MasterBrand Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 7 speakers on the call.

Operator

Welcome back to Master Brands Second Quarter 2024 Earnings Conference Call.

Operator

We appreciate your patience this afternoon following a brief severe weather delay due to a tornado warning in the Cleveland area. We will begin the conference call with the company's prepared remarks. During the company's prepared remarks, all participants will be in a listen only mode. Following management's closing remarks, callers are invited to participate in a question and answer session. Please note this conference call is being recorded.

Operator

I would now like to turn the conference over to Faran Folik, Vice President, Investor Relations, Treasury and Corporate Communications. Please go ahead.

Speaker 1

Thank you, and good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, President and Chief Executive Officer and Andy Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our Q2 2024 financial results. If you do not have this document, it is available on the Investors section of our website at masterbrant.com.

Speaker 1

I'd like to remind you that this call will include forward looking statements in either our prepared remarks or the associated question and answer session. Each forward looking statement contained in this call is based on current expectations and market outlook and is subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled Forward Looking Statements in the press release we issued today. More information about risk can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2023 Form 10 ks and updated as necessary in our subsequent 2024 Form 10 Qs, which will be available once filed at sec.govand@masterbrand.com. The forward looking statements in this call speak only as of today and the company does not undertake any obligation to update or revise any of these statements except as required by law.

Speaker 1

Today's discussion includes certain non GAAP financial measures. Please refer to the reconciliation tables, which are in the press release issued earlier this afternoon and are also available atsec.govand@masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our Q2 2024 financial results, along with our 2024 financial outlook from Andy. Finally, Dave will make some closing remarks before we host a question and answer session. With that, let me turn the call over to Dave.

Speaker 2

Thanks, Barron. Good afternoon, everyone. We appreciate you joining us here today for our Q2 2024 earnings conference call. We've had a productive several months since we last spoke. We delivered another solid quarter of financial performance and our associates continue to make meaningful strides across all of our strategic initiatives.

Speaker 2

We announced our acquisition of Supreme Cabinetry Brands, our first transaction as a standalone public company, which we will share more details on shortly. Lastly, in concert with the transaction, we restructured our debt. A busy period for the team, but I'm proud of what we accomplished and our prospects for the remainder of the year as we continue to navigate choppy end market demand. Now let me provide a little more detail on each of these areas. Net sales in the Q2 of 2024 were $677,000,000 a 3% decline over the same period last year.

Speaker 2

This low single digit decline was in line with our expectations as year over year volume growth was offset by the continued impact of lower ASP due to anticipated trade downs and normal promotional activity. We saw healthy performance from our customers in the new construction market driving our year over year volume growth. With continued growth in both large and medium builders and small builders turning positive in the Q2. We believe our strategic initiative work, specifically around Align TO Grow, has allowed us to capitalize on this and to perform at or above the underlying market conditions. As I mentioned on prior calls, our Align2grow initiative enables us to focus on the right parts of the market, the right customers with the right products at optimal service levels.

Speaker 2

We benefited from this last year as we launched new products and channel specific offerings, specifically targeting production builders. And our net sales continue to benefit from these efforts in the Q2 of 2024. Moving to operations, Astrobrand continued to perform well. We delivered adjusted EBITDA of $105,000,000 in the 2nd quarter and a related margin of 15.5%, 20 basis points higher than the same period last year. Our margin expansion was again driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of lower average selling price, personnel inflation and strategic investments.

Speaker 2

Our TIC enabled initiative, particularly our work on quality processes, played an increasing role in expanding our adjusted EBITDA margin. Better data fidelity has continued to drive improvements in our quality processes, which improved both internal productivity as well as customer satisfaction. In several cases, we've heard from customers that our performance on both quality and delivery is industry leading. We know we have more opportunity for improvement and our digital tools paired with the master brand way give us a roadmap to improve the customer experience. In addition to year over year personnel inflation in the Q2, we've seen inflation increase sequentially in other areas of our cost of goods.

