Q3 2021 JELD-WEN Holding Inc Earnings Call
Good morning, My name is Julie and I will be your conference operator today.
At this time I would like to welcome everyone to the child, when holding Inc. Third quarter 2021 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'd like to ask a question. During this time press star followed by the number one on your telephone keypad. If you like to withdraw your question Crestar one again.
I would now like to turn the call over to Chris Director of Investor Relations. Please go ahead Sir.
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.
Im joined today by Gary Michel our Chairman, President and 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.
Gentlemen, does not undertake any duty to update forward looking statements, including guidance, we are providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation.
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 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, Chris Good morning, everyone and thank you for joining us.
During today's call I'll share how our team quickly implemented a number of measures to counteract global headwinds related to supply chain challenges labor constraints and inflation pressures how are well defined business operating system is driving productivity cycle time improvements and capacity expansion to meet high cut.
Demand and how we expect our recent actions will improve performance in the fourth quarter and give us confidence for continued growth in 2022.
Please turn to page four.
Over the last several years, our teams have proven their agility to operate and deliver for our customers through uncertainty while staying focused on the long term and we once again demonstrated that agility in Q3.
It's why I wouldn't trade our position with anyone our values based approach to business coupled with the discipline of our Jem business operating system. The gel with excellence model has separated us as a supply partner and employer.
Our commitment to constant improvement is why I continue to be so amazed by this team I have never been more confident in our leadership and teams around the world as we accelerate our long term strategy and deliver for our customers in this dynamic external environment.
No matter the challenge labor constraints supply chain disruptions operating limitations due to certain COVID-19, lockdowns and adverse weather events. This team responds with solutions, we adjust and we deliver.
In the third quarter demand remained strong in all of our end markets supporting our belief in the long term strength of new housing and replace and remodel where R&R markets.
Filling that high demand was affected by universal challenges that rapidly accelerated across the industry orders and backlog grew in each segment in North America posted record book to Bill results driven by an increase in orders throughout the quarter highlighting the underlying strength in housing demand.
In our largest market and the result of our innovation and commercial excellence initiatives over the last few years.
Our global team took swift and decisive action to address these challenges leading to improved results in the month of September and our confidence going forward.
As we shared in October these short term external driven factors impacted our full year business outlook for revenue growth and EBITDA. However, we remain steadfastly committed to the financial targets. We set for 2025 at our Investor day in May to accelerate growth expand margin.
<unk> deliver cash and allocate capital to deliver exceptional shareholder returns.
That the way in which our associates throughout the enterprise have approached these near term challenges head on proactively seeking creative solutions to rapidly evolving obstacles has only reinforced my confidence in our ability to deliver our 2025 commitments.
Now on page five I'll turn to specific performance highlights for the quarter.
In the third quarter consolidated revenue grew 3% and core revenue grew 2%.
Every segment delivered core revenue gains led by continued price realization, which accelerated to 7%.
For over 12 consecutive quarters, we have realized pricing in excess of material inflation, which is particularly impressive in the face of accelerated raw material inflation that is a multiple of what we originally expected at the beginning of the year.
We've announced and deployed additional pricing actions that we expect to realize during the fourth quarter and into 2020 to lay.
Labor supply chain challenges and mandated operating restrictions in certain regions were a headwind to volume mix and productivity. Despite strong order and backlog growth that was broad based across the segments.
While we were unable to meet all the demand in this quarter. It was our fifth consecutive quarter of core revenue growth.
In North America core revenue grew 2%, including a 10% contribution from price order and backlog growth were strong and accelerated throughout the quarter September experienced the single greatest order rate of 2021.
Focus on operational excellence initiatives is mitigating near term labor and supply chain challenges, which continue to result in industry, leading lead times that are delivered share gains.
In a few minutes I'll highlight actions that we implemented in the quarter to attract develop and retain operations talent, which led to improving direct labor metrics and ultimately improved backlog conversion in September.
Europe, and Australasia posted solid growth as well despite facing many of the same external challenges as North America and Europe core revenue grew 2% driven by a 4% contribution from price realization.
Man remains robust in key markets and we're beginning to see signs of a recovery in the UK and France, which have experienced the most severe restrictions related to COVID-19.
Despite facing significant supply chain disruptions and raw material inflation in the quarter. The European <unk> continues to execute on Jem and commercial excellence initiatives to reduce cycle time drive capacity expansion and gain market share.
Australasia core revenue grew 3% the segment's fourth consecutive quarter of core revenue growth. This includes a 2% contribution from price.
Homebuilder incentive program low interest rates and solid economic growth continues to fuel our recovery in residential new construction with record housing starts in the quarter and in the repair and remodel of existing homes. However, strong underlying demand government imposed operating risk.
