Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the JELD-WEN Holding, Inc. Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

[Operator Instructions] Thank you. Chris Teachout, Director of Investor Relations, you may begin your conference..

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, which we will be referencing during this call. I'm joined today by Dave Nord, Chair of the Board of Directors; Kevin Lilly, Interim CEO; and Julie Albrecht, CFO.

Before we begin, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we are providing with respect to certain expectations for future results.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Dave..

Well, thanks, Chris, and good morning, everyone. Thank you for joining us today. As Chair of JELD-WEN's Board of Directors, I'd like to start this morning's call with some brief remarks about our third quarter performance and share some of the Board's area of focus. Before I turn it over to Kevin and Julie to walk you through more detailed results.

In summary, in the third quarter, we delivered solid revenue and EBITDA improvements over the prior year. I'm pleased that management has been able to deliver this performance really in light of challenging macroeconomic environment and some significant internal changes as you're probably aware of.

The Board has clearly supportive of management's actions to drive change and ensure that JELD-WEN reaches its full potential. We're committed to improving the financial performance of the business and delivering more value for shareholders. We've already taken a number of actions in the past few months to help us achieve this goal.

First, as I'm sure you are aware, we appointed Kevin Lilly as Interim CEO, who you'll hear from shortly. The search for a permanent successor is progressing well. We've identified a short list of qualified internal and external candidates, and we're working closely with an executive search firm to further narrow our list.

We expect the new CEO to be an exceptional operator who possesses strong knowledge of both the capital markets and shareholder value creation. While I can't speculate on timing, we're actively moving through the process, but making sure that we find the right leader for the future success of JELD-WEN.

Part of the Board's responsibility is to build on JELD-WEN's core of senior leaders by continuing to strengthen the management team as well. To that end, we've made several leadership appointments this year, including Julie Albrecht, our new CFO, who some of you may have talked to.

She joined us in July, so you'll have a chance to hear from her shortly. We've also refreshed our regional leadership in all our business segments, both Julie and our regional leaders have extensive management experience and we'll utilize their expertise to refocus the respective areas of the business and improve performance.

One of the actions in the area streamlining the company, we initiated the strategic review of our Australasia business with a goal of maximizing value for both JELD-WEN and the business. The process is well underway, but of course, no assurances can be made regarding the outcome or timing of our review.

But that said, we have some strong interest in the business thus far. As we move forward, we're certainly committed to sharing any meaningful updates with you as they materialize. I guess finally, we continue to seek out and add fresh perspective to the Board recently appointing Cathy Halligan as a new Director in September.

Cathy's diverse skill sets will be a great asset to our Board, particularly in digital transformation, marketing and e-commerce. As these actions demonstrate the Board and management team are fully committed to improving our results and maximizing the full potential of the company.

As a recognized leader in the global building products industry, JELD-WEN's brands, manufacturing capability and broad customer partnerships position the company for long-term success. Despite near-term headwinds in markets we serve, we know there are attractive and durable drivers of long-term growth.

So with that, let me turn the call over to Kevin to expand on these areas and provide more details about some of our near-term actions before Julie takes on and describe a little more of the detail of our operating results.

Kevin?.

Thanks, Dave. Good morning, everyone, and thank you for joining us today. Since stepping in as interim CEO of JELD-WEN, it's been my mission to help guide our team through a period of market uncertainty and organizational transition. I care deeply about the company and my teammates and believe in our potential to succeed.

My objective is to try a focus across the organization to improve execution and performance, while laying the groundwork for further strategic actions so the new JELD-WEN CEO can hit the ground running. I firmly believe that this company has a strong foundation that will help deliver our long-term success.

For more than 60 years, JELD-WEN has grown through building strong partnerships, making investments, both organic and inorganic, to serve new customers and markets and embedding innovation and sustainability into our strong portfolio of high-quality brands.

While there are challenges in the near term, we are positive on the intermediate and long-term demand potential in each of our end markets that remain under built for both new residential homes and existing homes that are increasingly in need of renovation.

And we remain confident in our ability to drive profitable growth through innovative products and services that meet the unique needs of our customers. However, as we've assessed recent financial performance, our results are not reflective of the full potential of JELD-WEN.

