Q3 2024 JELD-WEN Holding Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the Jeldwind 3rd Quarter, 2024, our eons conference call.
and Ryan's have been placed from youth to preventing a background noise.
Speaker Change: After the speakers remarks, there will be a question and answer session.
If you'd like to ask a question during that time, press star, follow above the number one on your telephone keypad.
Speaker Change: If you'd like to look through our question, press star 1. I will now head to Dave's Call over to James Armstrong, Vice President and Best Relations. Please go ahead, sir.
James Armstrong: Thank you, and good morning. We issued our third quarter 2024 earnings release last night and posted a slide presentation to the investor relations portion of our website, which can be found at investors.jillwind.com. We will be referencing this presentation during our call.
James Armstrong: Today I'm joined by Bill Christensen, Chief Executive Officer and Samantha Stoddard, Chief Financial Officer.
Before I turned it over to Bill, 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.
James Armstrong: These statements are subject to a variety of risks and certainties including those set forth in our earnings release and provided in our forms 10K and 10Q filed with the SEC.
The jailed 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.
James Armstrong: Additionally, during today's call, we will discuss non-gap measures which we believe can be useful in evaluating our performance.
James Armstrong: The presentation of this additional information should not be considered an isolation for as a substitute for results prepared in accordance with gap.
James Armstrong: A reconciliation of these non-gap measures to their most directly comparable financial measures calculated undergap can be found in our earnings release and in the appendix of our earnings presentation.
James Armstrong: With that, I would like to now turn the call over to Bill.
Bill: Thank you, James, and thank you to everyone joining the call today.
Bill: As we continue our transformation journey, I want to start by recognizing the hard work and commitment of our team during these challenging times.
Bill: We've made progress in several key areas, positioning ourselves to navigate the tough ongoing market conditions.
Bill: That said, the softer demand environment did impact our results this quarter, which came in below our expectations.
Bill: However, we remain confident in our ability to align our costs with the current market, while laying the groundwork for future growth.
Bill: Today I will first provide an overview of the quarter.
Bill: Samantha will then walk you through the quarterly performance. Before I return to discuss the actions we are taking to adapt to current market conditions and how we're thinking about the future.
Bill: I'll begin with our third quarter highlights on slide four.
Bill: 3rd quarter sales and EBITDA came in below our expectations, largely due to continued challenges from softer volume and mix across both North America and Europe.
Bill: Well, the positive impact of our ongoing productivity projects helped mitigate some of these pressures. They were not enough to fully offset the headwinds we experienced.
Bill: However, we remain encouraged by the progress of these initiatives which continue to position us for stronger performance as market conditions stabilize.
Bill: Despite our team's hard work, we encounter several challenges during the quarter.
Bill: First, while our volume remained in line with the overall market, the mix was impacted in North America more than anticipated.
Bill: Consumers continue to trade down and delay large-scale remodeling projects that typically involve windows and doors.
Bill: Additionally, although housing starts have remained resilient, the sharp decline in multi-family and higher-end home construction has significantly affected our VPI and LaContinua businesses which thrive in these markets.
Bill: it
Bill: Second, we faced quality and delivery challenges across several of our manufacturing units.
Bill: These issues prevented us from capitalizing on select growth pockets and is an area of continued focus as we know directly impacts our financial performance.
Bill: Additionally, we lost the stock business of a Midwest retailer.
Bill: who opted to source windows from China despite our longstanding partnership.
Bill: This decision represents a near-term challenge, but it is also sparked a renewed focus on customer acquisition to offset this impact.
Bill: Finally, we've reached a volume and flexion point at several facilities where demand is now below the capacity of two shifts.
Bill: Resulting an increased overtime and lower than expected productivity running at one shift.
Bill: We did however take actions to reduce full plant shifts in markets with decreased demand in the third quarter.
Bill: In response to these challenges, we accelerated several cost reduction initiatives to improve efficiency and adapt to current market conditions.
Bill: First, we completed actions to right-size our SGA in a spending, fast tracking programs to reduce costs in response to the weaker product mix.
Bill: Second, we are actively addressing the quality issues that limited our ability to capitalize on select market opportunities.
Bill: In particular, we've made significant progress improving quality in our door-scin production, which has shown marked improvement over the last quarter.
Bill: However, we recognize that more work is needed to ensure that we are meeting customer expectations and reducing waste across all of our businesses.
Bill: Additionally, to address our growth initiatives, we established wind rooms to organize and track new customer acquisition efforts which are already showing positive results.
Bill: Lastly, we continue to streamline our operations through footprint consolidation.
Bill: During the quarter, we announced the closure of our Wadoe Alabama and log-store Denmark facility, and initiated strategic moves to optimize UK production by transitioning more manufacturing into our highly efficient pen-reth facility.
Bill: These efforts will enhance our capacity and cost structure, ensuring we are well positioned for long-term profitability as the market improves.
Speaker Change: I'll now turn it over to Samantha to discuss the financial results in more detail.
Samantha Stoddard: Thanks Bill!
Speaker Change: Now, looking at Slide 6.
Samantha Stoddard: Our third quarter revenues were $935 million, down 13% from the prior year.
Samantha Stoddard: This decrease was driven by a reduction in our core revenues, do mostly to the expected market-driven volume declines in both North America and Europe, combined with a larger than expected mixed shift from higher price to lower price products in North America, as customers focus on affordability.
Samantha Stoddard: Our adjusted EBDA was $82 million in the third quarter, down $24 million year over year, leading to an adjusted EBDA margin of 8.7%.
Samantha Stoddard: During the third quarter, Freak Ashblow was a use of cash of $6 million, which included $44 million of capital investment.
Samantha Stoddard: As a result of our lower EBITDA and use of cash to invest in our transformation, our net debt leverage ratio is at 3.1 times, which is above our target range.
Samantha Stoddard: As you see on slide 7, our third quarter revenue decline was driven by lower volume mix of 13% with about 45% of the decline due to the mixed shift from higher average selling price products into lower price products.