Speaker 2

While it did not have a material impact on the Q2, we do anticipate certain costs to increase for the remainder of the year. Because of this, we chose to implement price increases in the Q2 across all our brands in the dealer and builder direct channels. Andy will provide more details on the timing of the anticipated benefit to our net sales and what this could mean for the phasing of our adjusted EBITDA margins in the second half 2024. From a cash generation standpoint, we delivered another strong quarter of free cash flow at $66,000,000 as the team continued to make improvements around working capital management. While this is lower than the same period last year, it's important to remember that 2023 benefited from the release of a 2022 strategic inventory build meant to ensure service and delivery to various supply chain constraints.

Speaker 2

As you can see, a very solid quarter of financial and operational performance from our associates. Now let's shift gears to our acquisition of Supreme Cabinetry Brands. For those of you still unfamiliar with the transaction, I'll briefly touch on the key points. On May 21, we entered into an agreement to acquire Supreme Cabinetry Brands for $520,000,000 and subsequently closed on the transaction after the quarter end. Supreme is a highly regarded manufacturer of premium cabinetry, offering a robust portfolio of on trend products with a focus on premium kitchen and premium bath cabinetry.

Speaker 2

Since their founding in 1954, they've built an impressive track record of product innovation across their premium brands, including Dura Supreme and Birch, while also achieving significant growth and profitability. Over the same time period, they've developed an exceptional dealer network, which they service through their 3 manufacturing campuses in Howard Lake, Minnesota Waterloo, Iowa and Statesville, North Carolina. What is so compelling about this acquisition is the strategic fit and near perfect alignment with our growth priorities and our channel and product strategy. Supreme enhances Master Brands portfolio with complementary products in the premium kitchen categories. Birch also has a well recognized premium bath brand, which gives us great growth opportunities in this attractive portion of the market.

Speaker 2

Supreme and Master Brand have complementary dealer networks with very little overlap, resulting in channel distribution capable of reaching more customers and end consumers than ever before. Lastly, the combination of the 2 companies' operations present compelling and identifiable cost synergies. Inclusive of the $28,000,000 of anticipated annual run rate cost synergies in year 3 following the acquisition, our purchase price multiple of adjusted EBITDA is approximately 5.9 times. While it has only been about 1 month since the close, we're off to a great start and are confident in this transaction. I'd specifically like to thank Tony Cugalski and his entire executive team who are staying with the organization for their support and partnership.

Speaker 2

He and his team along with all Supreme associates have really hit the ground running and are leaning into this integration, while continuing to manage their business with excellence. As I sit in meetings with them and the legacy Master Brand Associates, it's great to see the new team come together and embrace our shared purpose of building great experiences together. Andy will provide you with more details on the near term financial benefits of Supreme acquisition when she discusses our updated 2024 outlook. With the acquisition of Supreme, Master Brand is now utilizing all the pillars of our capital allocation strategy: reinvest in the business, maintain a healthy balance sheet, disciplined M and A and return value to shareholders. When it comes to the balance sheet, we took the opportunity this quarter to act on favorable market conditions and enhance our capital structure.

Speaker 2

For those of you that might recall, we went to the capital markets in late 2022 to finance our dividend to Fortune Brands. The timing wasn't optimal given the general uncertainty around the economy and the housing market. Now with our positive track record as a standalone company and improved debt market conditions, we chose to pay off our remaining term loan balance with the proceeds from our privately offered senior notes and replace our existing revolver with an expanded credit facility. Following our favorable ratings with all 3 credit agencies, we were able to successfully increase the size of our credit facilities, extend the maturity and lower the cost of capital. Overall, great work by the team getting this completed before the acquisition closed.

Speaker 2

Before I hand the call over to Andy to discuss our outlook, I'd like to provide a brief update on end market demand and our expectations for the remainder of the year. Market demand in the Q2 was largely in line with our expectations with some slight puts and takes between our customers servicing the new construction market and our customers servicing the repair and remodel market. That being said, as we progress through the quarter, we've seen some signals that temper our expectations for the remainder of the year. For those customers focused on the U. S.

