I was moved by the groundswell of support and the appreciation that was shared. This is one of the greatest parts of my job. Commitment to our strategy and continuous improvement through JEM have allowed us to deliver performance and improve our long-term prospects through this uncertain time. Our associates' commitment to these objectives and our values gives me confidence that we will continue to be agile in managing through while ensuring we emerge a stronger and even more successful JELD-WEN. I will now turn it over to John Linker to review our second quarter financial results in more detail.

Thanks, Gary. And good morning, everyone. I'll start on page 8. Our second quarter financial results demonstrate improved execution amidst a difficult market backdrop, a direct result of the diligent efforts of our associates focusing on our strategy and our continued investments in our business operating system over multiple quarters. Net revenue performed better than our original expectation with a decrease of 11.3% to $992 million. The decrease was driven by a 10% reduction in core revenue and a 1% headwind from foreign currency. The decrease in core revenue was primarily due to COVID-19 related impact on market demand and plant closures in North America and Europe, as well as continued market softness in Australasia, partially offset by good pricing realization in North America. Revenue improved sequentially across all regions in May and June from the troughs in April. Reflecting this momentum, we exited the quarter with low single digit revenue growth in the month of June in both North America and Europe. Our July results showed a similar trajectory of year-over-year revenue growth in North America and Europe. Adjusted EBITDA margin expanded 130 basis points in the quarter to 12.7%. The combination of a favorable impact from price realization, the execution of cost reduction programs and productivity tailwinds from JEM initiatives all contributed to the strong margin performance. Similar to my comments on revenue progression, EBITDA margins improved as the quarter progressed, with year-over-year margin expansion in both May and June. We reduced second quarter SG&A and discretionary spend substantially compared to prior year. Excluding the impact of legal expenses in the quarter, we surpassed our original $15 million savings target presented in our last conference call. While a portion of these savings were specific to the second quarter, given the actions that we've already deployed, we do expect some ongoing benefits in the second half of 2020. These actions will enable us to withstand potential demand weakness should it occur. Page 9 provides detail of our revenue drivers for the second quarter. As I mentioned in the previous slide, our consolidated core revenue declined 10%, comprised of a 13% headwind from volume mix, partially offset by a price benefit of 3%. Pricing improved sequentially from the first quarter as expected, with the largest pricing benefit driven by North America. The 13% volume mix headwind was caused by the impact of plant closures and lower customer demand, both related to COVID-19, in addition to the ongoing housing market weakness in Australasia. Please move to Page 10, where I'll take you through the segment detail performance for the second quarter. Net revenue in North America for the second quarter decreased 9%, driven by a 14% headwind in volume mix, due primarily to the COVID-19 impact from plant closures and stay-at-home orders. Revenue declined by high single-digit percentage in our US traditional distribution channel compared to prior year with revenue growth in doors offset by weakness in windows. Demand in our traditional windows business was unfavorably impacted by some regional project delays and geographic exposure to markets most impacted by COVID-19. In the US retail channel, second quarter revenue declined only low single-digit percentage compared to prior year as our home center customers largely continued normal operating hours throughout the quarter. In the retail channel, we saw an unfavorable mix shift of greater activity in stock SKUs and lower activity in higher margin special orders. We attribute this mix shift primarily to contractors and builders pushing to complete open projects with in-stock SKUs to avoid having to wait on special order lead times in such an uncertain environment. And in Canada, second quarter revenue declined in the high-teens percentage in local currency due to the significant impact of government-related shutdowns. Europe revenue declined 13% overall and 11% excluding the impact of foreign exchange. In Europe, revenue in Scandinavian countries grew low single digits due to limited COVID-related shutdowns while in the UK and France revenues were heavily impacted by facility closures in April and early May. Demand remained fairly steady in the Central European countries of Germany, Austria and Switzerland. Australasia revenue declined 18% and 12% in local currency versus prior year, although revenue did improve sequentially from the first quarter. The Australia housing market remains challenged and it appears the impact of COVID will push out the recovery we are expecting to see in the second half of 2020. Our facilities in Malaysia and Indonesia faced government-mandated shutdowns and operating restrictions that also impacted our second quarter revenue. In June, the Australian government announced a stimulus package to incent new home sales and renovation projects. We anticipate the stimulus package will help slightly offset some of the housing market challenges. However, the latest housing forecast to have further declined in new housing starts in the second half of 2020 from previous forecast. Moving to second quarter earnings. Adjusted EBITDA margins expanded by 130 basis points and core adjusted EBITDA margins expanded by 140 basis points compared to prior year. Seasonal adjusted EBITDA margin improved sequentially from the first to second quarter by approximately 500 basis points compared to approximately 250 basis points over the same sequential period last year. Margin improvement was driven in large part by strong price realization, benefits from cost actions, savings from the deployment of JEM tools and continued execution on our footprint rationalization and modernization program. In North America, adjusted margin improved sequentially by 670 basis points and expanded 190 basis points year-over-year, with improved profitability in all major business lines despite headwinds from volume and mix. We are very pleased with the performance of our North America door business, with EBITDA margins comparing favorably with the industry, benefiting from both pricing and cost actions. The recovery in our North America windows business continues to demonstrate progress, as reflected by the sequential margin improvement of nearly 700 basis points compared to the first quarter and approximately 60 basis points above prior year. Europe delivered its fourth consecutive quarter of core margin improvement with an increase of 140 basis points year-over-year due to strong productivity and cost reduction actions. Our Australasia segment delivered solid productivity and cost controls to offset volume weakness. While year-over-year margins declined, improved operational execution resulted in sequential adjusted margin improvement from the first to second quarter of approximately 400 basis points compared to approximately 300 basis points in the same sequential period last year. Please turn to page 11, where you'll see a current snapshot of our balance sheet and free cash flow performance through the first half of the year. We ended the second quarter with total debt and cash equivalents of $1.8 billion and $457.7 million, respectively, up from $1.5 billion and $226 million at year-end 2019. You'll recall we capitalized on improved credit markets in the quarter to bolster our cash and liquidity, successfully completing a $250 million notes offering. Our net leverage ratio increased modestly compared to year-end, rising from approximately 3.1 times to 3.3 times, which is consistent with our normal working capital seasonality. Net leverage improved sequentially from approximately 3.5 times at the end of the first quarter. Year-to-date free cash flow improved $12.4 million compared to the first 6 months of 2019 despite lower earnings. We invested $46.5 million of capital expenditures in the first 6 months of 2020, down $16.7 million from the same period a year ago. We continued to invest in JEM projects and our footprint rationalization and modernization initiatives. However, in order to maximize cash flow and preserve liquidity amidst uncertain market environment, in the near term, we continue to prioritize projects with the most attractive returns. We expect to maintain a prudent level of investment during the remainder of the year due to continued uncertainty related to COVID-19. Turning to page 12. Our global liquidity currently stands at $809 million and consists of $457.7 million in cash and $351.3 million of undrawn credit facilities. As I mentioned a few minutes ago, we took advantage of improved credit markets in late April to issue $250 million and 6.25% senior secured notes and bolstered our cash and total liquidity levels in light of uncertain demand environment brought on by the COVID-19 pandemics. This level of liquidity is the highest ever for the company and is sufficient to weather a protracted downturn in housing activity. Our liquidity also enables us to make continued investments in high-return capital projects to drive long-term value creation. With that, I'll turn it back over to Gary, who will provide closing comments. Gary?

