Q3 2022 JELD-WEN Holding Inc Earnings Call
Yeah.
Good morning, My name is Rob and I'll be your conference operator today.
At this time I would like to welcome everyone to the gel one holding Inc. Third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone.
Phone keypad, if you would like to withdraw your question again press the star one.
Kristie Jones director of Investor Relations you May begin your conference.
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 Dave Nord Chair of the board of directors.
Kevin Lilly interim CEO and Julie Albrecht 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 1095.
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.
Jud one does not undertake any duty to update forward looking statements, including the guidance, we are providing with respect to certain expectations for future results.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
A reconciliation of these non-GAAP measures to their most directly comparable financial 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 Dave.
Thanks, Chris and good morning, everyone. Thank you for joining us today as chair of <unk> Board of directors I'd like to start this morning's call with some brief remarks.
Our third quarter performance and share some of the board's area of focus.
Before I turn it over to Kevin and jewelry to walk you through more detailed results.
Summary in the third quarter, we delivered solid revenue and EBITDA improvements over the prior year.
I am pleased that management has been able to deliver this performance really in light of challenging macroeconomic environment and.
And some significant internal changes as you're probably aware of.
The board is clearly supportive of management's actions to drive change and ensure that jetblue and reaches its full potential.
We're committed to improving the financial performance of the business and delivering more value for shareholders.
We've already taken a number of actions in the past few months.
To help us achieve this goal first as I'm sure you are aware, we appointed Kevin Lilly as interim CEO .
You'll hear from shortly the.
The search for a permanent successor is progressing well we've identified a short list of qualified internal and external candidates.
We're working closely with an executive search firm to further narrow our list we.
We expect the new CEO to be an exceptional operator, who possess a strong knowledge of both the capital markets and shareholder value creation.
Well I can't speculate on timing, we're actively moving through the process, but making sure that we find the right leader for.
For the future success of Jetblue.
Part of the Board's responsibility is to build on <unk> core of senior leaders by continuing to strengthen the management team as well.
And we've made several leadership appointments this year, including Julia <unk>, our new CFO , who some of you may have talked to.
She joined US in July so you'll have a chance to hear from her shortly.
We have also refreshed our regional leadership in all our business segments, both Julie and our regional leaders.
Has extensive management experience and will utilize their expertise to refocus their respective areas of the business.
That improved performance one of the actions in the area of streamlining the company.
We initiated a strategic review of our Australasia business with a goal of maximizing value for both <unk> and the business.
The process is well underway, but of course, no assurances can be made regarding the outcome or timing of our review.
But that said we have some strong interest in the business. Thus far as we move forward, we're certainly committed to sharing any meaningful updates with you as they materialize.
Finally, we continue to seek out that fresh perspective to the board recently appointed Kathy Halligan as a new director in September .
Kathy is diverse skill sets will be a great asset to our board, particularly in digital transformation marketing and E Commerce.
As these actions demonstrate the board and management team are fully committed to improving our results and maximizing the full potential of the company.
As a recognized leader in the global building products industry <unk>.
<unk> brands manufacturing capability and broad customer partnerships positioned the company for long term success.
Spike near term headwinds in markets. We serve we know there are attractive and durable drivers of long term growth.
So with that let me turn the call over to Kevin to expand on these areas and provide more details about some of our near term actions before Julie It takes on.
And describes a little more of the detail of our operating results Kevin.
Thanks, Dave Good morning, everyone and thank you for joining us today.
Since stepping in as interim CEO of javelin, it's been my mission to help guide our team through a period of market uncertainty and organizational transition I care deeply about the company and my teammates and believe in our potential to succeed.
The objective is to drive focus across the organization to improve execution and performance while laying the groundwork for further strategic actions of the new <unk> CEO can hit the ground running.
I firmly believe that this company has a strong foundation that will help deliver our long term success for more than 60 years javelin has grown through building strong partnership making investments, both organic and inorganic to serve new customers and markets and embedding innovation and sustainability into our strong portfolio of <unk>.
High quality brands.
There are challenges in the near term we are positive on intermediate and long term demand potential in each of our end markets that remained under build for both new residential homes and existing homes that are increasingly in need of renovation.
And we remain confident in our ability to drive profitable growth through innovative products and services that meet the unique needs of our customers.
However, as we've assessed recent financial performance our results are not reflective of the full potential tailwind in recent quarter, we suffered from taking on too much without sufficient alignment and accountability at every level of the organization.
The result was inconsistent execution and not enough bottomline impact.
We understand the prioritization and execution must improve and progress must be reflected in our bottom line.
To this end, we're taking decisive actions to improve results and ensure the fundamental strength of the business lead to meaningful shareholder value creation.
Now before I discuss the current actions were taken to improve execution and financial performance let.
Let me first start with the highlights of our third quarter results.
We generated revenue of $1 3 billion and adjusted EBITDA of $116 5 million, an increase of 13% and 18% year over year, respectively.
All segments were positive in core revenue growth with price realization contributing 15% and volume mix, adding 3%.
North America led our regions within 23% increase in core revenue in the third quarter.
EBITDA margins expanded this quarter by 40 basis points to 9% due to favorable price cost improved operating leverage from volume mix and positive productivity.