Samantha Stoddard: I'll provide additional comments about our North America and Europe market trends shortly.
Samantha Stoddard: On Slide 8, you can see that our third quarter adjusted EBITDA, decreased by $24 million year over year.
Bill: Despite significant volume mix and cost headwinds, we generated solid-profit contributions from stable pricing and strong year-over year productivity improvements.
Bill: The cost pressures were higher than anticipated, primarily driven by labor and material inflation in glass and other commodities.
Bill: and were the main contributors to negative price cost.
Bill: Unfortunately, this price cost dynamic is expected to continue throughout the remainder of the year.
Bill: While our product-tivting gains were robust, they were slightly below our expectations to to inefficiencies from lower volumes.
Bill: In addition to these productivity improvements, we also benefited from significantly lower SG&A costs. Partially driven by the actions we took during the quarter.
Bill: Importantly, we are exceeding our targeted cost savings for the year. We previously communicated our annual cost savings to be $100 million and now expected to be approximately $115 million.
Bill: Moving to our segment results on slide 9.
Bill: In the third quarter, our North America segment generated $678 million in revenue, which was a decline of 14% from prior year.
Bill: This was driven by a reduction in core revenues of 14% due to lower volume mix.
Bill: More of the decline was driven by mix rather than volume as consumers currently prefer more affordable products.
Bill: We also exited some high-priced products that had delude of margins.
Bill: North America's adjusted EBITDA, decreased to $75 million from $100 million dollars a year over year.
Bill: This decline was due to the lower volume mix I just referenced.
Bill: as well as negative price costs in the quarter, only partially offset by improved productivity and lower SGN.
Bill: In Europe, we generated $257 million in revenue and $16 million in adjusted EBITDA in the third quarter.
Bill: Core Revenue's decreased by 12% year over year, driven by lower volume mix of 12%.
Bill: almost exclusively attributed to volume.
Bill: Adjusted EBITDA declined by $8 million, leading to margins of 6.3%.
Bill: The Declan Mental Impact from lower volumes and negative price cost was partially mitigated by solid productivity improvements.
Bill: Now, turning to the market outlook on slide 10.
Bill: We do not see much change to our market outlook for the year relative to the second quarter earnings call. Although the market continues to trend toward the weaker end due to persistent macroeconomic headwinds.
Bill: Despite the Fed lowering interest rates recently, we continue to see the North American market declining by low double digits as interest rates and especially mortgage rates remain elevated. Consumer confidence weakens and affordability remains an ongoing concern.
Bill: We still pay that new single family home construction will be higher by low single digits whereas the outlook for a pair in remodel activity remains challenging as existing home fails remain a decade low levels.
Bill: We expect repair and remodole activity to be down by mid to high single digits, trending towards the high single digit range.
Bill: Furthermore, our multi-family exposure is relatively small. The pace of market declines is very significant.
Bill: We continue to expect the combined multi-family and Canadian market to be down more than 25% year-over-year.
Bill: The European market remains under continued pressure and is also trending toward the weaker end of our guidance. Due to the ongoing macroeconomic and geopolitical challenges.
Bill: Overall, we continue to anticipate volumes in the region to be down by low double digits.
Speaker Change: I'll now turn it back to Bill to talk about our transformational journey.
Thanks, Samantha. Despite the near-term headwinds, my three key focus areas continue to be people, performance and strategy.
Speaker Change: with our current focus on people and performance.
Speaker Change: As you see on slide 12, we are driving a number of strategic initiatives around these pillars, and we have increased our investments to improve our long-term performance.
Speaker Change: Our investment in culture centers on bringing our values to life with an initial focus on trust and transparency as well as improving every day through numerous initiatives in place to balance growth and cost reduction.
Speaker Change: Through the third quarter, we completed a survey in part of our organization to monitor our progress.
Speaker Change: As a result of our leader alignment training, culture, sprints, and the pulse survey tied to our company values.
Speaker Change: We have already observed statistically significant improvements across the board.
Speaker Change: By the end of the year, we will have launched further competency-seetraining and complete another cultural sprint and an additional full company cultural survey.
Speaker Change: As we've done before, I would also like to showcase a few more examples of our transformation in the next two slides.
Speaker Change: The first project I'd like to highlight on slide 13 is our focus on improving the special order process with our retail customers.
Speaker Change: In the past, when a customer needed to place a custom order, they would sit down with a store associate to review specifications using an outdated and cumbersome system, requiring numerous clicks and entries which made it confusing and inefficient.
Speaker Change: This often led the store associates, either calling us to manually input the order, leading to inefficient season errors, or switching to a competitor's product line that was easier and navigate costing us valuable business.
Speaker Change: We have now upgraded the special order process making it more user-friendly and offering enriched content to assist both professional builders and homeowners. These enhancements reduce friction and boost engagement with our products.
Speaker Change: Additionally, we're refreshing, store displays and samples to give customers the chance to physically experience the product before purchasing.
Speaker Change: By the end of the first quarter next year, we expect to have over 300 stores updated with more to follow in the remainder of 2025.
Speaker Change: Our Special Order Business is a creative and optimizing the customer journey will enhance both our sales and margins.
Speaker Change: The second project I'd like to highlight on page 14 is the transformation of our UK manufacturing operations.
Speaker Change: Our Penworth facility in Northern England is a standout location, known for its high employee engagement and strong safety record.
Speaker Change: However, in the past we were limited at this site due to historical customer contract restrictions on capacity.
Speaker Change: As we evaluated our footprint, we identified an opportunity to better utilize the Penrith facility through expansion.
Speaker Change: To achieve this, we renegotiated our long-term supply agreement, invested in additional capacity, and refocused our UK network to either manufacture door slabs or assemble door systems.
Speaker Change: As I've mentioned before, we have too many facilities producing too many of the same products. This is another example of how we are optimizing our footprint as part of our transformation.
Speaker Change: We expect to continue these efforts across both our North American and European operations.
Speaker Change: As we approach the end of the first full year in our transformation journey, we've implemented numerous changes that are driving value across the company.