Striction and labor and supply chain constraints are extending the build cycle and leading to delays in backlog conversion.
Please turn to page six.
To reiterate market fundamentals are favorable and customer demand is strong and accelerating in all three segments and while not at historically commercially acceptable levels, our product lead times are industry, leading and proving to be a competitive advantage. We believe how we are managing the short term.
Challenges relating to labor supply chain and inflation will separate our performance.
To mitigate the global supply chain challenges, we believe our global sourcing capabilities and self sufficiency in key manufacturing processes are competitive advantages as well as ensuring more reliable and consistent delivery for our customers.
In North America, we in source supply of certain door components by investing in new production capabilities, which helped to offset industry supply shortages inflation and tariffs.
In many locations around the world, we were able to quickly substitute alternative materials for critical components that were temporarily not available in Europe. When one plant was unable to procure standard sizes and thicknesses of certain components, we used our machining capabilities to rework the product to me.
<unk> production requirements and continued supply.
Globally, our logistics teams have dynamically modified shipping routes to avoid high congestion ports and logistics centers.
We also have a robust pipeline of strategic sourcing initiatives focused on ensuring material availability driving productivity and mitigating raw material inflation, most notably during the quarter using our value analysis value engineering efforts, we reduced our material usage.
And signed new and longer term agreements with strategic supply partners to lower costs on key commodities.
The benefits from these initiatives are ongoing and we will benefit operations across the enterprise.
To address the widespread industry labor challenges, particularly in North America, we deploy jem problem solving capabilities by listening to and co creating solutions with our frontline workforce, we deployed a hyper local approach to recruiting which included more flexibility in our.
<unk> structures enhancements to our employee referral program deployment of innovative local advertising and ensuring competitive pay relative to market demand.
We're seeing considerable progress in a short period of time.
In September we closed our north American staffing gap by 80% experienced a 15% reduction in voluntary turnover a significant reduction in daily absenteeism and an increase in our associate engagement.
This has resulted in a meaningful increase in backlog conversion and customer satisfaction.
Based on this progress we expect sequential improvements in throughput in the fourth quarter.
These are just a few examples of the immediate actions we've taken to minimize these external headwinds and accelerate our capacity to meet high customer demand.
We have also made great progress on the deployment of our Jem model value stream sites, which are demonstrating performance separation through the appointment of Jem and the acceleration of problem solving and rapid improvement events.
In all we completed 12 RIS in the quarter at these sites delivering improvements in cycle time, leading to capacity expansion and 25% direct labor productivity.
We believe the early results from these model value streams provide greater visibility to the value drivers that when extrapolated across our operations support our long term financial targets, including capacity expansion for growth and productivity.
Some of the other perceived valuation overhangs on our business have now been eliminated as well. This includes the resolution of long standing material litigation, including with season signs, which has now closed the divestiture of our Tijuana plant is moving forward as planned and when completed will concur.
<unk> this chapter in our history.
Earlier in the quarter as previously announced Onyx sold its remaining stake in gel win affording us the opportunity to repurchase a significant amount of our shares at attractive valuations.
Page seven please.
We continue to believe our shares represent a great investment for us and an excellent use of our cash.
We repurchased seven 8 million shares for $220 million during the quarter and $9 7 million shares for $278 million year to date.
The $9 7 million shares repurchased so far this year represent roughly nine 6% of outstanding shares at the beginning of the year.
Before I turn it over to John Linker to give more detail on the quarter financials I'd like to close out this section as I began.
Highlighting our values driven premier performance culture.
In October Nasdaq's global named Gelled, when the North American recipient of its 2021 customer Excellence award for corporate culture impact.
This award recognizes the processes systems and training, we've instituted to proactively drive a values based culture and build the business ethically and safely.
Not only have we made great progress in our commercial and operational capabilities, but we are also building. This company the right way, we think Nab ex for the recognition and congratulate the 23000 gel <unk> associates, who live our values every day.
Finally, as we continue to navigate this global pandemic I want to reinforce that the health and safety of our people remains of utmost importance and a key pillar of our environmental social and governance strategy.
This past quarter, all global leaders recommitted themselves to our core values by signing a new leadership safety pledge outlining the expectations for prioritizing associate health and wellbeing as.
As we continue to attract hire and retain talent, we're reinforcing our values based culture built on personal responsibility and leadership accountability.
And now I'll hand, it over to John who will provide additional detail on our financial performance.
Thanks, Gary and good morning, everyone I'll start on page nine.
Third quarter net revenue increased 3% to $1 5 billion. The increase was driven primarily by a 2% increase in core revenue as well as a 1% favorable impact from foreign exchange.
Notably all three segments delivered core revenue growth with broad based acceleration in pricing demonstrating improvements both year over year as well as sequentially from the second quarter.