Thank you, John. We ended the second quarter with a solid backlog of orders, but the longer term demand forecast remains unclear due to the potential impact from COVID-19 on our markets and businesses. We continue to expect some downturn in demand in certain regions with impacts in some regions more than others. As demand and COVID impacts vary in each of our geographic segments, we are monitoring conditions closely and are prepared to respond quickly. Regardless of the market conditions, we expect benefits from price, share gain, productivity and rationalization to continue. We believe JELD-WEN is well positioned to weather through the pandemic and emerge an even stronger company. We have the right strategy in place with solid core fundamentals, enabling us to continue to deliver for our customers and deliver results. We took action to adjust our short-term and long-term cost positions adhering to our playbook and strategic priorities. And we enhanced our financial flexibility with healthy liquidity, assuring that we are able to continue to invest in our business and pursue strategic initiatives that position us for the long term. I'd like to share a brief update on the Steves & Sons litigation. While we're not able to take questions on this topic today, I can share that earlier this summer, the Fourth Circuit Court of Appeals heard oral arguments regarding the original antitrust and breach of contract lawsuit. The court's decision is expected later this year. On all other litigation matters brought by Steves, we reached a settlement that is agreeable to both parties. As part of that settlement, we entered into an amended supply agreement with Steves that ends in September 2021. As we wrap up before we open the line for your questions, I'll go back to where we started. We have been and will remain committed to the health and safety of our associates and partners to meeting the needs of our customers and delivering results for investors. We are successfully managing through the effects of COVID-19 and positioning our business to win longer term as well. We have taken and will continue to take the right actions to deliver for our customers and to deliver business results. We are clearly benefiting from the disciplined approach of our business operating system, executing our strategy and delivering productivity while still investing in the business. I'd like to again acknowledge and thank the JELD-WEN leadership team and all of our associates for their agility in meeting our customers' needs, with health and safety top of mind, taking care of each other, allows us to serve customers and our communities, creating value for our brand as we deliver improved results. And I'd like to thank you for your continued interest in JELD-WEN. At this time, we'll open the lines for your questions. Operator?