Speaker 2

Single family new construction market, we saw demand increase year over year low teens in the Q2. We service all sizes of builders in the U. S. And as mentioned, we were pleased to see all portions of the market grow year over year with large production builders performing the best. Large production builders, both public and private, continue to benefit from their scale and the ability to offer incentives such as rate buy downs, which provides them an advantage over not only other builders, but existing home purchases as well.

Speaker 2

Looking to the back half of the year, we expect to see continued growth in the new construction market, but more moderate rates year over year and slower sequentially. While public builder comments remain optimistic, slower new housing starts and high inventory of spec homes points to a potentially more muted outlook for single family new construction. These muted expectations are also due to normal seasonality and more challenging year over year comparables in the second half of the year. We remain positioned to perform at or above the market going forward due to our prior line to grow work for builders. In total, we believe this market will still grow mid single digits year over year for 2024.

Speaker 2

Moving to the repair and remodel market serviced by our dealer and retail customers, demand was on the softer side of expectations, albeit within our range. Lower foot traffic and extended decision times continue to be a headwind for our customers as end consumers remain hesitant about committing to large purchases. The market had been flat sequentially as we entered the Q2. However, we saw increasing choppiness in our orders as the quarter progressed. Feedback from our channels servicing the repairs and model market suggest this choppiness will continue in the second half of twenty twenty four.

Speaker 2

Add to this, recent economic data suggests that consumer spending faces headwinds, which we believe could continue to slow R and R spending on large ticket items. With these factors in mind, we anticipate R and R demand to now be at the lower end of mid single digit declines for the full year 2024. In Canada, both the new construction and repair and remodel markets remain slow year over year as expected. There continues to be commentary related to steps the Canadian government has taken to improve housing affordability, the new housing market remains weak. We expect to see soft end market demand continue in line with our previous outlook.

Speaker 2

Despite this weak demand backdrop, we remain pleased with our overall performance in the market as our team in Canada continues to strengthen builder direct relationships across the country. Based on these factors and current macroeconomic conditions, we expect these recent softer end market trends for the remainder of the year. While it appears the capital markets are factoring in rate reductions by the Fed later this year, it's important to remember that our outlook was more predicated on rate stability than on rate reductions. To the extent that rate reductions by the Fed either improve consumer sentiment, triggering more R and R activity or improve existing housing turnover or new home affordability, we could see some slight improvement in demand. We would not expect this demand to translate into higher net sales in the second half of twenty twenty four.

Speaker 2

With these factors in mind, we now expect end market demand to trend towards the lower end of our expected range of down low single digits year over year in 2024. Now, I'll turn the call over to Andi.

Speaker 3

Thanks, Dave. I'll begin with an overview of our Q2 financial results. Then I'll provide our thoughts around the back half of twenty twenty four and our updated full year outlook that includes the acquisition of Supreme. 2nd quarter net sales were $676,500,000 a 2.7% decline compared to $695,100,000 in the same period last year and in line with our expectations. Our top line performance was primarily the result of year over year growth from our customers servicing the new construction market, offset by continued softness in the repair and remodel market and pressure on our net ASP, largely due to continued yet stabilized trade down activity across the business.

Speaker 3

Gross profit was $231,000,000 in the 2nd quarter, compared to $236,200,000 in the same period last year. Gross profit margin was 34.1% compared to 34% in the Q2 of last year. We achieved 10 basis points of gross margin expansion despite lower sales as our strategic initiatives notably around quality processes and other continuous improvement efforts more than offset the negative impact of lower ASP and personnel inflation. As a reminder, the Q2 of last year also included $2,200,000 of nonrecurring insurance proceeds due to the tornado damage sustained at our Jackson, Georgia facility in the Q1 of 2023. Selling, general and administrative expenses were 140 $6,700,000 a 3.5% increase compared to the same period last year, primarily driven by $4,400,000 of acquisition related costs, higher investments in our tech enabled initiative and personnel related inflation, which was partially offset by lower distribution and commission costs as a result of the decrease in net sales.