Third quarter gross profit declined six 9%, primarily a result of lower revenue volume from external operating environment challenges in throughput limitations as discussed by Gary.
Additionally, labor efficiency was unfavorably impacted by labor market constraints and.
And the ramp up and Onboarding and training of new manufacturing associates to meet demand.
Third quarter material and freight inflation was sharply higher than what we expected at the time of our last earnings call in August as well as meaningfully higher than prior year.
To put the magnitude in context inflation in material and freight was approximately $80 million higher than third quarter of last year are approximately three times higher than we saw in all of calendar year 2020.
Despite the significant inflation headwind, our commercial and excellence initiatives demonstrated results as our third quarter price realization was sufficient to offset the inflation.
On a year to date basis gross margin expanded 40 basis points compared to prior year from favorable operating leverage on volume positive productivity and pricing more than offset material and freight inflation.
Third quarter SG&A declined $8 2 million, excluding the impact of legacy litigation related expense in the prior year third quarter SG&A increased as we lap the benefit of 2020, COVID-19 cost reduction actions.
Income tax was a benefit of $2 9 million compared to an expense of 16.0 in the same period last year. Several discrete items contributed to the tax benefit in the quarter, the largest of which was associated with our election of the high tax exclusion under the guilty legislation.
Just on these impacts and the ongoing impact of tax reform for 2021, we now expect an effective tax rate in the high teens, while the underlying GAAP book tax rate will be in the range of 26% to 28%.
Page 10 provides detail of our revenue drivers for the third quarter.
I will highlight our record pricing realization of 7% in the quarter and 6% on a year to date basis pricing improved sequentially as we realize the benefit of additional rounds of price actions to offset inflation.
North America led the way with 10% pricing in the quarter Europe with 4% in Australasia with 2%.
Volume mix declined 5% due to the throughput limitations that we discussed earlier.
Please move to page 11, where I'll take you through the segment performance in more detail.
Net revenue in North America for the third quarter increased two 1% driven by pricing.
Partially offset by the throughput related volume headwinds continued housing demand and strong order growth contributed to a healthy backlog exiting the quarter North America, 10% price realization rate was a sequential improvement from the second quarter as we implemented additional rounds of pricing in August to offset accelerating inflation with the law.
Our backlog however, we did not see the full benefit from this August price increase in the third quarter results.
Moving into the fourth quarter, we expect a full quarter impact of this recent increase and a sequential improvement in pricing, which should more than offset inflation.
Additionally, we expect a sequential improvement in volume in the fourth quarter as we are already seeing the benefit of the work we have done to overcome labor constraints and supply chain disruptions.
North America, adjusted EBITDA declined 16, 8% as favorable price cost was more than offset by lower volume and reduced labor efficiency.
Europe revenue increased three 7% overall and 2.0% excluding the impact of foreign exchange and.
Strong pricing contributed 4% to revenue growth.
This was partially offset by a 2% headwind from volume mix was primarily consisted of throughput constraints related to supply chain disruptions for critical components to a lesser extent, we continue to see a slight channel mix revenue headwind.
Europe adjusted EBITDA declined 45% due primarily to a sharp acceleration in inflation that was not fully offset by pricing in the quarter as well as the mixed headwind I mentioned, where we saw greater activity in the retail channel as compared to our higher margin project oriented business.
From a pricing standpoint, we took additional actions in the third quarter that we expect will result in sequentially improved pricing to fully offset inflation in the fourth quarter.
Australasia revenue in the quarter increased five 8% overall and 3% in local currency versus prior year.
<unk> benefited from accelerating housing demand. However, this strong demand was offset by revenue volume headwinds from government mandated operating restrictions related to COVID-19.
Pricing improved both year over year as well as sequentially.
Australasia segment, adjusted EBITDA declined 5% as positive volume growth and productivity were offset by higher inflation and lower absorption of overhead costs due to the government mandated operating restrictions.
<unk> to the other segments based on recent pricing actions, we expect to improve Australasia price cost realization in upcoming quarters.
Please turn to page 12.
Year to date adjusted operating cash flow totaled $181 6 million a decrease of $45 9 million. The decrease in cash flow from operations was primarily due to higher seasonal working capital investment and higher cash taxes.
Adjusted free cash flow declined $52 7 million due to lower cash from operations and slightly higher capex.
The balance sheet and liquidity remain in fantastic shape, our cash balance declined to $443 9 million as we used $221 million to repurchase stock in the quarter liquidity sits at $832 8 million as of the end of the third quarter and net debt leverage was two eight times, which gives us operating flexibility.
<unk> to invest in initiatives that will drive future revenue and earnings growth.