Certainly. [Operator Instructions] Matthew Bouley with Barclays. Your line is open.

Hey, good morning. Thank you for taking my questions. I wanted to start out on the margin side given you did drive that margin expansion despite the lower volumes. And Gary, I heard you saying that pricing and productivity fully offset the volume decline, and you've also taken further cost actions. My question is if you right-size the cost structure enough, then you've still got pricing flowing through. Can we confidently say that you'll remain with year-on-year margin expansion into the second half?

Yes. So thank you very much for the question. Yeah, what we saw was - the work that we've been doing over the last several quarters about deploying JEM in our productivity program, as well as our rationalization and modernization program, we're starting to see those benefits flow through. You put price on top of that and then the actions that we deliberately took at the beginning of the quarter really offset the effects of COVID in the quarter. What we've done is we've tried to permanize some costs going forward. But we still believe and we still know that the benefits from rationalization, the benefits from JEM as well as the pricing tailwinds that we'll see will continue to expand margin for the remainder of the year.

Matt, I would just add on. I mean in terms of - if you think about the quality of operational improvement, I'd estimate that the tailwind from price cost, so that's price net of material inflation and tariffs and things like that, would be in the range of 200 basis points of margin, slightly higher, and then probably about 100 basis points of just true organic productivity from JEM and some of the footprint rationalization efforts. So certainly, the volume mix piece was a big headwind in the quarter. But underlying that, there's some very nice operational margin improvement going on.

Perfect. Appreciate that. And then secondly, on the North American windows side, it sounded like there was some strong sequential progress there. But obviously, in the past, there have been labor issues at times when you've seen kind of surges in demand, which we may or may not be seeing today in North America. So just - I guess, what are you seeing on the labor side with windows given how quickly things have recovered and many have talked about sort of difficulty with attracting labor here, how is all that shaping up for you guys? Thanks.

So we have been sequentially improving that business. Over the last several quarters, we're seeing - we like what we see. We've been disciplined in our approach applying JEM, you know, all of our JEM tools to our windows facilities, just as we have across the enterprise, and we're seeing benefits from that. Certainly, with a little bit of a demand headwind or lack of demand for a period has probably helped us a little bit in getting prepared. But we feel well positioned now to take on demand as it comes. And the improvements that we see will continue really in the next several quarters. So it's kind of bring on the demand for windows. We'll probably say at some point during the session that there's absenteeism here and there based on the COVID-19 pandemic. Luckily, we've been able to manage through that and meet our customers' needs. And we expect the same thing both in the entire North American business, as well as around the enterprise in Europe and Australia as well.

All right. Appreciate the color, and congrats on the results.

Phil Ng with Jefferies. Your line is open.