Speaker 3

Net income was $45,300,000 in the 2nd quarter, an 11.5% year over year decrease compared to $51,200,000 in the same period last year. This decline was primarily driven by lower net sales, non recurring interest expense of $6,500,000 related to the restructuring of debt, dollars 4,400,000 in acquisition related costs and the nonrecurring $2,200,000 of insurance proceeds in 2023 related to the tornado at our Jackson, Georgia facility. These combined headwinds were partially offset by lower income tax expense of $14,800,000 representing a 24.6 percent effective tax rate, which compares to $18,500,000 or a 26.5 percent rate in the Q2 of 2023, which was partially related to items from the spin off from Fortune Brands. Diluted earnings per share were $0.35 in the Q2 of 2024 based on 130,700,000 diluted shares outstanding, a decrease from diluted earnings per share of 0.39 dollars in the Q2 of last year based on 129,900,000 diluted shares outstanding. Adjusted diluted earnings per share were $0.45 compared to $0.44 in the prior year quarter.

Speaker 3

As stated in our earnings release this afternoon, effective as of the second quarter, adjusted earnings per share have been revised to exclude amortization expense, including those related to the acquisition of intangible assets. The resulting impact to our adjusted EPS for the Q2 of 2024 and the comparable period equates to a $0.02 increase and will total $0.08 for the full year. This does not include any impact of amortization from the Supreme transaction. Adjusted EBITDA was $105,100,000 compared to $106,300,000 in the same period last year. Adjusted EBITDA margin expanded 20 basis points to 15.5 percent compared to 15.3% in the comparable period of the prior year despite lower sales.

Speaker 3

This margin expansion was driven by our higher gross margins, which again were the result of cost savings driven by our strategic initiatives, including quality process enhancements and other continuous improvement efforts, which more than offset the negative impact of trade downs, strategic investments and personnel inflation. Turning to the balance sheet. As Dave mentioned, we had a very successful debt refinancing, including the private offering of senior notes. In addition to lowering our interest rate, we received favorable terms, increased our overall liquidity, eliminated required amortization payments and extended our maturity profile. With our revolver maturing in 2029 and our senior notes maturing in 2,032, we believe our new capital structure provides us increased financial flexibility and security to execute on our strategy and achieve our long term financial targets.

Speaker 3

Net debt at quarter end was $499,500,000 resulting in a net debt to adjusted EBITDA leverage ratio of 1.3x at the end of the second quarter, down from 1.7x in the Q2 of 2023. This does not reflect the impact of the Supreme acquisition as we drew down on our new revolver after the quarter end to partially finance the transaction. Following the transaction close on July 10, our net debt to adjusted EBITDA was 2.3 times on a pro form a trailing 12 month basis. We still anticipate lowering this to less than 2 times within 2 years of the transaction date assuming no additional M and A activity. Operating cash flow was $96,100,000 for the 6 months ended June 30, 2024 compared to $194,000,000 in the comparable period last year and ahead of our expectations.

Speaker 3

As we noted, the Q2 of 2023 reflected a planned non recurring release of our 2022 strategic inventory build to address various supply chain constraints. The impact of this inventory release masked the incremental improvement we made in our shared services ability to collect and pay invoices and negotiate improved terms, which has benefited both our days payable outstanding and our days sales outstanding year over year. Capital expenditures for the 6 months ended June 30, 2024 were $18,300,000 compared to $11,400,000 in the prior year period. As mentioned on our last call, we made the decision to accelerate investments in the business, specifically in our tech enabled initiative. With the addition of Supreme, we now expect 2024 capital expenditures to be in the range of $65,000,000 to $75,000,000 compared to our prior range of $55,000,000 to $65,000,000 Free cash flow was $77,800,000 for the 1st 6 months of 2024 compared to $182,600,000 in the comparable period last year.

