Q2 2019 Earnings Call
At this time I would like to welcome everyone to the children Holdings Inc. Q2, 2019 earnings 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 then the number one on your telephone keypad. If you would like to withdraw your question press the funky. Thank you.
Kareena Fidia SVP corporate planning and analysis 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.
I'm joined today by German show, our CEO and John Linker, our CFO .
Before we begin I would like to remind everyone that during this call. We will make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to variety of risks and uncertainties.
Putting those set forth in our earnings release and provided in our Form 10-K , and 10-Q filed with the SEC.
No one does not undertake any duty to update forward looking statements, including the guidance, we're providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe will 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.
Reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP.
Can be found in our earnings release and in the appendix to this presentation.
I would now like to turn the call over to Gary.
Thanks, Kareena good morning, everyone and thank you for joining us today.
Please turn to page four.
This morning, we announced second quarter results that were encouraging in many aspects although revenue results did not meet our expectations.
I'm pleased with the progress that we've made and cost productivity initiatives footprint rationalization and modernization project and the disciplined deployment of our business operating system, the Jelled with excellence model or Jim.
I'm also pleased that we delivered another quarter of favorable price realization positive productivity and strong cost control.
As a result of our improving execution, we generated second quarter adjusted EBIT da margins consistent with our expectations supporting our second quarter outlook provided in our last earnings call.
We expect to generate productivity cost savings every quarter, regardless of the operating environment and we're now seeing this consistency flow through our financial results.
We generated another quarter of positive net productivity on a consolidated basis contributing to three consecutive quarters of core margin expansion in North America, and two out of three quarters of core margin expansion and Australasia, even in the face of weaker than expected demand.
Our revenue declined by 4.6% year over year, driven largely by market weakness in Australasia, and North America as well as unfavorable foreign exchange.
Despite volume headwinds during the quarter, we generated core adjusted EBITDA margin expansion of 120 basis points in North America, and 110 basis points in Australasia, demonstrating the power of what can be achieved through the disciplined execution of gem.
I'd like to thank our dedicated associates, who focus on delivering this margin expansion through productivity price realization and strict cost control.
We increased our pipeline of cost savings projects for the second half of the year, which we expect will deliver future margin improvement independent of the market demand environment.
While encouraged by this progress I was disappointed with the core margin contraction in our Europe segment, John will share with you in more detail some of the actions taken to stabilize performance and deliver margin expansion in that business.
End markets performed below our expectations in the second quarter, most notably the ongoing pull back in the Australia housing market accelerated as the quarter progressed, resulting in the demand environment. There was much softer than our already conservative expectations in North America softness in residential new construction continued in both the us and Canada, evidenced by weak market data and permits and starts.
Together these factors contributed to a 3% decline in core revenue.
I'll speak more about markets and our expectations in a few minutes.
In light of the demand we saw in the first half, particularly our second quarter revenue performance the impact of market conditions, and Australasia and a small divestiture completed in the quarter were lowering our outlook for the full year to approximately flat from a range of 1% to 5% previously.
We're maintaining our expectations for adjusted EBITDA margins due to pricing actions and line of sight to additional productivity savings despite reduction in our full year revenue outlook.
As we navigate near term market headwinds our improved execution leaves me more confident in our 15% longer term EBITDA margin target.
Please turn to page five for a brief summary of our financial results for the second quarter, John will provide a more detailed review shortly.
Net revenues for the quarter decreased by 4.6% year over year, driven by a 3% decline in core revenues and a 3% unfavorable foreign exchange impact.
Net income decreased by $12.4 million to $22.4 million diluted earnings per share for the quarter was 22 cents, while adjusted earnings per share was 45 cents for the quarter.
Adjusted EBITDA dollars decreased 4.9% to $127.6 million due primarily to volume headwinds and adverse foreign exchange.
Despite the contraction in revenues adjusted EBITDA margin at 11.4% was flat year over year.
Welcome to execution and cash from operations increased free cash flow by $44.7 million during the first half of 2019, improving our cash conversion.
Net leverage at quarter end was approximately 3.2 times, which is slightly above target levels due to recent acquisitions and seasonality of working capital, we repurchased approximately 253000 shares during the quarter for $5 million and have approximately 105 million remaining under our current share repurchase authorization.
During the quarter, we closed the sale of creative media development or CMD, a full service marketing and creative agency our ownership of CMV dates back to 1999 and is no longer considered core to our current operations.
Andy generated annual revenue of approximately $25 million.
On page six I'd like to provide a brief update on our end markets and outlook for the rest of the year.
North American single family permits in housing starts through the first half of 2019 were lower than we anticipated leading to a weaker residential new construction demand relative to our initial expectations.