Speaker Change: Referring to slide 15, you'll see the EBITDA improvements we anticipate for 2024.
Speaker Change: At the start of the year, we projected $50 million in carryover benefits from our 2023 initiatives and an additional $50 million from new actions taken in 2024.
Speaker Change: We also accelerated certain aspects of our transformation to achieve an additional $15 million in SG&A savings.
bringing our total expected savings for the year to 115 million dollars.
Speaker Change: This builds on the $100 million in savings we achieved in 2023.
Speaker Change: The market headwinds have also delayed some of our growth initiatives, and we have recalibrated our initiatives, pulling ahead select cost measures.
However, there is still significant opportunity ahead.
Speaker Change: As we look forward, we'll stay focused on our core areas.
Speaker Change: accelerating our actions where we see the most potential without disrupting our business.
Speaker Change: We'll continue optimizing our network and automating processes to drive cost savings.
Speaker Change: We'll also be working closely with our customers to strengthen partnerships and outpace the market.
Speaker Change: I'd now like to discuss our 2024 guidance.
Speaker Change: As I mentioned at the beginning of the call, we have experienced a sharper than expected decline in the mix of our business when compared to our expectations.
Speaker Change: We do expect a mixed impact, along with the loss of a large customer and ongoing quality issues to further affect our fourth quarter performance.
Speaker Change: As a result, we are revising our net revenue guidance for 2024 to a range of $3.7 billion to $3.75 billion.
Speaker Change: down from the previous estimate of $3.9 billion to $4.1 billion.
Speaker Change: This adjustment reflects a deeper core revenue decline now expected to be down 13 to 14% compared to our previous projection of down five to 9%.
Speaker Change: Consequently, we are also lowering our adjusted EBITDA guidance for the year to a range of $265 million to $280 million.
Speaker Change: from the prior range of $340 million to $380 million.
Speaker Change: This reflects the impact of lower anticipated revenue with an estimated 30% decremental rate.
Speaker Change: combined with lower base productivity and price cost that is expected to decline approximately 1% year-over-year.
Speaker Change: Despite these challenges, we continue to expect $115 million in cost savings this year.
Speaker Change: driven by roughly 50 million dollars in carry forward benefits from last year's initiatives along with 65 million dollars of new cost savings actions to be completed this year.
Speaker Change: On slide 18, you see our updated cash flow outlook for this year.
Speaker Change: Due to continued market softness, higher inventories and our lower guidance.
Speaker Change: We now anticipate that this year's operating cash flow will be approximately 125 million dollars.
Speaker Change: This is after we incur an estimated $100 million of non-operating cash expenses to fund portions of our transformational journey to drive future earnings.
Bill: With this update, we expect our cash flow deficit to be approximately $25 to $50 million for the full year 2024 after taking into account our commitment to continued capital investments.
Bill: Turning to slide 19, we outline the year-over-year drivers behind our updated EBITDA guidance for 2024.
Bill: Starting with last year's adjusted EBITDA of 380 million dollars, we now anticipate a headwind of approximately 182 million dollars from volume and mix.
Bill: split roughly evenly between the two.
Bill: Additionally, we expect a $40 million headwind from price-cost as costs have increased while pricing has remained relatively stable.
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Speaker Change: Without the substantial actions we're taking in our transformation journey, these market-related pressures would likely have led us to guide toward a modest, adjusted EBITDA of $158 million.
Bill: However, as we've emphasized, our transformation is yielding results, driving approximately $115 million in cost savings this year, and allowing us to set an EBITDA target of $273 million as our midpoint.
Bill: These actions are helping us navigate a challenging market environment and positioning us for improvements when conditions normalize.
Bill: Given the near-term headwinds we are facing, we believe this is the right time to provide investors with initial guidance on the longer-term financial benefits we expect our team to deliver.
Bill: As shown on slide 20, we anticipate generating an additional $100 million in EBITDA from our transformation projects in 2025.
This includes approximately $50 million from carryover benefits of projects completed in 2024.
Bill: as well as further actions planned and sequenced for next year.
Bill: We currently have more than 350 active projects.
Bill: It's important to note that this benefit is independent of any potential market-related improvements.
Bill: While we currently expect the market to be slightly down in 2025, when the market does recover, we anticipate achieving incremental margins of approximately 25 to 30 percent from the additional volume.
Bill: To continue driving these improvements in 2025, we expect CAPEX to remain elevated with planned investments between $175 and $200 million.
Bill: Additionally, we anticipate taking further footprint actions to right-size our network.
Bill: To be clear, we expect 2025 to be another challenging year.
Bill: With the possibility of market improvements in the second half as interest rates decline and existing home sales likely increase.
Bill: Therefore, we'll be optimistic to assume the full $100 million in improvements will flow through without some offsets.
Bill: We know the $100 million improvement is not sufficient, and we are actively exploring additional opportunities to accelerate our transformation given the unprecedented sales decline.
Bill: We will provide more detailed guidance for 2025 during our next call in February.
Bill: Looking further ahead, we expect the annual $100 million in benefit to continue over the midterm based on the number of projects in our pipeline.
Bill: We continue to focus on the significant self-help opportunities available to us.
Bill: As demonstrated today, and reflected in our financials, our transformation is delivering results.
Bill: When the market rebounds, we will be well positioned to capitalize on improved conditions with a leaner, more efficient network.
Bill: Let's turn to slide 21.
Speaker Change: Today is Election Day in the United States.
Speaker Change: Regardless of today's outcome, I do want to emphasize that we are well positioned for success no matter the result.
Speaker Change: One of the major topics during this election cycle has been tariffs.
Speaker Change: and some speculate that these tariffs could have a significant impact on our business.
Bill: I want to clarify that we import only about 1% of our materials by cost from China, and most of these materials could easily be sourced from other regions without significant disruption to our operations.
Bill: Looking back at 2024,
Bill: It has undoubtedly been a challenging year for Gelbwein with significant headwinds.
Bill: Despite these challenges, our team continues to make significant progress in our transformation, driving costs out of the business and positioning us for a solid future.