Hey. Good morning, everyone. And congrats on a very strong quarter. John, if I heard you correctly, it sounds like sales are up low single digits in North America and Europe. That's a pretty nice reacceleration. How do you handicap whether that's pent-up demand? And any risk that we should be mindful of in the back just as you kind of cycle through that big drop-off in housing starts in that spring time frame?

Yeah. I think all fair questions. I'd say probably best in North America to unpack it a little bit by channel and region of the country. And similar to what we've said in the prepared remarks, I'd say that the demand in the retail channel remains pretty strong, remains healthy. We see inventory levels in retail below prior year in North America with our major customers. So I guess in terms of the next - the near term, we expect this trend of heavier stock activity to be a continuing revenue trend. It has a corresponding margin headwind for us on - in the very short term. But at least from a demand side, that looks pretty strong. And then as you think about what's going on in the traditional channel in North America, we continue to be very pleased with our results, particularly in the South and West regions. We think we're picking up some share in some - in certain product lines, as Gary alluded to. We still got some work to do in windows to bring the demand back there. And then some of the markets that were more impacted by COVID were more challenged. So overall, I think it's a timing issue, and I'll let Gary sort of put a ball on that.

Yeah. I think the things that we're really looking at is these new - the new sales orders in homebuilding and residential new construction, very encouraging. As those - we're watching as those turn into starts and completions. So when the homebuilders put those into play, really will drive our demand profile going forward, but it's very encouraging. And as John mentioned, as longer projects in the R&R space become - start coming through, we'll see a better mix certainly in the retail space as we see more special orders. So we are watching those, but we're somewhat optimistic in what we're seeing so far. The signs are there. We just need to be cautious in watching how that flows through kind of in the second half.

Got it. That's really helpful color, guys. And then from a pricing standpoint, any color how pricing kind of progressed inter quarter North America and go into July? And then to your point, you're starting to see that wholesale channel reaccelerate. I would assume with that backdrop, mix could be a tailwind, but kind of talk through like that pricing evolution and then how we should think about mix as the year progresses?

I would just say that the pricing actions were already taken prior to the quarter. Most hit either at the beginning - the end of first quarter, beginning of second quarter. So we pretty well got most of the quarter benefit in pricing from around the world with some later pricing that happens in some of the global markets later in the summer and the year based on seasonality. But for the most part, the North American pricing is in place. We've been pleased with the way that has flowed through. We do expect that to be a tailwind going into the second half.

I'll just add on, as a reminder for folks, when we talk about price, it's a like-for-like price or - so to the extent there's an average unit price impact. We typically talk about that more as mix. And so in terms of visibility to delivering that continued price cost tailwind, looking at a like-for-like kind of basket of products from last year, we've taken the actions we need to take and we see that tailwind continuing into the second half of the year at this point.

All right. Thanks a lot. Great color, guys.

Tim Wojs with Baird. Your line is open.

Hey, guys. Good morning. Nice job on the results.

Thanks, Tim.

I guess, maybe first, just how would you - you talked to this - a little bit about this, John, on the retail side, but how would you characterize, I guess, channel inventories broadly within North America versus normal? And at this point, do you think your customers would look to rebuild inventory in the third quarter or do you think they're still being pretty tight overall?

Yeah. I mean in terms of the retail side, and this is broad generalization across doors and windows, interior and exterior, so - but I would say, in general, the stock units are probably still in the range of 10% to 20% lower than prior year. It varies a lot by region of the country. I would say at this point we're having more conversations with our retail partners about how to support the demand growth and refilling their stock shelves, and we're having about -- concerns about demand or anything like that. So at this point, I'd say the - certainly, there's probably some concern on health of supply chain and things like that. If the absenteeism picks up and - that Gary alluded to, that could always have an impact on us or our supply chain. So I'm sure the retail partners are focused on making sure those inventories are healthy getting into the back half.

Okay. And then any color on how they are on wholesale?