Net leverage stepped up slightly in the quarter above our target range of two to two five times due to the compelling opportunity to repurchase our shares in an attractive valuation, we expect net leverage reduction in upcoming quarters as we execute on our margin improvement plans and generate free cash flow, we remain focused on deploying our cash.
And a disciplined returns focused manner and compounding the returns on that cash over time with that I'll turn it back over to Gary who will provide closing comments Gary.
Thanks, John Please turn to page 14.
The actions, we've taken to attract and retain talent improved labor productivity and fortify our supply chain produced tangible results in September and into October demand continues to be strong and we have seen acceleration in North America order rates from August to September and again from September to October.
And average shipments per day had been sequentially and significantly improving since August.
And we expect this trend to continue throughout the quarter.
Our healthy backlog accelerating order activity and improving throughput give us confidence that we will deliver revenue and earnings growth in the fourth quarter consistent with our updated full year outlook shown on this slide.
While inflation remains a headwind, we expect that our pricing actions will more than offset material and freight inflation in both the fourth quarter and full year 2021.
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Looking ahead, we continue to expect supportive housing fundamentals in each of our segments to drive strong demand for our products in North America underlying demand trends, including supportive interest rates under built housing stocks and a favorable shift in buyer sentiment will continue to drive growth in new construction.
Struction and R&R.
In Europe, R&R has moderated slightly from elevated levels, but overall residential demand remains healthy and we are beginning to see an increase in commercial demand as well.
And Australia residential housing demand continues to recover from a multi year housing recession as COVID-19 restrictions are being lifted we see demand continuing and eventual reopening of borders to immigration is expected to support recovery and the multifamily new construction market a key driver of <unk>.
Long term housing demand.
The benefits of our operating system and approach to solving problems is addressing our ability to meet the accelerated demand we are seeing.
Please turn to page 16.
Our innovation engines are fired up as well we have over 120 ideas in our innovation funnel, some big and some small which are the foundation of our growth.
Some of these ideas are delivering now and are the platform for accelerated growth in 2022 as well.
These ideas relate to the pillars of our universal strategy for growth that we presented at our Investor day earlier in the year and include connected products energy efficient sustainability, and creating a differentiated and superior customer experience.
Our VPI investment is paying off as well as we are now shipping product from our new East coast facility and expect significant growth in 2022, new product introductions will also spur growth, including the new composite window product lines energy efficient platforms, sustainable and connected door and window products.
We look forward to sharing even more innovation with you in the coming quarters.
The continued benefits of our operating system and Premier performing culture, coupled with our internal investments in innovation and new product offerings give us confidence in our ability to accelerate growth in 2022 and achieve our 2025 growth targets set forth in may including 6% to 8% annual.
Organic growth and 15% to 17% adjusted EBITDA margin.
Thank you for joining us today, John and I will now take your questions.
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 will pause for a moment to compile the Q&A roster.
And your first question comes from Deepa Raghavan with Wells Fargo Securities. Please go ahead.
Hi, Good morning, Gary John.
Thanks for taking my questions.
Just focusing a little bit on your sales guidance.
Q4 sales growth imply it has a wide range of kept your full year sales outlook, even though you'll pull down your EBITDA a little bit understandably so but.
Looking at Q4 sales to a range of low single digit to high single digits.
What does your current throughput and conversion indicate.
Does it indicate.
Revenue growth at the midpoint at mid single digits for example.
Q4.
Good morning Deepa.
In terms of the full year guide on.
On the revenue side of that is unchanged as you noted.
Got it.
What I would say around your question is we do expect a sequential improvement in pricing.
In the third and fourth quarter.
And we do expect sequential improvement.
Mix moving from the third or fourth quarter.
Philips lighting that would imply a slight volume mix headwind versus prior year in the fourth quarter.
<unk> being relatively neutral in the fourth quarter.
Okay. That's fair thanks for that.
Let me just switch gears and ask about your lower Capex output.
What kind of projects are you eliminating at this point in time.
And is that pretty much because of the material and labor constraints that you're seeing or did something else change over the course of the quarter.
Yes, I wouldn't I wouldn't characterize it as we're not investing in something it's really just a timing issue of when the projects are.
We are ready to be invested quite frankly, we're investing.
And a lot of growth opportunities and we continue to invest in our Jem productivity and.
Operational pieces, what we're finding with Jim in particular, as we're at that point, where.
We are in that virtuous cycle, now where it doesn't take as much investment to continue to get productivity and throughput improvements.
We're continuing to do rapid.
Rapid improvement events were focused on our value our amount of value streams that we're starting to get the benefit without the necessity.
Of significant capital investment there, but also as you pointed out at the end of <unk>.
The prepared remarks.
We are investing quite a bit of innovation and we have been for the last several years and we're starting to see that come into.
Into its own as we are beginning to launch product projects and products around VPI and multifamily are.