Julie will provide more detail on our financials and outlook shortly.
As we head into Q4 and next year, we face an increasingly challenging macroeconomic environment with persistent inflationary pressures and a softening housing market in North America and Europe . We're.
We're taking a fresh look at our business to find new ways to reduce the impact on our financial results.
All positioning the company for success.
As Dave shared we are taking steps to streamline and strengthen the company to improve our bottom line over the short and long term as we continue to navigate these near term challenges.
Now, let me share several actions, we're taking to improve our cost structure and profitability.
First we continue to right size the organization in line with our customer demand as the housing market continues to soften. This includes reallocating resources to where demand is strongest while scaling back in areas, where we're seeing softness.
We are also reduced management layers to lower cost and improve agility of decision making.
Second we've taken an end to end look at our supply chain to better manage our raw material and freight spend while ensuring improve security of supply to our customers.
We've taken steps to optimize our supplier partnerships.
In some instances moving to multi source and in others, reducing the number of suppliers that take advantage of our purchasing power in both scenarios. However, we're taking the opportunity to reengage with our suppliers to create mutually beneficial outcomes.
And this past quarter, we hosted a two day supplier summit in the U S with approximately 75% of our partners.
We also held one on one meetings in Europe with key strategic suppliers.
The purpose was to strengthen our partnership by better understanding each other's respective needs discuss collaboration opportunities and identify ways to take cost out and improve sustainability of the value chain.
Third we're also taking steps to simplify and streamline our business to focus resources on our core assets and product lines.
The strategic review of our Australasia business that Dave mentioned earlier falls into this category.
So the closing of our mountain UK stare the windows business that will conclude by the end of the year is another good example.
But from a day to day execution perspective, this is about prioritizing initiatives and aligning the appropriate resources to deliver quality execution.
Lastly, our segment leaders are taking a customer centric data driven approach assessing profitability and growth potential across product lines channels geographies and facilities.
Julian I have worked together with our senior leaders to institute more process discipline and governance to deploy appropriate resourcing and execution oversight.
Our goal is to ensure the organization can more quickly implement measures to accelerate profitability and growth.
Before I hand, the call over to Julie I'd like to take a moment to recognize our global associates and their continued dedication to the company and our customers, especially during this time of significant change and external challenges.
In our recent annual employee engagement survey, we had extremely strong participation rates and experienced improvement in nearly every key measure year over year.
Strength of our engaged and talented global workforce is what gives me tremendous confidence in our potential as an organization.
I'll now hand, the call over to Julie to share more detailed financial results.
Thank you Kevin and good morning, everyone I'm excited to join you all for my first call as <unk> CFO .
I'd like to begin with some perspective on my near term priorities to improve our financial results.
Since joining in mid July after considerable time getting to know my finance team and many other associates and I've also visited several of our manufacturing facilities.
Feel strongly that we have a team eager to win and ready to help develop and implement a framework to improve our operational and our financial performance.
Im focused on four areas that will drive shareholder value and strengthen gelled win for the benefit of all stakeholders and you see these on slide seven.
First is improving our cost structure to address the cyclical and structural opportunities to enhance profitability.
Second is data availability quality and analysis. So we can better use data to guide our decision, making on the commercial side as well as to improve our operation.
Net is increased rigor and alignment around capital expenditures with a clear linkage to our strategy and optimizing returns.
And lastly is promoting a culture of engagement and accountability with finance being a strong business partner that helps gel blend achieve its financial targets.
You'll hear me talk more about each of these in detail in the coming quarters and in our conversations and please feel free to ask me any questions you have on these topics.
I also want to highlight that I am committed to providing useful information that helps you better understand <unk> overall business and financial results.
Now to our consolidated results for the third quarter, which you can see on slide eight.
As Dave and Kevin had mentioned, we delivered solid revenue and adjusted EBITDA improvement over the prior year period.
Our revenues were approximately $1 $3 billion and our adjusted.
<unk> EBITDA was nearly $117 million, which resulted in a 9% EBITA margin of 40 basis point improvement compared to the prior year.
Adjusted EBITDA benefited from favorable price cost <unk>.
The impact of positive volume mix and improved productivity, which were all partially offset by higher SG&A expense.
Shifting to our GAAP results.
Reported a third quarter GAAP net loss of $33 2 million compared to net income of $40 5 million in the same period last year.
This quarter's loss was primarily due to a $55 million pre tax noncash goodwill impairment charge in our Europe segment, reflecting their challenging operating environment.
There is additional information in the appendix about our GAAP result, and our non-GAAP financial measures.
Now as you see on slide nine our 13% sales growth was driven by core revenue growth with price realization, having a 15% positive impact and increased volume mix growth contributing 3%.
These positive drivers were partially offset by the impact of foreign exchange from the stronger U S. Dollar.
On this slide you also see a breakdown of key revenue growth drivers by segment.
Core revenue growth was positive and improved sequentially across each of our segments.
Price realization was again strongest in North America at 17% followed.
Followed by Europe at 13%.
Ill show Asia increased 10%.
As we realize a full quarter benefit of price increases implemented during the second quarter to combat persistent inflation.