I think it varies a lot by region of the country. It's hard - it would be hard for me to give you a really specific answer there just because it is such a different picture in the Northeast, where some of our wholesale partners that cover some of that markets that were most heavily impacted by the early phases of the shutdown. I mean, clearly, their order intake - their order activity in Q2 was substantially lower than what we were seeing from wholesale partners in sort of the South and West regions that sort of plowed right through some of the early shutdowns. So I'd probably hesitate to give you a number there just because it's kind of so different by region of the country.

Okay. Okay. That's fair. And then just maybe on the special order business. I know that was kind of pressured in the quarter. How did that kind of exit Q2? And do you think that could have a more significant kind of improvement here in the back half of the year as people get more comfortable on the special order side?

You know, really, what was happening at the beginning of the quarter, Tim, was contractors trying to finish projects or do short-cycle projects which really drove more of a stock purchase rather than special order that was - that had lead time and trying to avoid uncertainty. We're seeing that increase a little bit. There's still stock - a preference towards stock at this point. But that being said, as those projects start to be quoted, start to be worked on and people willing with little risk in the market there, we're expecting that to continue to pick up kind of ratably over the quarter.

Yeah. And I'd just say there's a couple of factors in the mix area in North America. There's the stock special piece, which the margin differential for us on stock special is pretty meaningful. So that had an impact and then there is an impact between - a little bit - we saw more demand in interior doors and a little bit lower demand in exterior doors at retail. And then in general, as we've already said, our retail customer base had - was more stable than our traditional customer base in the quarter. So all those three things together have - they do interrelate to some extent, but they have an impact on average unit price and mix. And so - I mean as you think about our results in Q2, we delivered the margin expansion we did with a fairly significant headwind from this mix impact. And so thinking about the back half and some of the levers, clearly we can control the price and the productivity, and the market will control the demand and the mix a little bit. But there's probably more opportunity for that mix to - that mix impact to become either less of a headwind or a tailwind in the second half of the year and really drive continued margin improvement for us.

Okay, great. That’s all I had. Thanks, guys. Good luck on second half.

Thank you.

Susan Maklari with Goldman Sachs. Your line is open.

Thank you. Good morning.

Morning.

My first question is just around - you discussed some of the JEM initiatives that you've obviously been working on. Can you just - can you give us some more color there? And also, relative to the runway, you've talked about realizing about a third of that $100 million of rationalization savings, are you ahead of that given where you are? Are you still on track with that? Can you just give us some perspective there, too?

Sure. I'd say on the productivity side, in the quarter, our strongest productivity came out of our Europe business. We've got a great team there that's got a strong pipeline of visibility of projects. And these are - in some cases, these are quite small, granular type of projects. In some cases, these are more capital type productivity and efficiency projects that have been in the pipeline for a long time and Gary can speak more to kind of what's going on there. But certainly, our best performance was in Europe and that's reflected in their results. And even in Australasia, in a quarter where they were very challenged by demand, we saw some productivity there and then also some sourcing productivity did a nice job from our sourcing team to offset some of the inflation. So that's where we're seeing a lot of that activity. On the footprint rationalization and modernization side, yes, on previous calls, we've told you that we expect to exit this year with about a third of the $100 million savings target from footprint rationalization and modernization that we expect to exit the year with about a third of that completed. I'd say we're still pretty close to that number. The projects that we've implemented at this point represent a run rate exiting the fourth quarter of this year with about a third of that $100 million. We're actively evaluating and improving the next phases of those projects as well, which will drive the rest of the savings going forward.

Yes. Really, what you're seeing in the quarter, it is the benefit of those projects that we put in place several quarters ago and have been executing - continue to execute on those. As John said, we've continued to stay the course on the rationalization and modernization as well as on JEM deployment and our productivity improvements across the enterprise. The - we've always said that should there be a downturn or any headwinds in our demand, we would look at the rationalization programs and determine which ones we would accelerate or even deploy faster. So I feel really good about our pipeline. We've take a look at that and we continue to invest in those programs and will continue to get the benefit towards not only the $100 million from JEM - or from rationalization but also the $100 million towards - from the JEM deployment globally.

Okay. Thank you. And then following up on that, you mentioned in your comments, some SG&A savings that you'd also realized in the quarter. Can you talk to how sustainable that is? As the volume has started to come back and demand ramps across your different markets, should we expect some of that to come back in the second half or should it be pretty sustained?