Bill: I am confident that when we reflect on this period in the years to come, 2024 will be seen as a low point in both sales and margins.
Bill: based on the volume-mix decline experienced in the last 12 months.
Bill: However, we are making the right decisions for the long term, and we are putting the right investments, systems, and people in place to achieve our goals.
Bill: I remain optimistic about our future and am extremely proud of the team's hard work during this difficult period.
Bill: I'm confident that our team will continue to execute effectively, and I see many long-term opportunities for value creation ahead.
Bill: Thank you for your continued interest. And with that, I'll now turn it over to James for the Q&A.
James Armstrong: Thanks, Bill. Operator, we're now ready to begin Q&A.
Bill: Thank you for watching!
Speaker Change: At this time, if you would like to ask a question, press star 1 on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star 1 again.
Bill: Please see the complete disclaimer at https://sites.google.com
Bill: As we poll for our first question this morning, in anticipation of the following question, I'd like to take a moment to give a brief update on the Tawanda divestiture.
Bill: At this time, we continue to work through both the court-mandated divestiture process and related court proceedings.
Bill: I will reiterate that we've taken every step the court has required of us and it is our goal to reach a fair resolution to this process.
Bill: As this remains an ongoing legal matter, I'm unable to provide further details in any of the Q&A today.
Bill: Now, operator, do we have our first question ready?
Speaker Change: Yes, your first question comes from the line of John Lovallo with UBS.
John Lovallo: Good morning, guys. Thanks for taking my questions. The first one here, hey, can you just give us a little bit more color on the quality issues that you talked about? I mean, have these been fully resolved at this point? And then were they one of the drivers of the loss of that Midwest customer? And then in terms of the Midwest customer, can you size it in terms of revenue and EBITDA?
Speaker Change: So, to answer your second question, it was not a result of quality issues, the loss of the Midwest customer. Coming back to then where we are on quality, so this was focused in both doors and windows, specific areas.
John Lovallo: and as the market volume is tight and inventories are low, there are certain areas of opportunity.
Bill: and we were not able to deliver on some of those given some plant issues that we have in different sites. So think about it like deferred maintenance topics and some of the capital improvements that we're making are catching up.
Bill: The 24 impact on sales is about 20% to $25 million approximately bill just talked about the full year impact we're working very hard on mitigation plans, specifically targeting customers for the business that was lost by focusing on customer needs and then positioning ourselves to react quicker.
Bill: In any circumstance.
Speaker Change: Understood. Thank you and then.
Speaker Change: The midpoint of the outlook seems to imply you know close to a 50% sequential decremental in the fourth quarter. When you guys have talked about some of the challenges with capacity utilization and the quality issues and so forth, but when would you expect these decrementals to normalize.
Speaker Change: So high level, John we don't expect a significant change in the volume or mix reality as we roll into the first part of next year. So we expect that we're going to continue on a low level both in North America and in Europe. We've said, we've set up trigger points in our internal planning process to clearly.
Bill: Find when do we reach.
Bill: I would say a lower threshold on volume and sites, where we need to shift either complete shifts out or we actually need to take more dramatic action like closing sites and our expectation is that 25 will be a turning point from a volume standpoint, so I would expect that in the back half.
Bill: 25.
Bill: The leverage should improve as we start to see hopefully more tailwind on the volume.
Bill: And we're also in parallel right sizing our asset base for the future state and also investing in bringing some of the automation on line. That's in the pipeline has not yet been deliberate but will be delivered next year.
Bill: One other thing to note.
Speaker Change: Do you expect to be back in the 25% to 30% decremental margin in 2025, but just taking a look at Q4 and understanding kind of that year over year bridge.
Speaker Change: Volume mix is essentially about a 30% decremental. The factor is that we had quite significant other income in Q4 of 2023 in the neighborhood of $20 million that did not repeat this year. So that's probably also adding to kind of that EBITDA bridge flow through you are seeing.
Speaker Change: Great. Thank you guys.
Speaker Change: Alright, Thanks John.
Speaker Change: Your next question is from the line of Phil <unk> with Jefferies.
Speaker Change: Hey, guys.
Phil: Bill curious how did sales progressed through the quarter and into October and then from a mix standpoint. Similar question. How has that progressed through the year and then Sam. It's helpful. That you gave color that fourth quarter, you've got some noise with other income but is there any nuance around margins being.
Speaker Change: The price because the channel has too much inventory and you're curtailing production as well.
Speaker Change: Okay. So I'd say, Phil volume mix has continued to deteriorate I would say what we were anticipating is that the R&R market would be more stable as we looked into the end of the year, especially when we look at our doors business.
Speaker Change: And that actually hasn't materialized.
Speaker Change: So <unk> continued to soften and we as you know have a pretty big exposure there.
Speaker Change: We're not expecting short term improvements in that trajectory. So we're at that kind of high single digit R&R deterioration as we kind of look into where we're tracking in the month of October we continue to be at that lower run rate. So no signals that things are going to change or improve dramatically but.
Speaker Change: That would signal to us that it's going to get dramatically worse.
Speaker Change: And again, it's both volume and mix because we see continued discretionary spend pullbacks on any major door window projects.
Speaker Change: The other thing that's important to just.
Speaker Change: Think through even though it's a small share of our Canada and BPI business, which is our commercial windows business. It's a small part but its significant deterioration on a full year run rate think of it as a $100 million to $150 million.
Speaker Change: Of topline headwind I think the last point, what's going to be relevant for your question is with the softness in R&R I'd say inventories are stable for that softer environment. So we're not expecting any dramatic movements based on what we're seeing for our sell in currently.
Speaker Change: Okay. That's helpful.
Speaker Change: And this is probably a very overly simplistic view, but if I take you back half of 2024 implied guidance and whatever you delivered three Q.
Speaker Change: And mirrored that for next year, just take the back half run rate for this year multiply that by two and maybe bacon $100 million of cost out.