Speaker 3

Similar to operating cash flow, the year over year decline was largely due to the planned inventory reduction from our 2022 strategic build previously discussed. Our free cash generation in the Q2 was ahead of our expectations and we continue to expect free cash flow to be in excess of net income for 2024, which includes both the net income and free cash flow impact of Supreme. Finally, during the Q2, we repurchased approximately 267,000 shares of our common stock under our existing stock repurchase program for a total of $4,600,000 We have approximately $21,000,000 left under our existing repurchase authorization. Turning to our outlook. As Dave mentioned, we now expect our end market demand to trend towards the lower end of our original outlook, down low single digits year over year in 2024.

Speaker 3

With our customers servicing the R and R market seeing softer demand persisting, we do not see a path to the legacy Master Brand business achieving flat net sales year over year. Despite these market conditions, we are benefiting from our past and current strategic initiatives and investments for growth and remain confident in our ability to outperform the underlying market. As such, we expect organic net sales to be down low single digits. Let me provide some additional color on our expected Mastermind legacy net sales and adjusted EBITDA cadence in the back half of the year. We expect our quarterly net sales to be relatively consistent across the 3rd and 4th quarter, a departure from normal seasonality.

Speaker 3

Trade downs and promotional activity should continue at a similar pace to the first half of the year, but the impact will moderate from a year over year perspective as we are lapping the onset of these in 2023 predominantly in the Q4. Additionally, we expect 4th quarter net sales to benefit from recently implemented price and the traction we're getting with new products and channel specific offerings, allowing the quarter to outperform normal seasonality in what is typically a lower quarter within the year. Based on this quarterly net sales cadence, the timing of price realization compared to the sequential cost of goods inflation, further investment in our tech enabled initiative and the non repeating $6,000,000 benefit in the Q3 of 2023, specifically the insurance proceeds related to Jackson, Georgia and medical insurance rebates, we expect headwinds to adjusted EBITDA margins in the Q3 of 2024. We would again not expect normal seasonality to play out in the Q4 due to the favorable impact of pricing actions, new product launches and program wins and the annualization of trade downs. We anticipate Supreme to perform in line with our expectations from the time of the transaction contributing mid single digits to our net sales growth percentage for the full year.

Speaker 3

On a combined basis, our revised full year 2024 net sales outlook is an increase of low single digits. On this higher combined net sales outlook, we are raising our expected adjusted EBITDA range to 385 $405,000,000 and related adjusted EBITDA margins of 14% to 14.5%, flat year on year to slightly up compared to full year 2023. This outlook anticipates Supreme to be accretive to adjusted EBITDA margin and excludes estimated one time cost of slightly more than $20,000,000 related to acquisition and integration costs. Our interest expense is now expected to be approximately $73,000,000 to $76,000,000 It's important to note, while our interest rate is lower, our overall debt level has increased resulting in a higher interest expense going forward. This interest expense includes both the new debt to finance the acquisition as well as the non recurring interest expense of 6,500,000 related to the restructuring of our debt.

Speaker 3

Our anticipated tax rate between 24% 25% has slightly improved from our prior guidance. On balance, we now expect our full year adjusted diluted earnings per share will be in the range of $1.50 to 1 $0.62 which now includes the favorable impact of Supreme. It's worth noting that absent the exclusion for amortization, the Supreme acquisition would still be accretive to diluted earnings per share in fiscal 2024. As I mentioned earlier, our updated outlook for capital expenditures for the combined company is expected in the range of $65,000,000 to $75,000,000 inclusive of one time integration CapEx of approximately $4,000,000 This combined investment is approximately 1.3 times depreciation, which is within our stated long term goals. Now, I would like to turn the call back to Dave.

Speaker 2

Thanks, Andy. We're pleased with our results year to date and we're excited at the progress we've made to position our business for near and long term growth. While 2024 is shaping up to be more of a transitionary year from a demand standpoint, we think the fundamentals of the housing market, such as the gap in housing supply and an aging inventory of existing homes bode well for Master Brand going forward. We believe continued execution on our stated strategy, investments for growth and acquisitions such as Supreme will allow us to capitalize on these trends and create long term value for our shareholders. As always, we appreciate your support and look forward to updating you on future calls.

Speaker 2

Now with that, I will open up the call to Q and A.