We believe the key drivers of new home construction all line favorably over the long term and were encouraged by some of the commentary from our national builder customers. However, there are no clear signals yet for a meaningful acceleration of activity during the second half of 2019.
The North America repair and remodel market experienced mixed levels of demand during the first half, making us cautious about the outlook for the remainder of the year.
We think this is timing, but our expectations for growth within the repair and remodel channel in the second half of the year have moderated.
Similar to our thoughts for North America, and new home construction, we believe many of the key drivers of our and our activity remain favorable over the long term.
Europe segment demand was flat during the first half of the year and varied by region.
We experienced the weakest demand in northern and Central Europe , which account for the majority of segment revenues and the strongest demand activity in the UK and France.
Our full year outlook assumes flat volume in Europe and at this point of the year. It looks like we're on track with our original expectations.
In Australasia, our expectation at the beginning of 2019 was for a gradual deceleration in housing activity throughout the year, However, new home construction deteriorated at a faster rate than anticipated, particularly late in the second quarter.
Australia is housing industry Association or HIAA now forecasts, a 17% decrease in housing starts for the year compared to expectations of an 11% decline anticipated at the beginning of 2019.
While the recent election and subsequent rate cuts should be a positive for the new construction market in Australia, the timing and magnitude of any benefits are uncertain and unlikely to yield results in 2019.
Please turn to page seven for an update on our footprint rationalization and modernization plans.
As a reminder, we expect to generate $100 million of savings through a series of footprint consolidation and modernization projects, yielding approximately a 3.2 million square foot reduction of our facility footprint. Starting this year, we had projects in process or other approved projects in the pipeline that represent approximately a 1.1 million square foot reduction were approximately 35% of the total projected reduction.
Since then we completed several facility closures and transition that capacity to remaining locations.
We have added project plans for the next 700000 square feet or about one third of the remaining reduction needed to hit our targeted cost savings.
In our North America door business, we're making progress deploying modernized production lines in several locations as part of this overall footprint rationalization program.
These new lines, which include manufacturing processes proprietary to gel with were designed and engineered to increase production rates reduce cost and improve quality.
We're in the process of scaling up these new lines, which we expect will increase throughput by reducing cycle time and reduced per unit production costs by 20% once older more manually intensive capacity and redundant sites is taken offline.
Last week I visited with the team at one of our door modernization plans and was able to see firsthand the progress that we're making.
When you see the new lines operating impact of one piece flow and automation come to life with the elimination of material handling and batch processes.
The reduction in labor and scrap are clearly seen an engagement of our associates as infectious.
With greater throughput and improved quality output, we know we have a winner.
I look forward to updating you on these projects again later in the year.
Before turning it over to Jon on page eight I'd like to tell you about a new product launch and I'm very excited about.
You already know that we have great focus on cost and productivity, but an equal importance are the investments, we're making in product innovation that drive growth by bringing new solutions to our customers.
We believe our oral line composite Windows series will be a meaningful contributor to growth in years to come our world line Windows utilize proprietary technology and a blend of materials exclusive to gel one to satisfy the unique need in the market a product with the beauty in a static of wood windows and the durability of vinyl windows.
Worldwide, both slimmer sightlines in incorporating more glass than existing composite alternatives and at an attractive price point, we anticipate a limited launch on the west coast in the fourth quarter and have a national rollout plan in 2020.
Customers tell me that oral line, we'll open up more opportunities with a larger array of architectural designs for homes. The combination of design opportunities the ability to bring more light and better views into the home with a product that both the look and feel of wood with the durability and price point of vinyl is a game changer.
Our solution is unique and our customers are excited and I couldn't be more pleased with the investments we've made to enhance our product portfolio.
With that I'll pass it over to John Linker to provide a detailed review of our financial results for the second quarter.
Thanks, Gary and good morning, everyone I will start on page 10.
For the second quarter net revenues decreased 4.6% to 1.1 billion.
The increase was driven primarily by a 3% reduction in core revenues.
And a 3% headwind from foreign currency.
This was partially offset by a 1% contribution from the acquisition.
We reported net income of $22.4 million for the second quarter, a decrease of 12.4 million versus prior year.
Decrease in net income was primarily driven by lower revenues FX headwinds and acquisition costs related to the purchase price structure of a recent acquisition as well as IP investments specific to the quarter.
Our effective tax rate was 35.3% in the second quarter in line with our expectations for the quarter.
And full year of 33% to 36%.
Excluding the impact of the guilty provision of tax reform, our normalized tax rate in the second quarter would have been approximately 25%.
Diluted earnings per share was 22 cents, a decrease of 10 cents compared to prior year.
Adjusted diluted earnings per share was 45 cents.
Adjusted EBITDA decreased 4.9% to 127.6 million.