Yes. So some of the actions that we took deliberately at the beginning of the quarter - or the end of first quarter, beginning of second quarter, were really - in some cases, one time we took a - one time look, we did take some more permanent actions as well. But as we started to look at what was going on in the quarter and thinking about the second half and moving forward, we started to look at where we could make sure that we took cost out on a more permanent basis. We didn't want that one - any one-timers to become headwinds to us, as we go into the second half of the year. So we have taken additional cost actions already. We have additional leverage we could pull if things get - if things were to go back, turn south on us. But we've really looked at a base case now where we feel pretty confident. We've take the right balance of permanent cost actions going forward in addition to the continued acceleration of the benefits that we mentioned that are more permanent in JEM and in rationalization programs that will start to fire out. So we feel like we're in a pretty good position there, that we didn't create a hole for ourselves with one-time actions, which certainly could have been a challenge. And we feel like we still have leverage we could pull if a more downward case were to present itself.

All right. Thank you, guys. Good luck.

Thanks.

Truman Patterson with Wells Fargo. Your line is open.

Hi. Good morning, guys. Great results. And thanks for taking my question. First, just following up on North America demand, the R&R interior pro contractor, how has that been trending recently? Are you seeing any sort of a pullback from the second wave of COVID? It seemed like, in your prepared remarks, you were maybe a little hesitant on where demand trends could go, but then in some of your follow-up commentary, it seems like everything is trending in the right direction. So hopefully, you can just kind of tie some of that together for us.

Yes. We're kind of walking a tight rope a little bit, Truman. The - right now, everything looks to be sequentially improving. We're exiting the momentum of the quarter into this quarter, and so far, so good. But with the news, particularly of COVID expansion again, these next waves, we just want to be cautious that if we do see additional shutdowns or whatever, they could affect the business. At this point, we do like what we see. It seems to be improving and the underlying message for us continues to be that all the things that we've been doing for the last several quarters around JEM, around rationalization are certainly helping our cost structure. The additional actions that we've taken in light of COVID have helped us out as well. And really, what we're watching is exactly that. What happens with pro contractors, what happens in the more special orders, does that help us on the mix side and then when do these new sales orders from the builders become starts and ultimately completions, which help our business as well.

Okay. But - sorry, go ahead.

Go ahead.

So if I hear you correctly, but as of kind of June and July, you haven't necessarily seen the consumer pullback allowing that interior contractor back into their homes in Texas and Florida where the cases are increasing again?

Again, it's regional, but no.

Okay. Okay. Great. And then second question, you've made a few comments on the call today where you're going out and gaining market share. Could you just really discuss where you're taking the share regions, product lines, et cetera?

Well, we're not going to be 100% specific, but we have picked up - we do believe we have picked up some share in a few channels, particularly when you look at builders, some of our traditional markets. In the door business, we feel pretty confident that we've picked up some share both interior and exterior doors. So we feel pretty good about the work that we've been doing around the builder, picking up some new communities and some new channel partners in that space. On the windows side, we're looking for demand. Obviously, we've got to top off some of the share loss that we had in prior periods, prior years based on some of the operational piece, but we're well positioned to do that today. When you look at markets like Australia and - where there's been a consistent downturn, the team's done a real nice job of holding on to share there, maybe even picking up some here and there among builders that are still either building and then picking up some share in the R&R markets which are a little more stable even in the downturn that they're seeing.

Okay. Thank you.

Michael Rehaut with JPMorgan. Your line is open.

Hi. This is Elad Hillman on for Mike. Congrats on the quarter. And thanks for taking my questions. First, how should we think about the underlying decremental, incremental margins prior to the benefit of price cost and then rationalization and also going forward for the second half?

Sure. I mean generally speaking, if we're just thinking about volume incrementals, decrementals, excluding mix, productivity, price, any of that. I mean, generally, we'd be in the sort of 30% - low 30% range. The first two quarters of this year, the decrementals have been - excluding the benefit of productivity and price and SG&A, the decrementals have been more challenged than that because of the mix pieces that I alluded to since we report volume and mix together. But generally speaking, that sort of 30% - low 30% is what you should think about as sort of a contribution margin level from a volume standpoint across the business.