Operator

Thank Our first question is from Garik Shmois with Loop Capital Markets. Please proceed.

Speaker 4

Hi, thanks. And I'm glad to hear everyone's safe now that the tornado has passed. First off, just in light of the choppier end market, just wondering if you could speak to what actions you're taking on the manufacturing side to adjust to maybe a little bit slower organic demand?

Speaker 2

Yes. Thanks, Derek. I think it's been choppy makes that equation very difficult. So when we say choppy, it's you have some weeks where you have pretty good orders and then some weeks where you don't have good orders. And so I think in general, we're pretty good with where we're running from a capacity standpoint.

Speaker 2

And so there's maybe a little throttling down in a couple of areas, but it's not necessarily material for the long range here because again, I don't think the market hasn't inflected in any particular way. So we're kind of managing through that is probably the best way I can say it. And there's a little bit of choppiness that that brings to the P and L because of that, but I think it's prudent at this point until we see something materially change to kind of hold where we are on that front. So it's a little bit of just having to manage through the choppiness. Again, it's not material enough in terms of inflection that I'd say in the market that it's really time to take any sort of significant action.

Speaker 2

So it's really more managed through it and that in the short term that's the best you can do.

Speaker 4

Okay. Thanks for that. The second question is just on pricing. You talked about implementing price increases that's going to impact the second half of the year. But you have been seeing trade downs, which you spoke to as well.

Speaker 4

So just hoping you could expand on what will end up happening with the trade down impact as prices end up moving higher? Do you anticipate that becoming even more exacerbated in this macro environment? Or are you actually seeing some stabilization on the trade down impact?

Speaker 2

Yes, thanks. It's a good question. I think the what we're seeing is that's been developing for quite some time now is kind of a separation of the high end of the market and the low end of the market. And so I think that the pricing impact is probably not going to affect that change, it's already occurred. So we haven't really seen any material change in the pattern, Very robust patterns in our lower end products, a lot of that trade down occurred there.

Speaker 2

And then decent pace in the premium side of the market as well. And so typically those customers are already in the place where they want to be. And also I'd say the pricing action is not abnormal. It's sort of more what I'd call regular pricing action. It is in the normal course prior to COVID was the beginning of the year.

Speaker 2

This is a little bit different timing, but I think it's in magnitude roughly similar to what we would do in the past. And so it's really and again, the inflation is kind of what I'd call normal as well. It's not something that's an inflection point that we see, but it is going to stick for a bit. So we think that we need to take action price wise. So I think you've already seen that movement occur with the consumer to move into the kind of the bookends of our product portfolio.

Speaker 2

And we haven't seen any material change from that with any of the changes we've made with price. Okay.

Speaker 4

And then just my last question is just on Supreme. I mean, you did speak to seasonality in the second half of the year on the legacy business. But I was wondering if you could speak to any seasonality on Supreme and how we should think about that?

Speaker 2

Yes, I think what you're seeing part of this the strangeness of this period is we didn't close right at the end of Q2. So there's a couple of weeks there where we did not own Supreme. So that but typically they follow a similar pattern to us with seasonality. However, this year, it's probably going to be more equivalent because of missing that couple of weeks that we didn't own them in early part of July. So they will normally see the same thing we see at the end of the year where shoppers turn to other products, which we expect to see again as well this year, but I think because of other programs we've put out.

Speaker 2

The other thing I'll say is that Supreme, similar to us, has some new product launches and some new programs coming out that will hit in the Q4 as well. So we're kind of we just kind of aligned on that. Nothing through expert planning here, but it all kind of aligned that we're kind of following a similar pattern through the year. But I think normally you would expect Supreme to follow a similar trajectory through the year that we do. It's just this year is going to be different for the both of us for a variety of reasons.

Speaker 4

Okay. Thanks for that. I appreciate it and I'll pass it on.

Operator

Our next question is from Adam Baumgarten with Zelman and Associates. Please proceed.