Year over year consolidated EBITDA declined due to the impact from lower volumes and foreign exchange adjusted EBITDA margins were flat compared to prior year at 11.4%.
Core EBITDA margins, excluding the impact of FX and M&A. We're also unchanged compared to prior year. We are pleased with our ability to maintain margins given the more challenging demand environment.
We accomplished this through price cost tailwinds.
Discipline and cost productivity and SGN a controls.
North America, and Australasia drove strong EBITDA margin expansion on lower revenue.
While Europe core margins decreased primarily due to the impact of mix cost and efficiencies and inflation.
Page 11 provides detail of our revenue drivers for the quarter, our pricing realization in the quarter was once again strong at 2%.
However was offset by 5% decline in volume mix.
We saw positive price realization in North America, and Europe , consistent with our expectations.
As previously mentioned demand headwinds and Australasia were significantly worse than expected in the second quarter shown by the 11% headwind and volume mix.
Please move to page 12, where I'll take you through the segment detail beginning with North America.
Net revenues in North America for the second quarter were slightly down, 0.7% and core revenues declined by 3%.
As expected, we continue to see healthy price realization of 3%, but this pricing was more than offset by a decline in demand.
Volume headwinds were most pronounced late in the second quarter.
Adjusted EBITDA in North America increased by 9.7% driven by strong core margin expansion of 120 basis points. This is the third consecutive quarter of core margin expansion in the segment.
I am pleased with our ability to drive continued north American margin improvement on 3% lower core revenue. This demonstrates the progress we're making from favorable price cost realization in addition to productivity initiatives.
We clearly see the effect of our north American productivity initiatives in the quarter.
As labor and variable overhead rates improved as a percent of our manufacturing cost structure contributing to the 120 basis points of core margin improvement.
As an example of labor productivity, our highlight that our North America Windows business is now operating with 620 fewer headcount than at this point last year, while also maintaining on time and full delivery rates above 90%.
We also aggressively controlled SGN and the quarter supported by a sizable North America head count reduction in May to rightsize, the business with the lower volume base.
Our opportunity set continues to grow in North America has since our last call in May we increased the size of our productivity project pipelines for the second half of the year.
Moving on to page 13.
Net revenues in Europe for the second quarter decreased 5.7%. The decrease in net revenues was driven primarily by foreign currency.
We saw sequential expansion in price, but this benefit was offset by volume mix for flat core revenue growth.
Adjusted EBITDA in Europe decreased 21.8% as adjusted EBITDA margins decreased 190 basis points to 9.7%.
Margins were impacted primarily from mix inflation and cost and efficiencies.
As Gary mentioned earlier, we are disappointed with the continued margin contraction in our Europe segment and as a result, we have accelerated cost actions and restructuring of the business in the quarter. We completed the closure of our Posiet, Finland facility as well as executed a number of headcount reductions in our central European business to control cost structure and set the stage for sequential improvement in the second half of the year.
Our productivity project pipeline in Europe is very healthy and we also see favorable price cost into the third quarter.
Given this visibility.
Combined with the cost reduction actions taken in the second quarter.
And the recent announcement of our Europe segment leadership transition I expect that Europe will return to core margin expansion in the second half of 2019.
On page 14, net revenues and Australasia for the second quarter decreased 16.8%, driven primarily from an 11% contraction and core revenue and a 6% impact from foreign currency.
The softening of the Australia residential new construction housing market significantly worsened in the latter part of the quarter.
We saw our volumes dropped from low single digit percentage decline at the beginning of the year, which was anticipated to unprecedented double digit percentage declines in demand by the end of the second quarter and we are still seeing these volume decreases in the low teens early into the third quarter.
Price for the second quarter was flat to prior year.
Adjusted EBITDA in Australasia decreased 11.9%, however, adjusted EBITDA margins expanded by 80 basis points to 14.2% due primarily to core margin expansion of 110 basis points.
Margin expansion on lower volumes was due to positive productivity from ongoing initiatives and footprint rationalization projects to rightsize the business as well as tight cost controls.
Our productivity initiatives resulted in improved material usage and labor rates as a percent of our cost structure versus prior year.
We grew our Australasian productivity project pipeline nicely so far this year.
Giving us visibility to cost savings that will offset market headwinds in the second half of 2019.
SDMA is also a focus area as we initiated a new round of headcount reductions in the quarter to rightsize SDMA and Australasian business.
On page 15.
Cash flow from operations improved $44.7 million in the first half of 2019 to a use of $20.6 million from a use of $65.3 million in the same period, a year ago, driven by improved cash from operations through more efficient working capital of utilization.
Our capital expenditures increased $6.2 million in the first half compared to the prior year.