Moving to volume mix, North America, and Australasia volume mix grew by 6% and 4%, respectively, while Europe decreased 3%, reflecting the increased difficult operating environment in that region.
I'll now review our segment highlights for the third quarter, which are on slide 10.
Beginning with North America, net revenue increased over 23% driven by strong price realization and positive volume mix, partially due to an easier comparison due to the labor challenges experienced in the third quarter of last year.
Increased demand in this quarter was strongest within windows exterior doors and company owned distribution.
Adjusted EBITDA margin in North America increased 120 basis points to 12, 6% due to favorable price realization and positive volume mix, all partially offset by higher SG&A expense.
Net revenue in the Europe segment decreased five 5% driven by foreign exchange headwinds, partially offset by 10% core revenue growth.
During the third quarter macroeconomic conditions deteriorated in Europe , driven by the continued war in Ukraine.
<unk> inflation and rising interest rates.
All of these factors are negatively impact the performance and near term outlook of our Europe business, which is reflected in the goodwill impairment we took this quarter.
Europe's adjusted EBITDA margin decreased 150 basis points to five 9%.
The decrease in margin was driven by significant cost inflation, including a more than 80% increase in energy cost year over year, and the negative impact from lower volume mix, partially offset by productivity savings.
I'll show Asia revenue increased almost 6%, including a 14% increase in core revenue, partially offset by the negative foreign exchange impact from the stronger U S. Dollar.
<unk> was strong for windows and doors and generally remains healthy overall, despite persistent labor challenges in our building customers.
Australasia adjusted EBITDA margin increased 90 basis points in the third quarter to 12, 8% due to strong price realization and positive volume mix, partially offset by higher SG&A expense.
Now looking at slide 11 operating cash flow used during the first nine months was $73 million.
Compared to operating cash flow generated of $135 million during the same period a year ago.
We generated positive operating cash flow during the third quarter of $92 million, which was in line with the prior year.
Free cash flow used was $131 million during the first nine months of the year, but was positive by approximately $70 million during the third quarter.
We are focused on improving working capital and our segment and expect to generate positive free cash flow in the fourth quarter, while positioning ourselves to significantly improve cash generation in 2023.
Our balance sheet and liquidity remain in good position, we ended the quarter with total cash of $200 million.
And liquidity of $560 million, our net debt leverage decreased to three six times from three eight times last quarter, but it does remain elevated from two eight times at the end of last year.
This increase in leverage compared to last year was primarily due to lower earnings increased working capital, reflecting both inflation and supply chain challenges and from repurchasing $132 million or approximately seven 6% of shares outstanding as of year end 2012.
One.
This is a good place for me to comment on our capital allocation priorities first we will continue to invest organically specifically in projects that exceed our internal return hurdles and strengthen the financial position of gelled win.
We're developing new processes and tools that create more rigor around our capital expenditure process, while ensuring alignment with our segment strategies.
In addition, we are focused on reducing our financial leverage and we are targeting a net leverage ratio of less than three times in the near to medium term.
We will also continue to evaluate smaller acquisition opportunities and other capital allocation options, depending on a number of factors, including our net financial leverage and our cash generation as well as the returns achievable from these capital deployment opportunities.
Now moving to slide 12, I'll provide our current view of market conditions in each segment.
In North America looking at almost any leading indicator of activity. The housing market is slowing and is likely going to continue moderating.
While repair and remodel our R&R activity is impacted by many of the same factors similar to prior housing cycles, we do anticipate R&R activity to fare better than residential new construction.
We started to see orders moderate during the third quarter, particularly in our traditional channel and this softness has persisted through October as residential new construction activity slows and our distribution partners align their inventory to end market demand.
And while demand is likely continuing to soften in the coming months I do want to express our optimism over the intermediate and long term North America remains significantly under built relative to demand for new residential homes, while the average age of existing homes continues.
To increase.
In Europe , the economic situation continues to deteriorate largely due to the effects from Russia's invasion of Ukraine.
This conflict has driven broad inflation and rising interest rates across the region.
Within the residential portion of our business in Europe for the past few quarters, we have felt softening demand in residential new construction dating back to the beginning of the COVID-19 pandemic given the linked <unk> build cycles compared to North America.
More recently demand has significantly slowed for repair and remodel projects as consumers pulled back on discretionary purchases in response to higher energy costs and the uncertain macroeconomic outlook.
Our channel partners, particularly within retail are also aligning their inventory levels to softening demand.
And then Australasia demand for residential new construction and repair and remodel largely remains healthy and we continue to see good demand for our products given the backlog of existing homes and extended build cycles.
While visibility for our residential new construction is limited, we expect repair and remodel demand to remain healthy and for the backlog of existing homes to drive good demand for our business through at least the first half of 2023.
Now going to slide 13 after.
After affecting current market conditions, and our financial forecast, we are reaffirming our full year core revenue guidance of 10% growth, including 4% to 6% consolidated revenue growth.
<unk>, given persistent inflation pressures and lower than expected productivity savings, we are revising our full year adjusted EBITDA expectations to be between $400 million and $420 million from our previous guidance of 430 to 400.
Third $50 million.
On this slide you see the primary drivers underlying our updated guidance expectations for the year.