Speaker 5

Hey, everyone. Question on Supreme. Give us what you expect the company to contribute from a revenue perspective. But within the updated adjusted EBITDA guidance for the year, what are you assuming for Supreme within that?

Speaker 2

Yes, Adam, we're kind of covering the whole company as a whole in the EBITDA line. We're a single segment and so we're kind of reporting as a single segment moving forward and

Speaker 4

that's as far as we're going to go on that.

Speaker 2

But I think the way to think about it is our the legacy company is kind of at the low end of the range of previous estimates from last quarter. So that kind of gives you an idea of where it all fits. Okay, got it.

Speaker 5

That's helpful. And then just on the pricing, you talked about raising pricing in dealer and I think builder direct. Not sure if you're it doesn't sound like you're raising pricing in the retail channel. Is that just because it takes more time or you just don't need to or maybe you're not able to? Curious on the pricing side.

Speaker 2

Yes, sorry. Our retail pricing model is one that's ongoing. It's reviewed every quarter. So we didn't include it in that comment, but we are always adjusting price with the retailer every quarter based on an index based pricing arrangement. So we don't necessarily we don't take the same types of actions.

Speaker 2

We have different pricing mechanisms with the home centers. And so we would anticipate that as inflation comes into our P and L, it flows through to the retail channel as well. It just happens in a different mechanism.

Speaker 5

Okay, got it. Thank you. Best of luck.

Speaker 2

Thanks, Adam.

Operator

Our next question is from Tom Mahoney with Cleveland Research. Please proceed.

Speaker 6

Hello. Good afternoon. It was quite a storm here in Cleveland.

Speaker 2

Yes, you probably got a little working week

Speaker 6

And just about 10 minutes sooner. I'm interested in the nature of the costs that are moving higher. Is this related to ocean transportation or are there specific inputs that are moving higher? Just interested in those moving pieces.

Speaker 2

Yes, I'd say, I mean, certainly ocean freight is a component of it. And that's a market that if you follow, it's come up quite a bit. So that is a component of it. There are some other components, some of which there's just a general back to inflationary environment in a couple of materials, some of which are meaningful. I think in general, it's again, it's not none of this is an inflection of large increases, but it's enough that it affects the overall P and L.

Speaker 2

So it's ocean freight is a big component of that, but there are other costs in a variety of different areas.

Speaker 6

Okay. That makes sense. And then back to the comment that you made about the cadence of demand in the quarter. Can you just go over that one more time? I think what you said is you started better than you had finished.

Speaker 6

I'm interested if there's any differences between the dealer and retail channel. And then lastly, any feedback on the size of jobs moving forward or any read on project leads and backlog activity at this point in time?

Speaker 2

Yes, really, Tom, what's kind of informed our guidance is that order pattern and the backlog choppiness. And it's predominantly, if not all in the R and R space, which covers both dealer and retail. And it's different in different categories. I think in retail, it's a little more in the stock category than in the make to order category. Now our at the home centers, our make to order product is almost often a value oriented product as well.

Speaker 2

So we're seeing strength in that. But it's the orders are not coming in at a what I'd call a regular cadence. And so it's it just gives you pause to say it's there's a little bit of hesitancy on the consumer front. Again, not a major inflection point. It's you'll have a kind of a slower week and then a stronger week.

Speaker 2

Early July this year with the timing of where the holiday was, I think was particularly slow. Couple of categories in late June were kind of slow, but you have to just manage the backlog. Back to the question that Derek asked earlier, I mean, we have to keep our factories at kind of a steady pace and we use the lean tools to make sure we can throttle them up and down within that range, but it's we're sort of tuning them to a slightly lower level just anticipating that this choppiness will continue. Again, I don't think it's a it doesn't feel like a big trajectory change. It's just a little slower than what we had expected.

Speaker 6

Great, great. Understood. Thank you.

Operator

We have reached the end of our question and answer session. I would like to turn it back over to Ferran for some closing remarks.

Speaker 2

Thank you, operator, and thank you all for the flexibility this afternoon.

Speaker 1

We appreciate your interest and support, and we look forward to speaking with you in the future. This concludes

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