Speaker Change: Would that be like way off base I know youre, assuming perhaps some pickup in volumes in the back half of 2025 and it would be helpful to help us think through the cadence three or outside of demand maybe getting better in the back half, but how does the cost out savings and some of the headwinds you may have seen in the back half of 'twenty four reverse does that $100 million.
Speaker Change: Incremental savings.
Speaker Change: Is that more back half weighted first half weighted or pretty equally spread that would be helpful.
Speaker Change: You are talking 25 filled 125.
Speaker Change: So my first question is can I take the back half 'twenty 'twenty, four EBITDA that youre guiding to and delivered and multiply that by two is a good framework for 25, and you got $100 million of incremental cost out coming through rate does that layer in pretty consistently through the year or even more heavy in the back half just kind of help.
Speaker Change: Thanks drew.
Speaker Change: 225 based on what you know today.
Speaker Change: Got it okay. So I think thats a fair assumption, that's assuming that obviously the headwind that we currently have in the second half of the year and for Q rolls forward for a full year.
Speaker Change: We're expecting we're expecting neutral.
Speaker Change: We're expecting neutral to slightly down volumes in North America, we're definitely expecting down volumes in Europe are our perception of Europe is close to if not at the bottom, but <unk> got to think through that theres a longer gestation period to get our products built into starts. So we're kind of nine to 12 months away even.
Speaker Change: Though starts may be turning in certain markets as rates come down. So we expect Europe and 25 to remain challenging the upside that we see today currently is in the back half of 'twenty five in North America. So we have growth initiatives going in that $100 million roughly 25%.
Speaker Change: Of that is attributed to growth initiatives to tactical pricing and 75% are cost driven topics. So that's going to be the roll through of the $100 million and it's going to be evenly balanced throughout the year as we've said Phil given today's reality on the top line, it's not enough for us. So we're looking at ways that we can.
Speaker Change: Accelerate op.
Speaker Change: Opportunities to take cost out of the business increased efficiency, but not disrupt the business.
Speaker Change: And I do see opportunities and these are things that we're getting teed up and I think just as a rule of thumb your math high level works.
Speaker Change: With some potential upside from the market in the back half of the year, but we're controlling what we can control that means we're taking a hard look at our footprint.
Speaker Change: Taking a hard look at cost initiatives, but also making sure that we have capacity positioned for a rebound which has to occur I mean, you know the U S is under our belt.
Speaker Change: And they need the units and we think when rates start to settle in the resale market starts to engage that's going to start trickling through R&R and then we get a broader take up of that new construction at medium and high end, which is really where we have the mix upside and where we've really suffered this year on the mix down.
Speaker Change: Sure.
Speaker Change: And sorry to sneak one and bill from a price cost standpoint on a full year basis, it's about 1%, but it got worse in the back half of 2024. So when look at price cost for next year do you have initiatives in place from a pricing standpoint, it could be.
Speaker Change: Better than the back half run rate or how should we think about price cost for 25 at this point.
Speaker Change: Yes, yes, definitely we need to tackle the cost headwind fill our aspiration and our modeling right now as we're thinking through it as price cost neutrality in 2005, we've held price this year, but some of the costs have spun up.
Speaker Change: And we're going to need to countermeasure that next year. So that's going to be part of the transformation initiatives, but also making sure that we have the price cost neutrality as we kind of look at a full year.
Speaker Change: So you should assume price cost neutral in our model, which means we need to counteract the headwinds that we've seen come up in the third and fourth quarter, yes.
Speaker Change: Just to give color I mean, our goal is always be price cost neutral or better and although yes. It has gotten worse in the second half that was part of our outlook and so that's tracking in line with what we expected.
Speaker Change: And going into next year. This is top of our minds as well.
Speaker Change: Okay. Thank you I appreciate the color guys.
Speaker Change: Thanks.
Speaker Change: Your next question is from the line of Steven Ramsey with Thompson Research.
Steven Ramsey: Hi, good morning, maybe to.
Steven Ramsey: Talk about capturing share.
Steven Ramsey: And regaining the business that's loss through other customers can you talk about how this could play out realistically. If this is something that if successful.
Speaker Change: We're likely to help first half of 'twenty, five or looking towards the second half.
Speaker Change: Yeah, Hey, thanks for the question, Steve and so if you remember if we look back and reflect on what we communicated in our Q1 earnings call. We said that there was tactical pruning.
Speaker Change: That we were doing because there were certain projects that weren't meeting our expectations post launch and there was other business that.
Speaker Change: What's was not a good fit for us given the margin profile and so that was that was about $100 million that we signaled we'd be taking out theres, a small share loss as Samantha and I talked through with that Midwest customer and so that's a couple of hundred million dollars up to a couple hundred million.
Speaker Change: It's pretty small in the Grand scheme of things, but we've clearly said, okay. We need to tackle this in a very structured manner. So we have set up win rooms.
Speaker Change: Which it may sound pretty simple, but what we're doing is we're bringing the organization together, both the windows organization and the doors organization to build to make very quick decisions with the product teams. The operation teams and of course the sales teams.
Speaker Change: Opportunities in the market and being as agile as possible to react to some of the short term demand opportunities. We have a portfolio, we're running that portfolio with rigor through our transformation process.
Speaker Change: Process, and we're staying very close to it and what we can't control the market volume, but we can control our share and that's what we're starting to pivot to <unk>.
Speaker Change: Making sure that we are focused and targeting.
Speaker Change: Reload for some of the candidly windows business that we've communicated we are going to be losing but we see that is also an opportunity for us to get ourselves well positioned. So this is something that has a longer gestation. So think about this as an H 225 impact by the time everything is.
Speaker Change: Setup inspect and ready to go that's where we see some of the potential tailwind in our modeling as we look to 2025.
Speaker Change: Okay.
Speaker Change: Okay. That's helpful and then mix.
Speaker Change: A headwind all of 2024 do you think the mix is a positive driver.
Speaker Change: In 2025, and if the first half has some benefit for easier comps or just with your second half <unk>.