Got it. Thank you. And then also, I apologize if I missed this, but would you be able to split out and quantify sort of what the negative mix impact was in the quarter?

Yes. It was roughly 200 basis point headwind. It would be sort of best estimate.

Okay. I appreciate it. Thank you.

Yeah.

Keith Hughes. Please state your firm. Your line is open.

Yes. This is Keith Hughes from Truist. Just a quick question on the wholesale channel in the United States, you detailed earlier in the call what it did in the quarter. Given this pickup we're seeing in homebuilding, that seems to be coming down the pike, do you anticipate an inventory build in wholesale to prepare for that or do you think your shipments will look more like sell-out over the next quarter or two?

Yes. I think it's a little hard to say. Our model, particularly in that case, is a little more - it's a little more tied directly to the sell-out. As projects are being ordered, we build more to order in that market. The lead times are relatively matched. So I would expect it to be pretty clear, which is why we're watching when those new orders turn into starts because that's the hint of when we'll see that demand and when we'll actually be able to ship the product. The relatively short cycle once the building orders start coming in. Will there be some build out? Probably, because there is the day in, day out business and the smaller builder markets. But for the most part, we would see kind of a one-to-one.

And I'd just say, we haven't - our business hasn't necessarily been performing just like the market in the traditional channel. And as we alluded to in the prepared remarks, our US door business actually grew pretty nicely in the second quarter top line and which is probably, I would assume, not what was going on from a market standpoint, which implies that our window business was down in the quarter, which is more representative of what's going on in the market. So there is a certainly inventory build aspect of this story for us going forward. But if we continue the trends that we saw there in the second quarter, we may perform differently than the market in that channel.

Okay. Thank you.

Reuben Garner with Benchmark. Your line is open.

Yes, thank you. Good morning, everybody.

Morning.

So I guess a follow-up on that last answer, John. The - so doors were - revenue was up slightly in the quarter. Can you maybe help us with a breakdown of what volume look like in North America between doors, windows and commercial? And maybe if you're not going to do - not for the quarter, maybe for the more recent period, June and July, how did those kind of different sub-buckets of North America trend recently?

Sure. I'd probably prefer not to get into sort of specific volumes by channel, by product in North America. But at a high level, just thinking about volumes for the segment in the second quarter, I would say that doors volumes, and this is retail and traditional, was down high single-digit percentage. Windows, volumes down -- this is volume mix again. So windows down in the high-teens percentage and Canada down in the high-teens percentage as well was kind of what the volume picture looked like in the second quarter. I would say we expect all three of those to improve sequentially in the next quarter. I guess the question will be when do we get back to actual growth in those different verticals.

Okay. That's great. And then are those kind of relative performances? Did they - are they similar in the more recent month of data? In other words, did doors continue to outperform windows from a volume perspective? I'd imagine there's a little bit more of a DIY element to doors than windows. I don't know, too many people putting their own windows in. But it's - is that difference holding up here recently or have you seen a bounce back?

Yes. I think your - the trend is consistent early in the quarter. A lot of our window business, particularly on the traditional channel side, is high to -- these would be project-specific windows quoted by an architect, quoted for a new construction or a large renovation project on a home. And those are the pieces that certainly seem a little bit slower to come back versus that, as you alluded to, the R&R business, which is a little bit more resilient and less impacted by timing and availability of labor and workforce and whether people are allowing workers in their home and things like that, so.

Perfect. Thank you, guys. Congrats on the quarter and stay safe.

Thank you.

Thank you.

[Operator Instructions] Mike Dahl with RBC Capital Markets. Your line is open.

Good morning. Thanks for taking my questions. First question is on kind of the Europe top line outlook and follow-up maybe on Australia. But on Europe, you talked about, I think, July getting back to positive year-on-year. At the same time, Gary, I think some of your comments were a little balanced or mixed in terms of seeing some stability in your business. But recognizing that there is softening in the economic conditions. So how are you thinking about top line in Europe from a 3Q and total standpoint or as we go through also the balance of the year?