In recent quarters, we suffered from taking on too much without sufficient alignment and accountability at every level of the organization. The result was inconsistent execution and not enough bottom line impact. We understand that prioritization and execution must improve and progress must be reflected in our bottom line.

To this end, we're taking decisive actions to improve results that ensure the fundamental strength of the business lead to meaningful shareholder value creation. Now before I discuss the current actions we're taking to improve execution and financial performance, let me first start with the highlights of our third quarter results.

We generated revenue of $1.3 billion and adjusted EBITDA of $116.5 million, an increase of 13% and 18% year-over-year, respectively. All segments were positive in core revenue growth with price realization contributing 15% and volume mix adding 3%. North America led our regions with a 23% increase in core revenue in the third quarter.

EBITDA margins expanded this quarter by 40 basis points to 9% due to favorable price cost, improved operating leverage from volume mix and positive productivity. Julie will provide more detail on our financials and outlook shortly.

As we head into Q4 and next year, we faced an increasingly challenging macroeconomic environment with persistent inflationary pressures and a softening housing market in North America and Europe. We're taking a fresh look at our business to find new ways to reduce the impact on our financial results, well positioning the company for success.

As Dave shared, we're taking steps to streamline and strengthen the company to improve our bottom line over the short and long term as we continue to navigate these near-term challenges. Now let me share several actions we're taking to improve our cost structure and profitability.

First, we continue to rightsize the organization in line with our customer demand as the housing market continues to soften. This includes reallocating resources to where demand is strongest, while scaling back in areas where we are seeing softness. We also reduced management layers to lower costs and improve agility of decision-making.

Second, we've taken an end-to-end look at our supply chain to better manage our raw material and trade spend while ensuring improved security of supply to our customers. We've taken steps to optimize our supplier partnerships.

In some instances, moving to multisource and in others, reducing the number of suppliers to take advantage of our purchasing power. In both scenarios, however, we're taking the opportunity to reengage with our suppliers to create mutually beneficial outcomes. To that end, this past quarter, we hosted a 2-day supplier summit in the U.S.

with approximately 75% of our partners. We also held one-on-one meetings in Europe with key strategic suppliers. The purpose was to strengthen our partnerships by better understanding each other's respective needs, discuss collaboration opportunities and identify ways to take cost out and improve sustainability of the value chain.

Third, we're also taking steps to simplify and streamline our business to focus resources on our core assets and product lines. The strategic review of our Australasia business that Dave mentioned earlier falls into this category. Also, the closing of our Melton U.K.

stairs and windows business that will conclude by the end of the year is another good example. But from a day-to-day execution perspective, this is about prioritizing initiatives in aligning the appropriate resources to deliver quality execution.

Lastly, our segment leaders are taking a customer-centric, data-driven approach, assessing profitability and growth potential across product lines, channels, geographies and facilities. Julie and I have worked together with our senior leaders to institute more process discipline and governance to deploy appropriate resourcing and execution oversight.

Our goal is to ensure the organization can more quickly implement measures to accelerate profitability and growth.

Before I hand the call over to Julie, I'd like to take a moment to recognize our global associates and their continued dedication to the company and our customers, especially during this time of significant change and external challenges.

In our recent annual employee engagement survey, we had extremely strong participation rates and experienced improvement in nearly every key measure year-over-year. The strength of our engaged and talented global workforce is what gives me tremendous confidence in our potential as an organization.

I'll now hand the call over to Julie to share more detailed financial results..

Thank you, Kevin, and good morning, everyone. I'm excited to join you all for my first call as JELD-WEN's CFO. I'd like to begin with some perspective on my near-term priorities to improve our financial results.

Since joining in mid-July, as good considerable time getting to know my finance team and many other associates and have also visited several of our manufacturing facilities. I feel strongly that we have a team eager to win and ready to help develop and implement a framework to improve our operational and our financial performance.

I'm focused on four areas that will drive shareholder value and strengthen JELD-WEN for the benefit of all stakeholders, and you see these on Slide 7. First is improving our cost structure, to address both cyclical and structural opportunities to enhance profitability.

Second is data availability, quality and analysis, so we can better use data to guide our decision-making on the commercial side, as well as to improve our operations. Next is increased rigor and alignment around capital expenditures with a clear linkage to our strategy and optimizing returns.