Our cash flow performance, an increase in capital expenditures were both in line with our expectations and outlook for the full year.
As a reminder, our first and second quarter cash flows are typically negative due to the seasonality of our working capital cycle.
On the balance sheet, we ended the second quarter with total net debt of 1.45 billion an increase of 90 million since December 31 2018.
The increase in our net debt was primarily driven by the cash used to fund the VP acquisition, we closed in the first quarter.
And seasonal working capital usage.
Our net leverage ratio was 3.2 times and remains at the upper end of our target range, our balance sheet remains strong and our capital structure liquidity and free cash flow generation will provide us with the flexibility to reduce our net leverage ratio overtime and fund our strategic initiatives.
Before turning it back over to Gary I'll summarize the first half of the year. We're very pleased that we executed on our margin improvement plan amidst a challenging demand backdrop and I'm also encouraged with the year over year improvement and cash flow conversion.
The new construction housing market provided mixed signals across the globe.
And has not shown the clear signs of modest acceleration, we were hoping to see for the second half of the year.
While we remain optimistic about the long term demand drivers in our markets. We believe it is appropriate now to realign our near term revenue growth expectation to the most current market demand trends.
Ill turn it back over to Gary to take you through our latest 2019 outlook and provide you with closing comments.
Thank you John Please turn to page 17.
We have revised our expectations for 2019 consolidated revenue growth from 1% to 5% to approximately flat.
Reflecting our second quarter revenue performance softening demand trends and Australasia market uncertainty in North America, and the divestiture of CMD.
While demand in global end markets prompted the change to the full year revenue outlook, we continue to attract and win new customers in key product lines and realize favorable pricing with our existing customers.
We're maintaining our expectations for adjusted EBITDA margins for 2019, which results in a lowering of the expected adjusted EBITDA range to $450 million to $480 million from the previous range of $475 million to $505 million.
We estimate that we will generate approximately 26% to 27% of full year adjusted EBITDA in the third quarter year over year earnings growth in the third quarter will be limited by the Nonrecurrence of income from a $7.3 million legal settlement recognized last year as well as the unfavorable impact of foreign exchange.
We expect a core EBITDA margin will be approximately flat in the third quarter due to the 60 basis point headwind from this settlement last year.
Finally, I'll note that we have no significant update on the Steve's litigation appeal process and given the ongoing nature of the proceedings, we will be unable to take any questions on this topic during the Q and a session with that I'd like to open the call up for Q in AG operator.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from Matthew Bouley with Barclays. Your line is open.
Good morning, Thank you for taking my questions.
I guess, firstly on the head count reductions across all three segments could you.
I guess size that up a little in terms, what the margin savings will be and where these reductions in sales or manufacturing employees across the board just is there any risk to the growth side that would result from that thank you.
So I'll take the last part first we.
Were pretty surgical in where we're taking out cost.
It's certainly not putting any risk on the opportunities that we might have to service our customers and that comes first and foremost we're in a really good position as far as our on time.
Delivery and our ability to meet all of our needs in each one of the markets, but if you look at where we are the slowdowns occurred, particularly in Australia, we had some opportunities across North America in some of our operations plus we've got the ongoing work that we're doing with our.
Rationalization modernization programs, which naturally give us some some productivity opportunities and head count as well as other costs.
At this the size I mean, we're talking a couple of hundred heads and Thats DNA across the company.
We won't get a full benefit in Q3 and Q4, just given the timing of when those feather and but I would just categorize it more this is a pay as you go mentality or when we when we see the volume we're going to invest until then we got to make some short term savings to to make sure we hold margin.
Okay perfect. Thank you for that and then.
Secondly, the modernized production line in doors that Gary mentioned as part of the overall rationalization effort are those savings included in the 100 million are incremental to that and just anything we should understand around the capex and timing.
Of those savings related to that thank you.
Yes. So those are included in the 100 100 million savings for the for that program in particular, that's what we've talked about we've now you identify your we came to the year, we probably had about a third of that identify we've added about another.
30% to that so we're kind of half way.
So in in the identification and now sorry and started the execution we've been closing some facilities. This year already building new modernization plans.
As I talked about earlier.
We visited one last week I was just amazing to watch.
The new technology and the new operations.
Just it's visible.
It's visible when you see where the cost comes out.
Fewer people less material handling single piece flow.
You are very efficient and then the quality of the product coming off the line to significantly better all of that is going to to build up obviously, we're into kind of the bigger investments are our upfront to get things started we will realize some savings this year as we've mentioned before but it really starts to pick up and accelerate in year, two and year three.
Okay. Thanks for the detail.
Your next question comes from Mike Dahl of RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
And Gary and and John I wanted to follow up on some of the market commentary and just ask for a little more detail I think you'd talk about on.