Yeah. Europe played out kind of interesting in the quarter. Because the U.K. and France were actually shutdown completely, that was the majority of our issue from a top line standpoint in Europe. We actually saw very favorable demand in kind of what we call Central North Europe, Scandinavia, Germany, in particular, and that has continued. So that's kind of the dynamic of what happened. UK and France came back online. There's lingering effects, of course, of doing that from both the demand standpoint as well as us getting up to speed to fill those orders. We're still pretty good about where we are, and we're looking at the demand in those 2 markets. Going forward, we did see, as I mentioned earlier, RFQs for project business, which is obviously an indicator, a forward look at what we might see. We do expect those to turn into orders which would drive the top line as well. So if the UK and France come back online, we would expect that to improve. We'd expect that project business to turn into business. That's kind of how we're thinking about that. It's unemployment and we got to watch unemployment in homebuilding in Europe. I think those are the kind of the clouds over the demand picture there. But I think we're fairly balanced at the way we're looking at it right now.

And then, Keith, just July, you referred to July there. I mean, July is a big holiday month in a lot of our markets in Europe. So it's hard to draw a lot of conclusions from one month of data there. But I'd say going into the quarter, our base case would have been the revenues in Europe would still be down slightly. Year-over-year, certainly, July outperformed that and was actually up in sort of the mid- single-digit range year-over-year, but again sort of it's a light month from a holiday standpoint. So hard to draw conclusion for the whole quarter from that.

Okay. That's all really helpful. And then second question is kind of similar around Australasia. When you think about kind of the risk of a renewed pullback or further push-out of what could have been a recovery there with - you have volume down 11% in 2Q. Now when you're thinking about the second half and further declines in the underlying market, how should we think about sizing the volume declines for your business relative to 2Q?

Yeah. I think that's a really good question, particularly with what we're seeing lately. We're expecting pre-COVID coming into the year, that we would see stabilization in Australia with residential new construction markets in the second half, obviously, COVID -- the next wrench into works stopped for Australia's recovery in that market. And then what we just heard really over the weekend with the state of Victoria now shutting back down due to COVID flare up. I mean they are on a pretty severe lockdown now, which will affect our business going forward as well. And the thing that's working for us there is we have a very strong team. They've done a nice job, both on productivity and on kind of the longer term cost out. So we've been working on this for a while as the downturn has been there, and we're still seeing that. They have opportunities to go out and get additional business from elsewhere. But we're really watching what happens, particularly with the shutdown in Victoria now being a pretty significant change there. All in, we've got kind of some of that factored in and we're going to watch it carefully. If anything clears up there, that could help us overall.

Yeah. Just a little color there. I'd say, well, North America and Europe, we still feel pretty confident, we will see sequential revenue improvement from Q2 to Q3. Australasia is the one area of the portfolio that we would probably not feel that confident to say that volumes will sequentially improve and particularly with this news over the weekend that Victoria is going into curfews and lockdowns for six weeks. It's a large market for us. So expect that probably not to improve sequentially into Q3.

Okay. And just a really quick follow-up to that. I guess you kind of said it there, John, but presumably since Victoria is such a large population center, your business is likely kind of proportionately exposed. But is there any regional mix within Australia on a state basis that we should be aware of as we're thinking about these?

I think you're right as far as the proportionately exposed...

It's our largest market in Australasia. So it's certainly a significant piece of the headwind for us.

Okay. Thanks, guys. Good luck.

There are no further questions. I would now like to turn the call back over to our presenters for closing remarks.

I'd like to thank you all for joining us this morning. I think our Q2 results demonstrate the benefits from the ongoing operational performance improvements across the enterprise that our disciplined approach and deployment of JEM, our business operating system, and the benefits that we're seeing from rationalization and modernization over the last several quarters. We were deliberate in our actions to offset the effects of the pandemic in our markets, and we continue to diligently work to ensure the health and safety of our associates and our partners to meet our customers' needs and deliver results. We look forward to meeting with you again real soon. Thank you and be safe.

This concludes today's call. We thank you for your participation. You may now disconnect.