And lastly is promoting a culture of engagement and accountability with finance being a strong business partner that helps JELD-WEN achieve its financial targets. You'll hear me talk more about each of these in detail in the coming quarters and in our conversations. And please feel free to ask me any questions you have on these topics.

I also want to highlight that I am committed to providing useful information that helps you better understand JELD-WEN's overall business and financial results. Now to our consolidated results for the third quarter, which you can see on Slide 8.

As Dave and Kevin had mentioned, we delivered solid revenue and adjusted EBITDA improvement over the prior year period. Our revenues were approximately $1.3 billion, and our adjusted EBITDA was nearly $117 million, which resulted in a 9% EBITDA margin, a 40 basis point improvement compared to the prior year.

Adjusted EBITDA benefited from favorable price cost, the impact of positive volume mix and improved productivity, which were all partially offset by higher SG&A expense. Shifting to our GAAP results. We reported a third quarter GAAP net loss of $33.2 million compared to net income of $40.5 million in the same period last year.

This quarter's loss was primarily due to a $55 million pretax non-cash goodwill impairment charge in our Europe segment, reflecting their challenging operating environment. There is additional information in the appendix about our GAAP results and our non-GAAP financial measures.

Now as you see on Slide 9, our 13% sales growth was driven by core revenue growth, with price realization having a 15% positive impact and increased volume mix growth contributing 3%. These positive drivers were partially offset by the impact of foreign exchange from the stronger U.S. dollar.

On this slide, you also see a breakdown of key revenue growth drivers by segment. Core revenue growth was positive and improved sequentially across each of our segments. Price realization was again strongest in North America at 17%, followed by Europe at 13%, while Australasia increased 10%.

As we realized a full quarter benefit of price increases implemented during the second quarter to combat persistent inflation. Moving to volume mix. North America and Australasia volume mix grew by 6% and 4%, respectively, while Europe decreased 3%, reflecting the increased difficult operating environment in that region.

I'll now review our segment highlights for the third quarter, which are on Slide 10. Beginning with North America. Net revenue increased over 23% driven by strong price realization and positive volume mix, partially due to an easier comparison due to the labor challenges experienced in the third quarter of last year.

Increased demand in this quarter was strongest within windows, exterior doors and company-owned distribution. Adjusted EBITDA margin in North America increased 120 basis points to 12.6% due to favorable price realization and positive volume mix all partially offset by higher SG&A expense.

Net revenue in the Europe segment decreased 5.5% driven by foreign exchange headwinds, partially offset by 10% core revenue growth. During the third quarter, macroeconomic conditions deteriorated in Europe driven by the continued war in Ukraine, significant inflation and rising interest rates.

All of these factors are negatively impacted the performance and near-term outlook of our Europe business which is reflected in the goodwill impairment we took this quarter. Europe's adjusted EBITDA margin decreased 150 basis points to 5.9%.

The decrease in margins was driven by significant cost inflation, including a more than 80% increase in energy costs year-over-year and the negative impact from lower volume mix partially offset by productivity savings.

Australasia revenue increased almost 6%, including a 14% increase in core revenue, partially offset by the negative foreign exchange impact from the stronger U.S. dollar. Demand was strong for windows and doors and generally remains healthy overall despite persistent labor challenges in our building customers.

Australasia adjusted EBITDA margin increased 90 basis points in the third quarter to 12.8% due to strong price realization and positive volume mix partially offset by higher SG&A expense. Now looking at Slide 11.

Operating cash flow used during the first 9 months was $73 million compared to operating cash flow generated of $135 million during the same period a year ago. We generated positive operating cash flow during the third quarter of $92 million which was in line with the prior year.

Free cash flow used was $131 million during the first 9 months of the year, but was positive by approximately $70 million during the third quarter.

We are focused on improving working capital in our segment and expect to generate positive free cash flow in the fourth quarter, while positioning ourselves to significantly improve cash generation in 2023. Our balance sheet and liquidity remain in good position. We ended the quarter with total cash of $200 million and liquidity of $560 million.

Our net debt leverage decreased to 3.6 times from 3.8 times last quarter, but does remain elevated from 2.8 times at the end of last year.

This increase in leverage compared to last year was primarily due to lower earnings, increased working capital, reflecting both inflation and supply chain challenges and from repurchasing $132 million or approximately 7.6% of shares outstanding as of year-end 2021. This is a good place for me to comment on our capital allocation priorities.