The new construction side, just no clear signs of.
Re acceleration and then some stability in our in our on the new construction side clearly the homebuilder order trends at least the public ones have inflicted.
In reaccelerated to but somewhat notable degree.
And so I was hoping you know outside of just your normal.
Oh bag between you know orders or starts and when that impacts your business just give us a little more color on why you don't think.
That's that's been a clear indicator and maybe give us some comments around the cadence of what you saw in terms of north American growth or U.S. growth through the quarter and into July .
Sure Mike It's John I'll start certainly agree with you that during earnings season, we've seen some I'm more positive commentary from the builder community in terms of order rates or even some of the distributors talking about no work starting to increase year over year and the wholesale channel in terms of growth I would just say front from our standpoint as the quarter progressed, you know certainly in June was meaningfully weaker than Oh in terms of North America on the wholesale channel of them than April and May and so I guess from the commentary that Gary maybe you know, we certainly acknowledge that there it looks like there's some green shoots out there in terms of translating that into building products sales and no work for us in Q3 and what's in our pipeline. We just haven't seen that yet so I would attribute that more to the lag that you are not going to reference between orders and starts to get commencing and then that falling through to a being a supplier to that.
Yes, just Doug just underscore that we're prepared for.
For an up tick in demand.
In in those channels, we are well positioned from a inventory production capacity standpoint, so we're there to answer the call.
And.
We're staying very very close to our customers. In addition, we picked up some new channel partners, along the way and you know those cannot indefinitely contribute to growth as well as the market improves.
Got it okay. Thanks.
And then second question.
Clearly despite the.
Softness on the top line your ability to hold margin guide is a positive.
Sounds like price cost is helping can you give us.
A little more color on from a price cost perspective, how you're thinking about the.
Balance of the year, and then specifically related to tariff impacts what does your guidance now include and is there any.
Is there any potential impact from the proposed list for to your business.
Sure.
So I guess price cost in the second quarter.
We reported 2% price realization for the whole company.
I would size material and freight inflation at about a 1.5% as a percent of sales. So there was about call. It a 50 basis point tailwind.
In the quarter on material and freight and we are seeing freight moderating, it's certainly not as bad as it was at this point last year sort of stayed at these higher levels.
And then the inflation side is I guess performing in line with our expectations.
So I guess as we built built up the rest of the plan for the back half of the year I don't really see that materially changing that landscape changing I'm, if anything and Europe , we might see a little bit more acceleration on price cost I, just given the timing of some increases there and then second part of your question around tariffs.
Boy, it's really a moving target right now with all the.
The rhetoric in.
Diplomatic activity that's going on.
I would say for what to go into place for rest of the year that's embedded in our guide.
You know it's interesting. This most recent round that if it's enacted the currency devaluation and actually mitigate some of that on the RMBS, though.
Between that and some of the activities that we're taking to meaningfully move products outside of China.
You know, we believe that will be a insulated and I'll just remind you guys. It's 100 million of spend roughly was what we spent in China last year to import into the U.S. on a cogs basis of three and a half billion. So as we shrink that now those purchases down from China.
This becomes less and less the material issue for javelin globally.
That's really helpful. Thank you.
Your next question comes from Josh Chan of Baird. Your line is open.
Hi, good morning, Thanks for taking my question.
The first question is on sort of the footprint rationalization.
Could you just kind of update us on what kind of savings you are expected expecting this year I don't thing.
A lot, but but then into 2020, what kind of savings.
Should we expect from that program.
So we have we previously said, we expect to get around $10 million realized savings. This year on the program, so far and that will accelerate year, two and year three as we go forward and more of the projects come online. The first years, it's been more about you know the investment getting.
Again, the pilot plants in place so we're already seeing plants in all regions.
Youre coming off line, we were little bit slower in taking capacity offline in the early stages. So that we didn't impact our ability to serve customers as we're making those transitions, but we're now at that point of the year and in the process. The first phase where off some of that.
Capacity will be coming off line, Josh So we do expect to see that you're we're right on plan, we like where we are.
In terms of what we're seeing with the new plants and our ability to take off more capacity as the rest of the year progresses.
Okay. Thanks, and then my second question is sort of on the guidance.
Basically taking what you've done in the first half and then the Q3 guide I think it implies.
And more meaningful step up of EBITDA at least on a year over year basis in Q4 is that.
Am I looking at it the right way and what kind of provides you the confidence about the EBITDA improvement I suppose in the in the fourth quarter.
Yeah, you're right.
And so the I guess the implied guide here for Q3 means that core margins are going to be pretty flat year over year in Q3, Gary called out that there is a nonrecurring.
Headwind that we had from last year, that's about 60 basis points. So the core operations are actually performing better than Q3, but we got to lap that.