Deposit windows energy efficient products to meet.
The regulations around the world, but also to continue to move that forward in our energy Star and then some really nice new products in the connectivity space and.
As well as sustainability. So we're continuing to invest it's really a matter of timing and just just our view of where the capital spend is at this point of the year.
Great. Thanks for the color.
Pass it on.
And your next question comes from Truman Patterson with Wolfe Research. Please go ahead.
Hey, good morning, everyone. Thanks for taking my question.
So in the third quarter EBITDA margins were down a decent amount in the fourth quarter, you're expecting a rebound.
Both year over year and kind of <unk> typically.
<unk> over quarter.
Just hoping you can run through some of the major parts. There why that is is it primarily pricing flowing through.
Easing of some of the supply chain constraints some of the internal initiatives that you've done.
Trying to understand the confidence level there.
Thanks, Jeremy.
In terms of the pieces of the Q4 implied Q4 guidance and maybe maybe it will work kind of Q3 to Q4 sequentially as it was the way to think about it.
I would say price cost will be more favorable in Q4 than it was in Q3, just given the comments we made around additional pricing actions.
We put into place so inflation is still a very significant headwind.
For us.
The favorable contribution from price cost will be will be more in Q4 than it was in Q3.
I think the other the other piece.
We've made a lot of progress on our staffing levels, and our productivity and getting new associates.
That we hired over the course of the summer to meet demand in the longer those associates are with us either more productive for productivity we see.
And more stability in the work for us and so we've done a great great amount of work and kind of closing that head count gap filling positions and drive moving sequentially from the third or fourth quarter. We see benefits. Both just in terms of throughput that were as Gary mentioned, we're already seeing that in October consequentially over what we saw in the third.
Just as well as some more productivity on the labor efficiency side of having a more stable workforce does or doesn't really the big drivers in terms of that sequential improvement in margins that youre looking for but I'd say at a high level of confidence in being able to deliver that.
Okay, Okay, no no understood there clearly.
Demand is not the issue.
Right now on them.
When I'm thinking through John you called out I believe it was $80 million of raw material and freight inflation in the third quarter.
Could you run through when you're seeing kind of the peak pressure inflationary pressures will peak will be kind of fourth quarter or first quarter.
And then hoping you can run through some of the major.
Buckets of inflation or pressure points.
Sure sure.
Tough to call when we're going to see the pizza.
I don't know in terms of yes.
It seems to change every day.
And I'd say at this point as it is indicated in your first question I mean inflation is going to be worse on a dollar basis in Q4 than it was in Q3, but we've got more price in place to offset.
When does it peak.
No.
Kathy I can't call that Bob in terms of where are we seeing it.
Most significant acute issues right now are around freight and particularly ocean freight which has been pretty well advertised in terms of freight surcharges that are coming in from from Asia on containers logs and lumber we don't buy a lot of through longer per se, but we do have a lot of logs and while lumber has come off still seeing.
Inflation on the log side, we go under a song.
Packaging millwork.
And really in metals would be sort of the other categories, where we're seeing.
Seeing the big inflation right now so but on a percentage basis in the quarter I would say the most acute was that sort of rate and loss.
<unk> piece is kind of our resolve and most increases on a percentage basis.
Alright, Thank you all.
Thank you.
And your next question comes from Matthew Blair with Barclays. Please go ahead.
Hey, good morning, everyone. Thanks for taking the questions.
I wanted to ask about that comment you made on accelerating order activity in North America. It sounded like September was particularly strong.
That sort of across end markets and channels in thinking new construction versus R&R products, just where exactly are you seeing that order acceleration. Thank you.
So thanks for the question.
We're really seeing a pretty broad based particularly in North America.
We have been focused.
With our commercial activities over the last several years and really focused on improving our customer experience. We've updated a number of our product lines and really really been improving our relationships.
In those markets, coupled with the operational excellence piece, where our lead times are actually.
Like I said earlier not.
Not necessarily commercially acceptable from a historic level, but they are still industry, leading particularly in the windows space and exterior doors. For example, so we've been able to pick up some share we've been able to.
To drive that but we're starting to see demand.
Which was very strong into the quarter at the end of the quarter continue to accelerate and first signs EBIT in this quarter is that continuing so we're seeing it like I said.
Kind of broad based but very much in the areas that we focused on gaining share and improving our product line and our customer experience.
Got it no. Thanks, Thank you for that color there Gary.
Second one back on the price cost side. It sounds like you do expect to remain price cost positive in Q4 and it sounds like there is.
That's reflecting sort of shipping the higher priced product you've got in backlog right now.
It wasn't quite clear there also additional pricing actions.
Being contemplated or as part of that or just how should we think about kind of the next leg of pricing actions into 'twenty. Two. Thank you, yes, so you kind of hit on it.