Speaker Change: <unk> outlook is it something that occurs later in the year and then maybe one thing to get some color on here that mix benefit is that discretionary spend.
Speaker Change: <unk> or any other factors that could help mix in 2025.
Speaker Change: So I would say a safe assumption would be flat.
Speaker Change: There's been a general theme this year across all of the markets that we serve it's either being completely pushed out from a project standpoint, or if transactions are happening.
Speaker Change: It's going to a lower price point, so clearly the mix down has been ongoing for a number of quarters. We don't expect that to change dramatically next year, Yes, we will have a better baseline given the comps.
Speaker Change: But what we need in order to drive a rich mix improvement as consumer confidence specifically higher end consumers to dramatically improve and also project investors to have more conviction in cap rates and long term finance.
Speaker Change: Saying to start driving project related businesses again, and our project related business and when that happens will automatically get a mix uptick, but we are not anticipating any of that next year, because that's very hard to plan for but when it does happen there is going to be significant.
Speaker Change: Upside for us based on the portfolio that we currently have.
Speaker Change: Great. Thank you.
Speaker Change: Thanks for the question Stephen.
Speaker Change: Your next question is from the line of Susan Mcclary with Goldman Sachs.
Susan Mcclary: Thank you good morning, everyone.
Speaker Change: Thanks, David.
Susan Mcclary: One is thinking about the projects that you do have in the pipeline you mentioned the ability to pull some of those ahead given whats going on in the business. What is your capacity to handle more projects. How are you aligning these teams to make sure that these things are going through and that youre continuing to stay on track with the quality and the.
Speaker Change: Metrics Youre looking for and how much more can you get in or how much more can you pull ahead, given the deterioration in the underlying environment.
Speaker Change: Yes. Thanks for the question Susan So we have completed more than 500 projects as of the end of <unk>.
Speaker Change: And those are obviously spread all across the organization in different areas and that's what's been driving the improvements that you can see in the cost structure. We have just over 350, what we would call live projects that are actually in our.
Speaker Change: Or close to execution, what we're doing now is we are re sequencing those based on opportunities.
Speaker Change: And challenges that we currently see.
Speaker Change: We had a robust package of growth initiatives, which clearly we are having to recalibrate given the market headwind and the mix shifts down one of the initiatives that I talked about in my prepared remarks.
Speaker Change: <unk> really driving retail improvement for <unk>.
Speaker Change: And that retail environment is in tough shape right now so a lot of those projects and the refreshes in stores are getting pushed into the first half of next year. So.
Speaker Change: We're seeing shifts on the growth side, we're accelerating cost initiatives and one of the areas, where we see a lot of opportunity is really dialing in on the right long term footprint for our organization and we're doing two things that we've said this pretty consistently we need fewer sites with.
Speaker Change: Better investment levels to drive our long term operating efficiency and performance. So we.
Speaker Change: We finished.
Speaker Change: At the end of 2023 by reducing six sites will take five sites off an additional shift reductions. This year, that's coming off a baseline number of 90 sites at the end of 'twenty, two and we're at 79% today, which is still at <unk>.
Speaker Change: Too many and we're really focusing on how we can create the optimal future state.
Speaker Change: By investing in automation and process improvements, which will then drive a lot of the cost efficiencies that we've seen in the model. So we're working on positioning that as a key lever for next year, which would then be incremental benefit over and above the $100 million.
Speaker Change: We currently have line of sight on which is kind of 50 rolling in 50, new.
Speaker Change: In our organization.
Speaker Change: It's a challenging time.
Speaker Change: With the market headwind and with all of the challenges that we're facing really trying to get ourselves focused on a lot of the improvements.
Speaker Change: We've been doing a great job of knocking these down but clearly given the deterioration on the top line, it's not enough.
Speaker Change: So we do have two.
Speaker Change: Amp things up as we look into 2025 and that's what we're working on so there's a robust pipeline of projects, we're going through and sequencing, but clearly the key levers for us are going to be footprint automation and efficiency across our network.
Speaker Change: Okay. That's great color. Thank you Bill and then can you talk a bit about channel inventories and how those are positioned today your ability to kind of get those in line with where you'd like them to be heading into next year and I guess part of that too.
Speaker Change: Retail revenue how much of that is the impact to volume versus mix is that is it skewed more one versus the other.
Speaker Change: Yes, so I would say I would say the inventory as we've been saying this for a while it's low but it's stable it's kind of balanced to the poll.
Speaker Change: In the channel, which is for our products Unfortunately very fit.
Speaker Change: Theres a lot of discretionary spend that goes into larger size patio doors windows et cetera, So it's fairly fairly tight but balanced given the market reality and we don't think that's going to change dramatically as we roll into the first quarter, especially given the year end at <unk>.
Speaker Change: Most of our retail customers have thats in the new year, and then the volume mix I'd say, its probably 50 50.
Speaker Change: Roughly.
Speaker Change: That's driving.
Speaker Change: What we need Susan as we need the resale market to get reinvigorated and thats going to create a pull through the retail channel for our products and others and we need consumer confidence to be better and we need interest rates to be lower in order in our view to drive that and that.
Speaker Change: That's going to be the unlock for us and right now.
Speaker Change: We think that that will happen in 'twenty five but later in 'twenty five given the state of affairs, and where rates are and where consumer sentiment is.
Speaker Change: Yeah. Okay. Thank you for all the color Bill and good luck with everything.
Bill Christensen: Thank you. Thank you Susan.
Speaker Change: Your next question is from the line of Matthew Bouley.
Speaker Change: With Barclays.
Matthew Bouley: Hi, Good morning, everyone. Thank you for taking the questions.
Speaker Change: Good morning.
Matthew Bouley: Hi, Good morning, Yeah, I wanted to touch on that last point actually so so reducing the revenue guide.
Matthew Bouley: Core down 13% to 14 versus prior down five to nine Youre holding the end market is about the same I know you said theyre kind of drifting to the low end. So it seems like the Delta really is just a very significant change in the mix portion of it and I heard you just say, it's kind of 50 50 volume mix.