That Q3 item.
And then Q4 I mean, you just asked about the footprint savings most of that $10 million is really falling through in Q4, just given the timing of when we're taking some of the redundant capacity offline.
So that really start to benefit benefit us in Q4, and then just I guess remember that Q4 of last year was that it was a pretty challenging year quarter for us both top and bottom line and so we've got a favorable comp there in Q4, which will contribute to the margin expansion as well, but I guess, if you look at all the components sort of price productivity.
Those tee up well for for Q4, and then I think we are assuming some level of modest volume.
Acceleration sequentially from Q3 to Q4 in North America, not much but certainly we are assuming that Q4 will be a little better than Q3 and that contributes to sort of eliminating some of that volume mix headwind in Q4.
Okay, great. Thanks for the color there and thanks for you guys to time.
Yes, I appreciate it.
Your next question comes from Rueben Garner of Seaport Global Securities.
Your line is open.
Thank you good morning, everybody.
Good morning.
So.
Maybe.
In the North American segment can you talk about any.
Whether its year to date or the quarter or just in general differences in that volume and or price trends between your windows business and your doors business. Just just trying to see if there are maybe different.
Market drivers right now whether its inventory in the channel or that sort of thing.
Sure.
I think we did talk I think last quarter about.
Windows being down in Q1 versus prior year.
And then Canada being down and Q1 versus prior year pretty pretty meaningfully I'd say the windows piece still down in Q2 year over year, but some sequential improvement think were.
More aligned with the market there as opposed to some of the share headwinds that we've had in the past.
Canada is still pretty pretty pretty big headwind for us in Q2, and then we believe our door business sort of performed in line with the market and we've spoken a little bit about the new construction side, maybe Gary you want to comment on sort of what we saw in the retail the retail side and Q2, yes. So we we talked about residential new construction earlier the rent on the retail side do we saw a little bit of a choppy order patterns.
In retail.
Because really towards the end of the end of the quarter and coming into the quarter for Windows and then in the quarter a little bit so we're expecting that to to clear up we've gotta.
It looks like a pretty good backlog building and.
Capability to deliver on that so we're we're we think it's timing was tiny in the retail channel more than anything else. So we're pretty hopeful that that that'll that'll straighten up and come back in.
And as far as differences between the businesses go you know were seeing our productivity program pretty consistently across all the categories as well as costs, all our geographies which is.
That's a sweet for this business overtime and and were pretty.
Pretty excited about seeing that and thats going to help us through as well on this margin expansion regardless of product category.
Okay, Great. That's helpful and maybe that kind of leads into my next question. So it seems like you're maybe ahead of or definitely ahead of schedule and some of your.
Initiatives.
At least from a facility rationalization standpoint, as we look into next year, how should we think about.
Savings targets between your two buckets rationalization and operational excellence, what kind of visibility do you have as we move on to 2020% that you guys pull in some of these things board.
Well I think I'll wait to give you guidance later on not 2020, but at this point.
What I would tell you is were probably right, we're right, where we expected to be on the rationalization program.
We're the good news is that it's working as we planned it to work with folks are really engaged in.
In delivering quality quality products quality processes in our new.
Rationalize facilities. So what I'd say is we're really right on track in terms of being able to take our latent capacity offline. So.
I'd probably call it that but that allows us to continue to move forward with the next phases.
Sequentially and and with good confidence and maybe get more of the latent capacity out sooner in subsequent periods than than we did in the first phase so feel really good about that the other thing that we feel really good about and maybe they are we are a little further along than we thought we'd be is on the deployment of the gel one excellence model or our business operating system.
We've got.
Good visibility to our to our productivity pipelines in all the businesses in all the regions a lot of rigor around that cadence and that's what you're seeing come through even as we said when we set up these programs.
We we weren't going to rely on revenue I guess, we got our first test in the quarter are we able to a holder of spam margin.
Declining market.
No. Unfortunately have to show it this way, but we're pretty pretty feel pretty good about where those programs are leading us.
Great. Thank you guys.
Our next question comes from Michael REO of JP Morgan Your line is open.
I was wondering if you could bucket out the drivers of the lower margin in Europe , this quarter relative impacts from mix cost inefficiencies and cost inflation.
Sure.
So if you look at the Europe segment.
I believe rough numbers Europe was down around.
By five to 8 million in the quarter of EBITDA, the $8 million in the quarter.
Yeah, I bucket that is FX, probably around 4 million.
Mix being a with a little bit of volume around 4 million.
And then some some cost inefficiencies and distinct cost that hit us in the quarter and the 5 million range and then I was offset by productivity and price to get you back to the reported results. So we did see some nice productivity, we did see some some price, but unfortunately, it was wiped out by the mix and some of those distinct cost that we faced in the quarter.