A number of actions throughout the year and we took some more in the third quarter that are really what we're expecting.
We're expecting we're going to see here in the fourth quarter to be part of the benefit as we shipped through the backlog and those price increases start to be reflected in our shipments.
You are in the process of announcing additional pricing actions that go into effect for 2022 kind of on the on the normal cycle and really trying to stay ahead of.
The inflation, where we are so so some of the benefit as John walked through a little bit earlier.
Pricing that we'll see in the fourth quarter is really already implemented.
And just any sort its way through our shipments.
Great Great Alright, well, thank you very much.
And your next question comes from Susan Mcclary with Goldman Sachs. Please go ahead.
Thank you good morning, everyone.
My first question is.
Touching on Europe can you talk about the <unk>.
Factors as we spoke about the fourth quarter and perhaps the cadence of that margin as we think about where you ended this quarter going into into the end of the year.
Sure that would be an area, where we are.
As Gary was talking about certain pricing actions in Europe, specifically, that's an area, where we've got sort of new actions that were implemented in the third quarter that we did not see any benefit of and we would expect as we move into the fourth quarter that price cost to be favorable.
In the third quarter for the Europe segments itself.
This cost was not favorable for the whole company was able to offset price offset inflation, but in Europe, specifically we.
We did not.
You think about margin improvement going from <unk> to <unk>.
The profile there are a lot of that pick up is really on the price cost side of getting the benefit of the pricing and then just improve throughput.
We've been able to manage through some of the supply chain disruptions that were a headwind in Q3, we've got those behind us and throughput is improving and so we'll get better operating leverage on the throughput and productivity from that as well that's what will drive the margin improvements in <unk> in Europe.
Okay. That's helpful. And then just going back to North America in the last couple of quarters, you've talked about those share gains and I know Gary kind of mentioned that in his previous response, but can you touch a little bit more on where you think you are in terms of share.
Do you think that the operational headwinds this quarter caused any shift in that or are you actually continuing to on a relative basis outperform a lot of your peers. Despite all the headwinds that are there.
Yes.
Product by product.
We've made some we've made some great investments and we've talked about our exterior fiberglass business. For example, we know that.
All of the product is very popular our customers and our channel partners really like it and we've been able to.
Outpace outpaced the market in growth, particularly in exterior and those lead times, while they've stretched out competitive commercially or still competitively at an advantage I think you can look across across the market and see that so we've got a winner there exterior is a great example.
Several years ago, we had problems in our windows market space and Windows right now across all markets.
But our operational improvements that put us in a position where we remain.
Better at least commercially.
That much of the market, we're picking up some share there as we're able to just segment use our segmentation work.
And ensure that customers that are buying gentlemen products generally across the board are benefiting from the ability to get better at our lead times on.
On windows, where they need them, so we've been able to pick up some.
Some additional share of wallet and some market share in that particular case as well. So there's two examples of.
One data product really across.
Our view and the other one being an operational view.
Got you okay. Thanks for all that color.
And your next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, Good morning wanted to make sure I understood that.
Backlog situation in Europe in light of the UK and France demand coming back what are backlogs, they're like versus normal times are the constraints similar to here and then will the incremental demand in the UK and France coming back will that exacerbate any issues there.
Yes, so we're seeing we're seeing order rates in the UK and France.
<unk> back in fact, they were starting to see.
Yes.
The areas that were most hit by Covid.
Covid shutdowns and the like over the last last several periods. So we've seen order rates in the UK and France, I think something.
Running like two times, what what the rest of Europe was running and.
That certainly stresses are are our operations a bit, but we're keeping up with that demand we've got more of an issue.
On the supply chain side in Europe than on on.
On labor constraints. So it has really been around ensuring that we're able to meet that demand based on on shoring up the supply chain, which is where our work has really been in Europe.
Excellent and then to make sure I understand kind of the overall labor improvement story that you guys are driving is it mostly north America. So far and then if I think about the labor improvement now and where its billing how much of that is attracting new labor.
And how much of that is the efficiency.
New Labour that came maybe earlier in the summer versus in the fall.
Yes, it's kind of a little bit of a variation on the same theme when you look at the different segments, but in North America in particular.
We source.
Some labor.
Issues in.
In the beginning parts and kind of into the middle of third quarter, and we really feel like we hit the trough and in turn that corner, we worked with our own our own folks and really went to as I call. It a hyper local approach to attracting.
Tracking new personnel to work within our plan, but we also worked on the retention piece as well so.
The the.
We've turned that kind of stem that tide into September with like 80% to 85% of that gap being filled and we managed to improve that into October. The work then is to retain a boe to make sure that we get the best productivity. When your average tenure in the plan goes down.