Increased inflation, particularly for raw materials and energy is the biggest factor followed by lower than expected productivity improvement.
This reduced expectation for productivity cost savings is primarily due to underperformance in North America in the third quarter due to labor and material usage inefficiencies.
Partially offsetting these negative drivers are lower SG&A expense and favorable foreign exchange both relative to our prior guidance.
We've also taken a fresh look at our Capex guidance based on our run rate and Capex pipeline. We've updated this guidance to be between 85 and $95 million of Capex spending this year.
And as described we are taking necessary actions to lessen the impact on our financial results softening end market demand and persistent inflation file tis in the company for longer term success.
While we have not overcome the negative earnings impact from these headwinds. This year, we have taken cost actions that we expect to deliver total annualized savings of more than $80 million.
However, we have not been able to take costs out as quickly as we need to and we continue to actively identify and develop additional actions to improve margins.
In closing I'd like to reiterate what Dave and Kevin said earlier.
We have the foundational elements in place to drive significant improvement in our financial performance, including a talented and engaged workforce.
Strong portfolio of brands.
And customer partnerships that we have established over 60 years of business I am confident that the initiatives we have in place and others that we are developing will help gelled wind deliver its potential for long term growth and profitability.
We'd now like to take your questions operator.
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.
First question comes from the line of Don <unk> from UBS. Your line is open.
Good morning, guys. Thanks for taking my questions.
The first one is Julie maybe you could talk about what drove the elevated SG&A and overall corporate expense in the quarter and do you think this will normalize as we move further into the fourth quarter.
Yes, sure Hey, John Yes. This is really a couple of things driving that I mean, one thing is.
The timing and amounts related to incentive comp expenses I mean, there are various drivers there when you look at kind of year over year and quarter over quarter as you can imagine.
Obviously in each quarter, we are assessing what our.
Second payouts are under our Varicent various incentive plans and so when we look at this Q3 versus what we were doing last two or three they were just higher expense this year due to different dynamics.
The other thing is really higher medical claim expenses.
Just trends and increased activity there a little bit of obviously inflation continuing in medical costs as well, but really those are the two main drivers to the higher SG&A.
We are taking cost out of our SG&A line as part of our cost reduction initiatives.
Those are kind of ramping up in Q4, and then we've got additional actions that will be taken kind of rolling into 2023, So generally speaking.
I don't expect anything really unusual going forward. There obviously the earlier this year right. We've had some other income that was higher than we would've expected thats normalized more in Q3.
And so I would probably expect.
Q3 levels, maybe a little bit lower as we wrap up this year.
That's helpful. Thank you and then Dave.
In your CEO search are you looking for individuals with building products or industrial experience. In addition to sort of the characteristics that you mentioned before.
Certainly that's one of the characteristics, it's it's not an absolute necessity certainly that.
That's an advantage.
But the.
The right level broad experience leadership capabilities.
Capital markets experience.
It really depends we've seen.
Right.
List of candidates a lot of interest in.
Sure.
And there is a there is a number of candidates who have building products experience in various areas including in.
Some past experience in doors and windows, but.
It will really.
That's one element.
We will consider along with many others.
Got it thank you guys.
Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Hey, good morning, everyone. Thanks for the color so far.
So trying to understand the back half EBITDA guidance a bit better.
Walk down the midpoint by $30 million and you all have in your slides.
Higher inflation reduced expectations for Jim productivity savings any chance you can just break out the magnitude.
Dollar amount based on those two buckets and with the incremental inflation just trying to see if you can quantify the incremental pressures between North America and Europe .
Yeah, sure Jim and good morning.
Yes, I guess.
Inflation impact in the second half is slightly more.
More negative I will say that the negative impact from the lesson productivity.
Inflation headwind versus our prior expectations as higher by around kind of that 20% to $25 million range.
And I will tell you that energy both in Europe , and North America is cost $15 million or so of that increase.
Just I mean, I think you can imagine in both regions energy prices Theres just been upward pressure right as we've moved through this year and it was while we expected some of that.
Absolutely didn't expect what we're really looking at here and again I guess I will say in a lot of that is in the fourth quarter right. So.
That's really where we're seeing more of a drop off in our margin expectation than what we experienced actually kind of broadly in the in the third quarter.
The other big bucket, there would be just continuing pressure on certain of our raw material costs, so kind of energy and raw materials are what's driving that higher inflation expectation when it comes to productivity again, thats kind of probably in that $15 million to $20 million range.
A lot of that was in in the third quarter, although a little bit in the fourth quarter as well.
And kind of just speak to that for North America, one of the drivers.
Was ramping up a couple of our new products and really for various reasons, just a little more inefficiency in those ramp ups than we were forecasting and so that was just one specific item driving some of that weaker productivity.
So I guess, what I would say generally speaking is.
As we entered the second half we expected second half margins really again for the second half to be closer to 9% and we're looking at closer to 8% and so and again a lot of that is then you can see that drop off there in the fourth quarter.
Okay. Okay. Thank you for that and then in the prepared comments you mentioned European volumes are down 3%.
The conditions were deteriorating.
A bit given the kind of energy crisis going on and I'm, just hoping you can give a little more color.
On the countries.