Okay, and just a little bit more on the next was that related to a change in next year versus emcare into your business or anything else that would be impacting next that that would have had that impact on margin in Europe .
Yeah, It's primarily primarily channel so, we're where we where we got our revenue.
Yeah, we were a little slower in.
In central Central and Northern Europe , and a little a little stronger in the UK so more about Doug.
Geographic and channel mix.
Okay. Thank you.
Your next question comes from Phil Ng of Jefferies. Your line is open.
Good morning, guys. This is Maggie on for Phil.
John you touched on this a little earlier, but can we get an update on your efforts to regain share and windows and North America.
Seems like these operational issues have been resolved for a while now but volumes haven't really come back so what needs to happen to turn this into a tailwind and how do the new product launches kind of factor into that.
So this is Gary I'll I'll start.
The so you're right.
A lot of the effort, we put a lot of effort over the last call. It 12 to 18 months on ensuring our operations.
In our Windows business.
Yeah, we're we're able to out to meet customer demand, we've done that and we are getting kudos from customers about that we've been on a targeted program to two.
To first of all regained share with existing customers.
Demonstrating our ability to meet their demand and not disappoint them on projects, we're seeing that that turn for us and we're seeing sequential improvement in the windows business.
You know in that in that realm.
Additionally were able to take the new product launch over the rather sad that do today, but the siteline product, which is a very desirable product, we've been able to use that to gain new customers as well and the time to convert customers.
Maybe it's been a little bit longer little bit slower than we had hoped but it's certainly been positive you know we get the initial commitment.
For the conversion and they take time to work through their process of training stock up.
And and getting their customer base online with our new product categories as they work through.
Clearly somebody else's product at the time, so there is a little bit of a of timing there, but we feel pretty good when we look at it sequentially the operational issues are behind us.
Certainly the Siteline product is playing very very well for us and then as I pointed out earlier, we've got some great new products in our Windows business coming that we think are really going to be a growth driver for that business going forward.
Got it thanks for that color.
And Vince.
Saying so it was a positive in the quarter and I think a lot of that was carry over pricing from 2018. So how are you thinking about pricing in the second half, especially given the softer demand outlook and can you maintain a positive price cost spread with just carry over pricing or do you need to get incremental pricing in the second half.
Sure I am pricing will be a little cautious about making a lot of forward looking statements on our you know any any pricing actions or strategy.
You know that the cadence of price increases or is pretty pretty structural and the industry and we have made largely for the most part the actions that we're going to take in our key markets at this point in the year. So to your point most of.
Most of what we are.
Seeing is at this point at the benefit of pricing actions that were taken at the end of last year or earlier this year.
Obviously, we're going to continue to monitor the markets. We we certainly feel like we are we have to recoup any material or or radar tariff inflation to the extent that that.
You know that that environment changes and we will absolutely be on the front foot and take additional actions as we need.
But but for now in terms of the updated guidance that we've given you for today, there's really no additional pricing actions that are required to get there.
Awesome. Thanks, guys.
Your next question comes from Truman Patterson of Wells Fargo.
Your line is open.
Hi, Good morning, guys. This is kind of a multi part question. So I'll ask this one and then hop back in queue, but whatever revolve around Europe , you know I was.
I was expecting with as much pricing is you've got the margins would have been a little bit better can you just walk us through a little bit.
More in depth of the 120 that core margin decline you know it seems like there had been some.
Okay persistent issues from product quality I believe some input supply issues price cost timing mismatch.
I guess, what's occurring in this segment currently can you dig into the steps that you're taking to keep from op margin from deteriorating in in the back half of the year and John you gave increasing back half margin guidance or what gives you. The confidence that you guys will be able to expand margins in the back half, especially given.
You know the the new leadership changes that have come from outside the company.
Yeah, No no fair Fair point, we're we're certainly not satisfied with how the Europe segment has performed on we've got now a number of quarters in a row of core margin contraction I'm, It's a fantastic business for US we have good market positions and a lot of these markets.
We really like our footprint, there and and great brand names and so it's a business. We like we're just not satisfied with the operational performance for the most part I categorize the performance while there had been some volume headwinds in a few markets. This has mostly been a mixed story for the last few quarters as well as a.
I'm just an execution story for the last few quarters in terms of.
Prior to this quarter, we were negative on price cost in Europe going back into the last few quarters that should now flip into the back half of the year.
Productivity is certainly improving and the pipeline of visibility Weve got there we talked about the one facility closure that happened in the quarter there there's more activity.
Coming in that regard that we can't talk about publicly yet that we are we have visibility too. So I guess, if I think about the back half of the year.