Obviously productivity suffers a little bit in throughput. So our Jem initiative focused on training focused on retention is really paying off for us. So we're starting to see the benefits of throughput on a daily basis improved day over day in those plans, so that's where John bridge that earlier.
That's where part of that benefit comes from in the fourth quarter and will continue to work for us going forward.
Excellent. Thanks.
Your next question comes from Phil <unk> with Jefferies.
Please go ahead.
Hey, guys.
<unk> throughput is up sequentially any color how much.
Is it up sequentially, how far are you from normal in the fourth quarter, whether it's North America and Europe, and then just given how strong your backlog sound. When do you actually expect volumes will flip positive year over year, just if I heard John correctly, it's probably still going to be.
Modest negative on a year over year basis in the fourth quarter.
Yes, that's correct. The last part of your question was trackers, we're still expecting volume mix headwind in the fourth quarter. So while we've made a lot of improvements we're still not back to where we can be and meeting all the demand that's in our backlog.
I would say it's early.
In the third quarter at this point, but what I would say is.
In North America, specifically in terms of sort of average shipments per day.
We're seeing improvements in the sort of.
Sequentially from October over September in the high single digits close to 10%.
Ballpark in terms of sort of average shipments per day. So hopefully the magnitude there that we are seeing meaningful results clearly with the level of our backlog though.
More work to do there as you think about in Australia, just opening back up so after.
Quite a bit of.
Mandated shutdowns due to Covid, we had great order rates in Australia as well so the backlogs are pretty pretty pretty nice there, but we're just opening back up in a lot of areas. There. So that's going to be a significant spike in.
Capacity and throughput as we ramp back up again.
Also going to be dependent on how fast contractors can actually take off what they've ordered so so we expect that to be.
A tailwind on throughput for quite some time as well.
Got it that's helpful and appreciating inflation is really hard to project are you seeing any stabilization in any of your pockets of.
Inflation.
If it's stable from here now do you need additional pricing actions to stay favorable from a price cost standpoint, when we look at the 2022. The reason why I asked because it sounds like fourth quarter, you should be in a pretty good spot where margins are expanding so just trying to get a better feel if the pricing you guys are potentially going after for next year will that have a bigger.
Impact on margin drop throughs. Thank you.
Yes, I think the.
The stable is there any stabilization that is happening and happening at a higher level and there is still a bit of a tailwind or a headwind excuse me in in the fourth quarter that we're overcoming but youre right in that we will have a favorable.
Price cost in the quarter, and we expect that to carry into the new year, So new pricing as we look at it continues to look at.
The various inflation inflationary commodity and freight and looks to cover that we expect that the new pricing will start to be added on top of that you are kind of getting more into that normal cycle, but at a more accelerated level.
Of course.
Got it okay I appreciate it.
Yeah.
And your next question comes from Josh Chan from Baird. Please go ahead.
Hi, Good morning, Gary John and Chris.
I guess my first question on the guidance EBITDA change between now and October.
Could you just kind of ballpark for us what.
And what got worse and am I right to assume that the incremental headwind.
Relative to Q4 versus your expectation.
Yes.
Good morning, Josh It really comes down to inflation and more specifically on freight.
In terms of when we gave an update in early October until now it's just a very dynamic environment in terms of what we're seeing in yes and.
In terms of the.
Cause the $7 5 million or so at the midpoint that was implied reduction for the full year of EBITDA on that primarily came out of Q4 in terms of what we were expecting about a month ago.
Okay. Okay, that's fair.
And then on the supply constraint side of things it sounds like labor is getting better could you just talk about sort of the ability to get supplies.
<unk> and things of that nature, So and then overall.
Do you feel that your ability to produce has really gone a trough and that maybe it becomes less and less of a constraint going forward. Thanks.
Yes, I think I think you're right I think we have trough and we're on.
On the upswing for the most part on the supply chain.
Stability piece.
It has been in different places and it's been that.
Somewhat discrete we worked through it we've been able to in source.
Our flexibility in the way that we're structure, we've been able to in source.
Certain components to make sure that we're able to continue to supply we've been able to resource and we've also been able to do what.
To be fair to sort of look at the parts that we have we can do what we call cut from referred to which is.
An opportunity for us to look at the components that we currently have and content to the right size or to modify them to ensure that we can take care of customer.
Customer supply of course Theres some.
There are some implied cost to doing that but it takes care of customers and the throughput is clearly an leverage is clearly a lot better for us than sitting idle, but for the most part I think we've been able to address most of that you are bigger bigger straight North America was the throughput piece that we talked about I think that's behind that I know thats behind us.
And as we continue to see the sequential improvement in throughput.
There, we see the improvements that we'll see in Australia as that opens up in the same work in Europe, I think we're starting to see sequentially.