That you operate in and since we're a month into October .
Just what you are expecting.
How volumes trend in.
In the fourth quarter.
Thank you Truman I'll kind of start and then I'll hand off to Kevin.
We'll say in Europe in the fourth quarter I mean, we're looking at.
Around that 15% range of year over year volume decline and so that is a pretty big drop off versus what we had in the third quarter than what we've had so far this year. So that really again just reflect that really continuing weakness that we've already mentioned, but there are really additional color I'm going to hand off to Kevin yes. Thanks Julie.
Yes.
We're pretty much seeing.
With Europe .
Problems in pretty much all countries and with some of that we're seeing some of the volumes dropping.
Pretty significantly just due to those pressures, especially on energy. There's a lot of folks just worried about hitting their house as well. So some of those pressures and what we've tried to do through this is providing that transparency of where we see.
Some of those markets going forward and trying to be.
Accurate and transparent on where we see some of those volumes dropping from a demand side in Europe .
Alright. Thank you all for your time and good luck in the coming quarters. Thank.
Thank you thanks Truman.
Your next question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
My first question is actually a follow up on the response to trim and so if we look at the fourth quarter guidance.
Total you've got revenues I think implied down low single digits.
Up to 10% declines.
You have been running comfortable double digits on pricing so it implies quite a large.
Client and volume I think you just talked about Europe , maybe you could you talk about North America volume expectations for <unk> and if it's possible can you split out what the impact is in Europe .
Kind of customer destock versus sellout.
Yes, sure Mike I'll start with that so yes.
Yes, so maybe just kind of put it in context and so.
The fact that we're not changing our total sales guidance, 4% to 6%.
Core within that at about 10% growth as we've mentioned in our second quarter call that that then reduction was driven by pricing being better than we had expected, but volumes being lower and we mentioned volumes being flat to down 2% I will say at this point.
While we're continuing to expect that 10% core volume core revenue growth for the year, we do see pricing being a little bit stronger than we had expected three months ago and volumes being overall, a little bit weaker and so now I'd put us more at that kind of like two ish to maybe 3% down.
Kind of year over year, so that just kind of.
Grounds us end the year, when we look at the fourth quarter.
Pricing continues to be call it low double digit growth.
Volume at the company level is kind of we expect to be down kind of in that 567% and so that really is across the regions and so Europe is the leader there have already mentioned.
The expectation of down around 15%, but we do expect North America, and Australasia to be down kind of in that low to mid single digit range as well and so we are seeing really global weakness.
And demand.
Yes, just to add on to Julie's comments regarding North America, a lot of this has to do with kind of some of those.
Challenges were seeing.
Everything from the slowdown in the residential with.
Slowness in applications.
Permits starts et cetera, that's what we're kind of seeing it's pretty widely known that those market conditions are softening in North America. So some of the adjustments, but and as far as above.
Tucking related to that we are seeing some of that in.
Certain products overall, I think we're adjusting working with customers and suppliers to balance that out.
At this point in fairly decent shape, but somehow.
Thank you Brian .
Got it that's really helpful color.
And then my second question in your opening comments you talked about.
Kind of this resource exercise with respect to your heart.
Resource customers pursuing.
Profitable growth optimizing what youre, what youre targeting there in terms of.
The right customers the right sales I'm curious.
You embark on this exercise.
Is this something where.
It could involve just walking away from certain customers or product lines.
Any initial thoughts on what.
What a potential revenue impact could look like from us.
Yes, I'll take that one.
It really gets into honing down looking at all of our lines of business kind of independently and together.
To your point and areas that we do see low profitability, we're going to focus on.
Fix or repair process, but to your point as we evaluate those if we find that there are certain products or lines of business that are not sustainable.
Going to evaluate those and determine working with customers et cetera.
<unk>.
How we mitigate that whether it's.
How we improve repair or fix or how we may exit, but some of those it's still in process. We don't have any definitive decision.
Decisions on that but.
I think it's fair to say that we're looking at everything all things are on the table.
Got it okay. Thank you.
Your next question comes from the line of Michael Rehaut from Jpmorgan. Your line is open.
Hi, everyone and thanks for taking my question. This is Andrew <unk> on for Mike.
I just wanted to ask would you be able to give us a rough quantification of how you expect raw mats inflation to impact the P&L next year.
And any product launches that might help drive mix our topline growth.
Yes, good morning, Andrew.
We're not really prepared to comment yet I think.
Share externally on really detailed on our outlook for next year, we're working through our more detailed budgeting process right now and so I think it would be premature to.
Comment, especially specifically about raw materials.
As we move into next year.
Okay, great yeah that.
It goes in line with what a lot of companies are saying right now in our space would you be able to give us an update on any of the labor challenges or the Apple to use them you guys saw last quarter and trends within the plants.
Yes, I'll take that one.
It's kind of unique by region, but overall I think some of that has leveled out it is still a challenge.
Far as just labor shortages across the board, but I think from what we saw last year, we have mitigated some of that and then it stabilized to a certain degree.
Those challenges will continue but we're looking obviously at not just the labor, but also how we modernize.
Some of our facilities and.
You invest and with more automation as well.
Okay.
Okay great.