Just just comparing first half to second half.
Price cost will certainly be an improvement we're seeing inflation starting to wane in Europe , and then we'll get the benefit of pricing productivity should be a step up in the back half of the year and then just the nonrecurrence of some of these cost inefficiencies that have hit us in the first half of the year.
And acute a few of our business units will contribute to the margin improvement yeah, I would say to add to that that John and I have taken a hands on a very very deep hands on approach to the cadence of a productivity programs Anda and operational performance with the team in Europe .
We did make a leadership change that we did announce.
If somebody that's going to bring that debt.
Matt that bigger and discipline to ensuring that our operational performance improves we like what we see in the productivity programs, we like what we see in the region.
The.
The restructuring and and monetization programs in Europe .
And we're pretty confident that we will see that.
That inflection here in the second half.
Okay included embedded in that guidance.
Are you expecting to see a.
A return of mix or are you guys still expecting mix to be a material headwind.
Yes, we expect to start lapping that actually in the second half of the year, we started seeing that really towards the end of the second half of last year.
So theres some lapping there were expect you know we we actually in Europe are expecting the market to be about where we expected it to be this year, which is flat net net when you think about what's up and whats down. So it's just been a mixed market, but but overall flat and we would expect that we'll start to lap that mix.
Okay. Thank you.
Your next question comes from John Lovallo of Bank of America. Your line is open.
Hey, guys. Thank you for taking my question first can you just give a little color on the overall North America window and door market and how that performed in the second quarter and what your 6% decline in volume and mix may have represented in terms of share loss.
Yeah, I would I would say that we probably add we were right with market on that I would say that we've been seeing as I said earlier on the window side, we've been seeing sequential improvement.
In that business.
But some some.
Our.
Calmer Radek are choppy order patterns in the retail side.
But with the residential new construction business never really taken off in the first half.
We're probably right in line with market doors, we've been kind of solid performers and I don't I don't think I think shares probably stay pretty even.
In that environment.
Okay. Thanks, and then.
John in terms of the second half I think you had initially.
Thought there might be some spend that would have driven higher corporate expense is that still the case and how should we be thinking about kind of the corporate expense.
On a quarterly basis in the back half.
Sure we did see that in the second quarter, there was about $2 million to $3 million of distinct cost us. Some some projects that we had going to hit the PML in the second quarter that I don't expect that to recur and Q3 and Q4.
So I guess in terms of.
In terms of actual corporate costs, there should be nothing surprising there I mean should probably have perform.
Performed largely in line with the second half of last year, I guess is how I would characterize it in terms of Q3 and Q4.
Okay. That's helpful and then in one quick one here the creative media development, what was the EBITDA contribution on an annual basis.
I would just say that that business was below company margins. It was positive EBITDA margins, but it was it was below.
Below company level margins, and so pretty pretty small I guess on 25 million.
Of annual revenue.
Okay. Thanks, guys.
Yes.
Your next question comes from Keith Hughes of Suntrust. Your line is open.
Thank you question on inventories, where do you think you stand on inventory levels now versus demand.
Any kind of regional variation.
That would be helpful as well.
I would say that we are in a pretty good position given that we would have expected a little bit better.
Yes, a little bit better performance on the topline in.
In the quarter. So we were you know certainly at that point, nothing outrageous, but certainly well position. We also have good capacity.
So that if there were an uptick in demand, we're well positioned to take advantage of that you'll probably.
In.
Yes, it does.
In Australia, we are where we saw the short it's a much more short cycle business, there and much more build to order. So so we're pretty pretty matched up in terms of where we are there Europe again, we talked about it being mixed so it's still even within Europe . It's a mixed physician and here in North America, we feel like we're in a pretty good shape.
As far as we're concerned I would just add onto that if you'll recall in the past we did struggle but.
Window inventory being below expectations and triggering some service issues.
And at this point this year. We're we're we're in a very strong position from a stock build standpoint, where we can build stock and window. So to the extent that some of these.
Positive development that the homebuilders and distributors are starting to see that flows through to US. We're we're very well positioned to service our customers and maintain service levels, where they are.
Okay. Thank you.
Yes.
There are no further questions at this time I will now return the call to Gary Michelle for closing remarks.
Thank you and thank you everyone for joining us this morning, and your continued interest in jail when Im really pleased with the progress that we're making in our productivity and process improvements as we deploy jam our business operating system around the world.
With the market headwinds that are disappointing, we're committed to delivering productivity and margin expansion, regardless the pipeline of projects and programs, including our rationalization of modernization program. In addition to our continued improvements in execution will ensure that we deliver favorable results. We look forward to sharing additional progress on these in the coming quarters and again, thank you for joining us today.
This concludes today's conference call you may now disconnect.