Matthew Bouley: So I just really wanted to unpack that because that's a really significant move in mix that I don't know if we.
Speaker Change: Kind of seen to that degree with you guys. Historically, so I guess what are some of the specifics and is it the case that mix really is a several hundred basis point headwind and kind of.
Speaker Change: How do you think about that at least anniversarying and flattening out at some point in 2025. Thank you.
Speaker Change: Hi, Matt Yeah. The mix that we're seeing is really unprecedented. So this is not something that we've experienced in the past and I think you saw that in Q3 in particular in Q4, I would say, it's a little more volume than mix, but Q3 was absolutely more mix in volume so that the roughly 50 50 bills talking.
Speaker Change: When you kind of unpack the sales guidance revision.
Speaker Change: It's really looking at approximately $70 million and 40% is the softer R&R in North America. That's not just the retail channel that does include some retail program push outs, but it's across all the channels that we plan.
Speaker Change: Then you have the other portion being the lower sales mix and that's the piece that we're seeing kind of in this unprecedented market.
Speaker Change: Listing home sales are at their lowest level that we've seen in over a decade, and we are unfortunately experiencing that that mix impact than.
Speaker Change: Then you have the loss of the Midwest retail customers, we talked about let's call. It 2000 25 million Europe continued market softness another 2000 $25 million and then some of the multifamily headwind essentially picking up another $15 million and that really is the <unk>.
Speaker Change: Down when you think about that sales revision.
Speaker Change: In the guidance.
Speaker Change: Okay. Thank you for that Samantha, yes really helpful. There.
Speaker Change: And then secondly.
Speaker Change: So the Midwest customer you are saying that theyre going with.
Speaker Change: I guess imported windows, if I heard you correctly something sourced internationally.
Speaker Change: And I'm just curious because I think the windows category is not typically something where we've at least historically seen a large presence of imports.
Speaker Change: Wondering if that actually kind of goes with the prior question was hey, if folks are mixing down maybe lower priced imports makes more sense. If this is just kind of a cyclical phenomenon or if youre hearing of anything where.
Speaker Change: Maybe some some of these imported window competitors are actually for lack of a better term kind of cracking the code and figuring out how to how to bring that in to the U S. So I'm just curious how do you think about that kind of competitive dynamic with imported windows. Thank you yeah sure Matt So I would say it's counter <unk>.
Speaker Change: <unk> given the current environment that we're facing with tariffs with supply chains et cetera.
Speaker Change: We are not seeing a significant increase in import windows from Asia. So I would call this unique choice.
Speaker Change: To try something different and I don't want to speak for our customers, who we obviously are reacting to a decision.
Speaker Change: And making sure that we can reload the capacity for people that are.
Speaker Change: Requiring windows to be made in North America. So this is not in our view a trend.
Speaker Change: It's rather a one off and candidly we will see how this plays out given the election today and some of the potential supply chain implications longer term based on tariffs et cetera.
Speaker Change: Got it well thanks Bill Good luck guys alright. Thanks. Thanks.
Speaker Change: Your next question is from the line of Jeff Stevenson with loop capital.
Speaker Change: Hi, This is zach the shekel on for Jeff today. Thanks for taking my question, maybe just one more on the mix just curious how much of a factor you guys think the outside production builder growth. We've seen this year is or is it again, just a general slowdown in the mid to high end product yes.
Speaker Change: Yes, that's a major driver as of.
Speaker Change: A major production builders are building a lot of lower end homes. Because those are the people that are looking to get into this market clearly theyre, taking the lower end product and we've said that's a big mix down on our doors business and we are underrepresented on windows in that sector.
Speaker Change: Therefore.
Speaker Change: Hit for us.
Speaker Change: And it's a significant hit.
Speaker Change: Makes sense and then quickly on capital allocation.
Speaker Change: So last quarter, you guys bought back a bunch of Opportunistically bought back shares to offset dilution.
Speaker Change: Is that more on the backburner now given other strategic investments or how are you guys thinking about that moving forward.
Speaker Change: Yes, I would say definitely on the back burner I think our leverage ratio is above three times, we have a lot of work to do to improve our EBITDA, which will then reset the ratio on the appropriate corridor, but right now we're investing in ourselves through a significant capital outlay as we described today and thats going to be the main focus as we go forward we're never rule.
Speaker Change: Anything out, but clearly that is not an area of focus short term.
Speaker Change: Understood. Thanks, Alright, Thanks, Ed.
Speaker Change: Your next question is from the line of Trevor Allinson with Wolfe Research.
Trevor Allinson: Good morning, Thank you for taking my questions. Firstly following up on the 2025 Capex, you've talked about potentially seeing a ball volume rebound in North America in the back half of next year. If you don't see that volume rebound would you expect to pull back on any of that 2025 catheter capex spending to.
Speaker Change: Conserve some cash or in your mind is that pretty locked in and then I guess, taking the other side of that if volumes come back earlier.
Speaker Change: The first half of next year would you expect to pull forward some more projects, maybe some growth projects.
Speaker Change: Capex number go up a little bit.
Speaker Change: Yes, so we have ample opportunity to improve our foundation and Theres still a lot of work that needs to be done. So I don't think we're going to pull back unless there is a very dramatic market adjustment.
Speaker Change: There's very long lead times on some of these capital projects that we have in place to the tune of 18 months a lot of it's in flight. We're also releasing additional capital.
Speaker Change: If things get way better that's a great problem to have I don't necessarily know if our organization can handle much more than what we're doing today, because we've effectively doubled our outlay on capex and we're still getting used to that higher cadence.
Speaker Change: So I would suggest that's probably unlikely.
Speaker Change: But we do expect to continue at this rate just given the opportunity that we see especially footprint.
Speaker Change: That takes some capital to really get it into the right position.
Speaker Change: Okay got you that makes sense, and then DPI and multifamily talked about being down 25% plus for the year clearly multifamily starts have been soft for a while now here. So can you remind us the lag between a multifamily start and when that impacts your revenue and then if you think that for your business.