That's all for me good luck in the coming quarters. Thank.
Thank you. Thank you.
Your next question comes from the line of Matthew Bouley from Barclays. Your line is open.
Good morning, everyone. Thank you for taking the questions.
Just back on that topic of inventory Destocking.
I am curious.
I think Kevin you mentioned something around.
Specific categories I, just wanted to pull on that thread a little bit more just which categories.
Within the distribution channel do you think either have excess inventory or maybe over ordered in recent quarters.
And sort of as you look forward.
What do you think that Destocking impact might look like thank you.
I'll give you a couple of examples.
Kind of a mix, but I think in the area of exterior doors and also interior doors, we're seeing.
Some of that pulling back.
So I would say as far as where we see some of that with retail and traditional those are probably some of.
The major areas we are seeing.
And obviously, we're trying to adjust working with customers and our suppliers of balancing that but I would say those are the two that we're probably seeing some of that destocking and inventory focus.
Got it that's helpful and then.
Second one just on the topic of pricing.
Given the level of pricing that has been implemented and clearly a strong number there in North America.
I mean, I guess, it's kind of a follow up to the prior question, but.
Can you speak to sort of which categories and channels are better positioned to kind of hold price where it is or.
In those categories, where there might be some excess inventory.
Should we expect to see sort of more promotional activity going on thank you.
I think we're still seeing as Julian mentioned, some challenges with inflation et cetera, but overall, it's pretty dynamic I would say that what we are trying to do is make sure that.
So kind of we're focused on the value that we provide to customers and hope that price reflects that but of course. It does mean that we're going to be working with suppliers and customers.
As always balancing out to make sure that.
Mutually beneficial highway.
How we manage that so I think price it's been a dynamic we've been a little bit.
Kind of behind but it's also something we're trying to do too.
Work on inventory as well.
Alright, thanks for the color.
From.
Your next question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning, everyone.
Good morning Wonder for my first question can you talk a little bit to the mix shift that you're seeing has there been any noticeable change there as you think about custom versus stock products or anything that you are expecting as we go into year end.
Yes, I think.
Mix.
It's very dynamic I do think that.
For us working with a lot of our customers on the pro customer segment is obviously desirable.
I think we're seeing with some of the pullback.
Happening kind of across the board I don't have specifics as far as if we're seeing some of our.
More of the custom or traditional versus retail.
Been a Mexico off the board, but it's something that we're trying to balance.
Okay.
And then.
Perhaps taking a step back and thinking about things bigger picture. There has obviously been an intense focus on the operations side of the business in the last couple of years and really driving some efficiencies and some improvements there.
You think about the go forward and positioning a new team in place how are you thinking of some of those efforts there where they sort of small within your priorities and anything that we should be looking out for or thinking about from that perspective.
Yes, I think it's a really strong focus as always.
Can you just talk about the gel one excellence model or Jem, which we've been implementing over the years and a lot of that has provided us some additional capacity in some optimizations.
I'd say going forward one of the things we focused on is really pushing that accountability within the region.
Down to the plant and function level. So I think what youre going to see in future quarters is a little more definitive plans of how we're managing some of that productivity as well as rationalizing and optimizing our footprint. So we have a lot of work going on in that area, but I do think that.
What's different to me is driving that accountability within the region the businesses.
One to the plant level, but also the function levels as well. So we've got some plans in place it's too early to comment but going forward, we expect to provide a stronger updates and progress on how we're doing in future updates.
Okay. Thank you and good luck thank.
Thank you. Thank you.
Your next question comes from the line of billing from Jefferies. Your line is open.
Guys.
I guess, sorry to harp on this Julie you mentioned that pricing is holding up pretty good I am still a little surprised the big step down in margins anything you want to call out just because it is a little sharper in the trough than we expected how should we think about decremental margins across the regions would be helpful as well yes.
Totally.
Yes, so as I mentioned earlier, we have entered the second half expecting our second half margins to be around 9% and again, we've had a really significant drop off in our outlook really specifically to the fourth quarter that really is most most dramatic in in Europe . When you think about just absolute margin.
Deterioration and so that is really driven by again in that region. The dramatic drop off in demand, but as well as this inflation I've talked about as well so that when you look at margins.
In Europe , I would expect them to be in the fourth quarter better than what we saw in Q3, but still pretty.
Pretty significantly down.
As the prior year and generally more in this range that we've delivered throughout 2022, obviously this year and then.
Just talking then about.
North America really.
I think there'll be able to deliver pretty consistent.
Margin levels kind of Q3 into Q4, and so while that is lower than we had expected earlier a few months ago.
We're not expecting as dramatic of a drop off versus our expectations. As we are in Europe , and then a little bit of weakness when it comes to Australasia, but.
Not as much and again their numbers since they are only about 10% 15% of our business really just overall have less of an impact. So hopefully that helps that really Europe is kind of a leader when it comes to.
How margins have deteriorated.
What we were expecting and especially in the fourth quarter.
And a little bit less dramatic absolutely in North America.
And then how should we think about decremental margins by segment.
Decremental volume.
Volumes declined.
Hello, Yes leverage.
Yeah.
Yes, I mean.
I don't know that I have the specifics there I mean volumes are.