Sequentially improved results going forward as we are able to get that revenue reported.
Okay, great. Thank you both for the color.
And your next question comes from Mike Dahl with RBC capital markets. Please go ahead.
Hi, This is actually Chris on for Mike Thanks for taking my questions.
Can you help us quantify the impact of the channel mix headwind you guys saw this quarter and when that dynamic is going to abate.
And if you exclude that which does your four fourth quarter guide so assume that core volume growth is negative on a year over year basis.
Hi, good morning, the channel mix headwind that we talked about was really specific just for Europe.
As it relates to that retail versus project business on a year over year basis that was.
Call it $3 million to $4 million of EBITDA range in the third quarter as we think about moving into the fourth quarter.
I'd say, we're assuming that gets better.
It does not fully behind us.
In the fourth quarter, so it's not hugely material for the total company, but the comment was specific to Europe.
Got it that makes sense.
My second question.
Going back to the implied EBITDA margin outlook.
There's been a decent bit of variability in margins on a regional basis I was hoping you could flesh out some of the assumptions in terms of margin performance across your regions and whether or not you expect year over year margin expansion across all of your segments.
Sure I would say that in the fourth quarter or sort of what's implied in our guidance would be that North America would be the stronger.
Margin improvement.
Europe call it close to flat and then probably.
So a slight headwind.
In the fourth quarter in Australia, given some of the shutdowns that we had coming into that we started the quarter with still some of those shutdowns in Victoria and some other locations, where we were just unable to get to get product out the door. So we're absorbing absorbing all the overhead without getting all the throughput so.
In North America would be sort of the strongest margin profile. The three in terms of year over year improvements in the fourth quarter.
Understood I appreciate I appreciate the color.
And your next question comes from Michael Rehaut with Jpmorgan. Please go ahead.
Hi, Good morning, this is Maggie on for Mike.
First question on share repurchase following day.
8 million shares are purchased in the third quarter could.
Could you remind us how much is left on your authorization and talk about the potential for further.
Share repurchase going forward versus maybe other areas.
Capital allocation.
Sure in terms of the most recent authorization that was updated earlier in the year about $150 million approximately last one on that authorization.
I would say that as we think about capital allocation.
Look at it through.
Sort of disciplined returns focused lens.
We're certainly prioritizing investments that would have the highest return on a risk adjusted basis to us here in the third quarter, we saw a very compelling opportunity given valuation and our expectations for future growth to make an outsized investment in share repurchase activity in the third quarter as we go forward it will be.
Balanced between M&A share repurchases internal investments.
Ending on what what opportunities we have in front of us, but we're committed to drive improvements in return on capital from that perspective.
Got it.
Thank you and then.
<unk>.
Going back to the last question you mentioned that the channel mix headwind with specific to Europe.
As I look at the volume mix component of North America.
Was that entirely volume driven and then as I look forward over the next few quarters.
Some of the new products that you've highlighted thank you begin to have flowed through can you talk about how youre thinking about the potential for any mix shifts in the North America segment.
Sure in the third quarter year over year in North America, there actually was a slight pickup in.
And mix as we started to see a special order activity.
So that was favorable.
Unfortunately that was.
<unk> five.
The volume headwinds that we had just from a throughput standpoint of not being able to get product out the door from some of our labor and Covid constraints.
Constraints that we had so there was a slight mix benefit that was in there, but we just didn't really get to see the benefit of that in our reported results given the throughput side of things.
Okay.
Thank you.
Your next question comes from Reuben Garner with benchmark.
Mark. Please go ahead.
Thank you good morning, everybody.
Most of my questions have been answered I just have one clarification on the backlog.
Yeah.
At the time of the order or when the product is.
Shipped.
Sorry did you ask if pricing was when prices that we missed the first part of that.
On the backlog.
<unk>.
That's in backlog are the is the pricing.
For those products that at the time of the order or when the product is shipped.
Yes.
Thank you for that clarification, yes for the most part is set at the time of the order.
Typically we have relatively short cycle order cycles.
They've been protracted.
This particular period, which is a little bit unusual.
But for the most part that pricing needs to work its way through that backlog and.
And we will see that that's why we see the benefit in the fourth quarter pricing that we put in in the third quarter.
Got it. Thank you good luck navigating through the rest of the year.
Thank you.
And there are no further question at this time I will turn the call back over to Gary for closing remarks.
Well. Thank you all for your interest in <unk> and for participating this morning in our call.
We look forward to catching up with you all over through the quarter and talking about.
Our performance in the fourth quarter.
A growth trajectory for 2022, and our commitment to our launch rate charges targets and the strategy that we put forth at our Investor day earlier in the year again. Thank you for joining US. This morning look forward to catching up.
This concludes today's conference call you may now disconnect.
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