Speaker Change: Typically you are kind of nearing a bottom for that end market. If there is a little bit further to go here before we get there right.
Speaker Change: Right so.
Speaker Change: Permitting permitting multifamily projects is a very arduous process. So lets take that out of the equation and just assume that starts going up today, you should expect our product anywhere in the range of six to nine months, because we're putting windows in the structure and they want to button that up so they can finish out the <unk>.
Speaker Change: <unk>.
Speaker Change: But of course, we need we need to permitting to kick back on and that has a lag so from a stark meaning there is concrete being poured at six to nine months, but to get to that start there is a longer period of time, depending on where you are.
Speaker Change: We have made investments and this is one of our growth initiatives is to hire additional salespeople and bear the cost but to start building a more robust portfolio.
Speaker Change: Portfolio of projects in the markets that we don't serve.
Speaker Change: With customers from other regions that are building in white spots for us. So we are building a nice portfolio of projects and we expect when we start harvesting dose as we look into the back half of next year, but it is a moderate uptick, especially on multifamily just because we haven't seen a turn yet.
Speaker Change: Okay got you I appreciate the color and good luck moving forward. Thank.
Speaker Change: Thank you. Thank you.
Speaker Change: Your next question is from the line of Mike Dahl with RBC capital markets.
Mike Dahl: Hi, Thanks for taking my questions.
Mike Dahl: And I just wanted to go back.
Mike Dahl: Mix dynamics for a minute.
Speaker Change: I think I heard you say that when you look at the.
Mike Dahl: The revision, 70% of the volume revision is kind of retail.
Speaker Change: R&R R&D.
Speaker Change: Other is lower mix I know, you've kind of addressed the production builder dynamic, but maybe I missed it can you just specify kind of.
Speaker Change: When you look at this year, how much of a headwind would you peg and just smaller footage of home of homes, and new construction, meaning fewer windows and doors per home.
Speaker Change: And when you make the comment about volume being flat.
Speaker Change: Flat to down a little in 25 is that inclusive of that continued mixed dynamic potentially carrying over or is that more of a pure volume dynamic.
Speaker Change: Yes, so just to clarify I said 70 million or approximately 40%.
Speaker Change: The guidance revision is around the softer R&R so that some retail and then again, we talked about some of that higher end products in the traditional channel.
Speaker Change: You were mentioning kind of the mix dynamic with production builders.
Speaker Change: As much as it is lower and so it's not necessarily the quantity, but the lower priced products that are going into these production homes.
Speaker Change: So I do expect as I said, we havent had clear signals that each one of next year is going to be dramatically different.
Speaker Change: But we do expect kind of the back half to pick up a little bit. So that's kind of I would say the phasing right now our view of that mix dynamic.
Speaker Change: Okay, but to be clear if its like if your comment is kind of flat to down on volume next year is that flat to down on combined volume mix.
Speaker Change: Next year.
Speaker Change: Yeah, I would say flat to down on volume mix next year I think it would be too early right now to call the volume quantity versus the mix shift I would say it's volume.
Speaker Change: Volume mix combined.
Speaker Change: Okay and then.
Speaker Change: The other question I had I guess I'm struggling a little bit with this concept of kind of the transformation journey.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: And by that I mean, like if I look at your bridge. It basically implies that if it were not for these cost reductions I know you are quoting it in EBITDA terms, but it basically would suggest your business wouldn't have been profitable this year and so while I appreciate that getting from kind of a net loss and EPS terms to where you are today.
Speaker Change: It's still reflect some.
Speaker Change: Cost out.
Speaker Change: How much of that is really kind of.
Speaker Change: Truly transformational versus just the right sizing of the business, which is kind of normal when you've seen this much sales.
Speaker Change: The degradation and you're only talking to pretty normal incrementals.
Speaker Change: No way.
Speaker Change: If you are saying, 25% to 30% volume Incrementals.
Speaker Change: Stuff was really kind of more for structural I guess I would've thought the potential that you see.
Speaker Change: Much better than historical norms on some of those incrementals, if and when volumes do come back.
Speaker Change: Yes, so I guess from a macro level I would say this is a combination of process rigor.
Speaker Change: And ownership within our organization, but also giving us visibility on where and how do we want to invest so prioritizing initiatives.
Speaker Change: If you think way back in our history.
Speaker Change: I don't think we were doing a very good job of tackling some of the foundational challenges that we have and so this process. This transformation process. Yes. There is a mix of some what many would term as daily business activities in there but.
Speaker Change: But there is also a fairly sizable piece of how are we allocating capital what's the return on those projects and creating the rigor in the organization to also make the tough decisions.
Speaker Change: Remind you on the oral line exit this year, if we're not delivering and hitting our hurdles we're going to have to make the tough decisions and we're doing that because now we're tracking and we have a very.
Speaker Change: Strong visibility in our organization of these work streams.
Speaker Change: <unk>.
Speaker Change: The decremental challenge that we have is that we're now starting to get down below two shifts to one shift and we have capacity utilization challenges across our network and we've said from the very beginning we have too many sites and we need fewer sites, we have to overinvest in those fewer sites to get them up to.
Speaker Change: The level that we feel appropriate to deliver great quality products on time safely to our customers and thats. The main lift and that's the transformation that we're driving so I would say the low hanging in the fruit on the ground has been picked up in a very tough market headwind and we're now working on <unk>.
Speaker Change: Long term view and how do we really get to that future state a footprint that's going to drive.
Speaker Change: Growth given what has become a very volatile market in North America in a very soft demand environment in Europe.
Speaker Change: So hopefully that answers the question on a broader base.
Speaker Change: Yes, I appreciate that thanks Bill.
Bill Christensen: Youre welcome Thanks for the question.
Speaker Change: Thank you at this time I will hand, the call back over to Mr. Armstrong for any closing remarks.
Mr. Armstrong: Yes. Thank you for joining our call today, if you have any follow up questions. Please reach out and I'd be happy to answer them for you.
Speaker Change: This ends our call and have a great day.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
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