And again, we're expecting volumes to be down like I've already mentioned.
In Q4, and again most dramatically in Europe . So.
But I can't really comment right now on how specific that is again really a combination, especially in Europe of the lower volumes and more significant inflation.
And then I guess for 2023 and also you guys are prepared to talk about this you've been able to <unk> been very successful in taking price even in a softer demand environment.
How should we think about your ability to kind of maintain pricing and push price to offset inflation any updates.
Any potential major line reviews on the horizon, particularly in North America, and the retail channel. Thanks, a lot guys.
Yes, I think thats always an area of.
A focus we are working closely with our customers, especially in the retail side overall as far as price as I mentioned before it's something that we're going to have to balance.
We are still seeing some of those inflationary pressures and also some of the recovery we've been behind on that recovery, but like I mentioned to it does.
Really involve our close relationships with suppliers and customers to kind of talk through that we think price is one component.
That we need to measure, but also gets into the overall value for our customers and that's a conversation that happens really customer to customer about what warrants the price.
So we're going to do our best to manage that but.
It's going to be an ongoing dynamic.
And your next question comes from the line of Tim <unk> from Baird. Your line is open.
Well, hey, everybody good morning.
Brian .
Maybe just on the backlog.
Exiting the quarter, where does your backlog sitting at maybe just in North America versus versus what would be kind of typical at this point in the year.
Yes.
I would say that we're in.
Not a real heavy backlog business.
I would say that we are seeing.
Some of those reductions.
Year over year.
It's not so much but definitely quarter to quarter, we're seeing some of that drawdown.
I think from a overall perspective on backlog.
In some places we are pretty healthy.
In our Australasia business, but North America, specifically to your question.
That's one we're seeing a little softness, but that's the one we're trying to balance with inventory levels and working with our.
Our entire supply chain going forward, but we are seeing some.
Pressure on the backlog just because of the demand softening because of.
The overall reductions in the residential new construction.
Okay. Okay.
And then I guess, you've got the strategic review and Australasia, that's ongoing I mean.
How are you thinking about maybe the rest of the portfolio and there could be maybe be kind of a larger strategic review that could be on the table just Europe in windows in the distribution business here in North America.
And components I think it's just not clear that all of those businesses need to kind of strategically be together. So I'm just kind of curious what's your opinion on that is.
Yeah, I'll start and.
Dave can jump in as well, but at.
At this point in time Australasia is the only part that we are doing the formal strategic review we are focused on reviewing all segments to your point.
But at this point in time, it would be premature to discuss any other options. While we are focused on.
Is how we adjust to the challenges in Europe and reviewing plans.
We kind of rightsize that business North America, as well like I said doing line of business reviews to make sure we've got good visibility and transparency across our product lines.
So we can kind of build that into our future plans, Dave anything else you want to add.
Yes.
That's right I think.
One of the things to do.
Keep in mind this is.
As Kevin talked about one area.
This for us is simplifying.
<unk> bye.
But that includes Kevin mentioned that we probably took on too much the team took on too much to execute effectively so.
We're focused right now on.
The Australia business improving Europe .
There's still a lot of work to do within the North American business.
Even on things that we have talked about.
And then executing on but when you look at the footprint rationalization, but your point on product lines Thats come up before I mean there'll be.
Ongoing evaluation as there always is.
But some of that might be more medium term or longer term.
Okay. Okay.
Appreciate the thoughts good luck on the rest of the year.
Thank you.
Your next question comes from the line of Joe <unk> from Deutsche Bank. Your line is open.
Thank you and good morning, good morning morning.
Yes in response to an earlier question I don't think I heard this covered but can you talk about the relative pricing in the quarter within North America for doors versus windows.
Yes, we don't I mean, yes, we do.
Don't really get into that level of detail. So I think you can assume nothing terribly unusual there but that's.
Thats not information, we typically provide.
Okay, even just on a directional basis, not maybe a number but it was doors stronger than windows or anything like that.
I don't think there was anything unusual there between the different kind of market segments. So I think you can assume that it was pretty reasonably balanced across the north American portfolio.
Okay, Great and then Julie on cash flow can you, maybe just walk us through a couple of different scenarios that could play out for sources and uses of cash over the next year you talked about working capital management, you have the potential asset sales out there.
Just how you might prioritize the uses of that cash specifically as you look to bring down leverage below that target.
Yeah, absolutely and you're you're spot on that we are keeping a close eye on different sources of funds as we move through 2023.
<unk> are one of our main focus areas is what we do control and that is obviously our earnings generation and our management of working capital and so those are really top priorities because we obviously have room for improvement in 2023 over what we've delivered this year. So so that's kind of like number.
One when you think about sources of cash.
But you are also spot on that we have a potential divestitures out there that are kind.
Kind of all or part of the activity that we're working on so then when you get to use is.
If we can deliver whatever amount of sources I mean.
As I mentioned in my in my prepared comments continuing to invest in ourselves and I think we have some improvement for how we manage kind of front.
Back of our Capex processes, but obviously, we will continue to invest in the business again in the spirit of kind of controlling what we can control we can control how we spend our capex dollars and generally are we getting the returns on those that we expect.
Absolutely deleveraging is a top priority, we do want to get down to that less than three times net leverage.
We could have a path to that absolutely during 2023, and so that's again kind of co top of the list with Capex.
And then you.
Kind of move into other opportunities right as we move beyond I mean, we've got various.
Potential for how do we want to I'll say invest in ourselves when it comes to footprint rationalization other types of call. It kind of transformation profit improvement activities that are beyond what we would be doing just in the normal course, and so thats another potential use of funds as we look at.
Really driving improvements to our profitability next year and beyond.
M&A share repurchase all of those are things that we will just review up very opportunistically as we move forward.
Thank you very much.
Sure.
Your next question comes from the line of Rubin Gardner from the Benchmark Company. Your line is open.
Thank you good morning, everybody.
Most of my questions were answered, but I do have one on next year.
And you guys can help us with kind of a bridge, obviously theres a lot of moving parts with.
Savings in cost.
Initiatives and pricing actions to keep up with inflation and then now the potential volume headwinds can you kind of I mean normally we would take volume declines the decremental margin on it to kind of figure out what the downside is but can you talk about what the offsets are to that.
Next year and kind of how to think about.
Downside earnings scenario.
Yes, I think it is.
Not a lot of guidance to provide for next year, but just to your point about things, we're going to do on the cost side and the.
Productivity side.
The balance some of things we need to do have a longer term.
This is what we're also trying to balance that with a short term stuff that we can do.
A lot of it has to do with the day to day stuff, we do in the Gen side as far as gotten driving productivity across our plants and operations, but.
Also.
As Julian mentioned strong look at our SG&A as far so from a cost structure, we're looking to make sure that we scale, but also with an eye on the.
The ability to scale back up.
In the future if demand goes the other way so I think thats one of the challenges. We have is making sure we can scale appropriately and get better indicators as far as making sure we're moving faster as the market adjusts.
Okay, and just a follow up maybe a different way to ask it.
Thank you guys were doing kind of in 2017 through 2019, you were kind of in the low 400 from an EBITDA perspective with single family starts in the eight to 900000 range is that.
Is there downside to that right now just because of some of the issues that have gone on or any changes in share or anything else.
Or can you just kind of frame it from that perspective.
Yes, we're really not going to get into that level of detail right. Now I think as we've already talked about and it's pretty clear from the market, especially as we start 2003, there is going to be volume decline I think.
Looking at second half I think it's a big TBD right across the regions, what's going on with interest rates, whereas the conflict in Ukraine.
Whereas that landed whats the status and so I think that demand on a full year basis next year is going to be really dynamic I mean, I think we kind of know it is going to at least start the year weaker and I think as far as Kevin has mentioned.
What we're very very focused on how do we mitigate.
On the bottom line.
The demand weakness that we're going to see so anyway, I think we've kind of got to leave it at that right now.
Understood. Thank you guys.
And your last question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.
Good morning wanted to think about the growth areas of our Allied VPI can you talk about how that is trending now both from a demand and operations perspective, I think you shared something about inefficiencies in the ramp up phase maybe share more on that and lastly was the lower capex.
Related to those two product lines.
Yes.
I'll take that one VPI, we're still seeing.
Strong demand in backlog and we've been adjusting for that demand and have mitigated a lot of that.
So thats, where good to see as we've kind of expanded to the east coast that business continuing to grow.
And giving us the right problems to work with which is how we expand capacity.
On the online side.
It's one that we still are confident that our product from a long term viability and sustainability standpoint, and energy efficiency that product.
I would say, it's ramped up slower than any of us would have liked.
We're still getting good demand, but from a production side and volume side, we're kind of in line with some of the forecast I would say some of the stuff, we're probably hoping to do here in Q4 is probably going to push into Q1.
And Theres really no connectivity between those new products and our lowered capex guidance. Those are there are other drivers around.
Taken a fresh look at priorities and Capex some supply chain delays here and there so kind of just a few different factors nothing really unusual with the lower capex for this year.
Okay helpful. And then last quick one for me you've talked about volume mix.
Range for Q4, maybe to focus on North America, or if you want to talk other segments.
Does that imply that pricing is still positive in Q4, but down from levels in the previous quarter thinking about the impact of solely the pricing one.
Pricing kind of year over year pricing growth in the fourth quarter.
He is a little bit below.
What we've delivered.
And I look at year to date pricing I think it's like kind of net 13% range year to date through Q3, and so yeah. I think Q4 is it more in that kind of 8% to 10%.
Range.
Sure.
So, yes, slightly down year over year, but still very solid.
Great. Thank you.
Sure.
And I will now turn the call over to Kevin Lilly for some final closing remarks.
Thank you and thanks for spending some time with us today.
As you heard we've delivered on expectations in a pretty challenging environment and some of those challenges are reflected in our near term outlook.
It's something that we've looked at going forward and I think we're confident and we have a very capable team to deliver and on a personal side just from somebody from the inside I can tell you there is kind of a renewed sense of urgency.
And energy to drive forward, we know we have a lot of work to do but as far as the alignment the accountability and.
The focus that we have.
As we simplify and movie operations forward.
We're looking forward to providing more updates on our progress in future calls, but thank you very much for your time today.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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