First, we will continue to invest organically, specifically in projects that exceed our internal return hurdles and strengthen the financial position of JELD-WEN. We're developing new processes and tools that create more rigor around our capital expenditure process, while ensuring alignment with our segment strategies.

In addition, we are focused on reducing our financial leverage, and we are targeting a net leverage ratio of less than 3 times in the near to medium term.

We will also continue to evaluate smaller acquisition opportunities and other capital allocation options depending on a number of factors, including our net financial leverage, and our cash generation, as well as the returns achievable from these capital deployment opportunities. Now moving to Slide 12.

I'll provide our current view of market conditions in each segment. In North America, looking at almost any leading indicator of activity, the housing market is slowing and is likely going to continue moderating.

While repair and remodel or R&R activity is impacted by many of the same factors, similar to prior housing cycles, we do anticipate R&R activity to fare better than residential new construction.

We started to see orders moderate during the third quarter, particularly in our traditional channel, and this stuff is has persisted through October as residential new construction activity slows and our distribution partners align their inventories to end market demand.

And while demand is likely continuing to soften in the coming months, I do want to express our optimism over the intermediate and long term. North America remains significantly under-built relative to demand for new residential homes, while the average age of existing homes continues to increase.

In Europe, the economic situation continues to deteriorate, largely due to the effects from Russia's invasion of Ukraine. This conflict has driven broad inflation and rising interest rates across the region.

Within the residential portion of our business in Europe, for the past few quarters, we have felt softening demand in residential new construction, dating back to the beginning of the COVID-19 pandemic, given the lengthier build cycles compared to North America.

More recently, demand has significantly slowed for repair and remodel projects as consumers pull back on discretionary purchases in response to higher energy costs and the uncertain macroeconomic outlook. Our channel partners, particularly within retail, are also aligning their inventory levels to softening demand.

And in Australasia, demand for residential new construction and repair and remodel largely remains healthy, and we continue to see good demand for our products given the backlog of existing homes, and extended build cycles.

While visibility for residential new construction is limited, we expect repair and remodel demand to remain healthy and for the backlog of existing homes to drive good demand for our business through at least the first half of 2023. Now going to Slide 13.

After assessing current market conditions, and our financial forecast, we are reaffirming our full year core revenue guidance of 10% growth, including 4% to 6% consolidated revenue growth.

However, given persistent inflation pressures and lower-than-expected productivity savings, we are revising our full year adjusted EBITDA expectations to be between $400 million and $420 million from our previous guidance of $430 million to $450 million.

On this slide, you see the primary drivers underlying our updated guidance expectations for the year. Increased inflation, particularly for raw materials and energy is the biggest factor, followed by lower-than-expected productivity improvement.

This reduced expectation for productivity cost savings is primarily due to underperformance in North America in the third quarter due to labor and material usage inefficiencies. Partial offsetting these negative drivers are lower SG&A expense and favorable foreign exchange, both relative to our prior guidance.

We've also taken a fresh look at our CapEx guidance. Based on our run rate, and CapEx pipeline, we've updated this guidance to be between $85 million and $95 million of CapEx spending this year.

As Kevin described, we are taking necessary actions to lessen the impact on our financial results, softening end market demand and persistent inflation filed to in the company for longer-term success.

While we have not overcome the negative earnings impact from these headwinds this year, we have taken cost actions that we expect to deliver total annualized savings of more than $80 million.

However, we have not been able to take cost out as quickly as we need to, and we continue to actively identify and develop additional actions to improve margins. In closing, I'd like to reiterate what Dave and Kevin said earlier.

We have the foundational elements in place to drive significant improvement in our financial performance including a talented and engaged workforce, a strong portfolio of brands and customer partnerships that we have established through over 60 years of business.

I'm confident that the initiatives we have in place and others that we are developing will help JELD-WEN deliver its potential for long-term growth and profitability. We'd now like to take your questions.

Operator?.

Good morning, guys. Thanks for taking my question. The first one is, Julie, maybe you could talk about what drove the elevated SG&A and overall corporate expense in the quarter.

And do you think this will normalize as we move further into the fourth quarter?.

Yeah, certainly, John. Yes, just really a couple of things driving that. I mean one thing is timing and amounts related to incentive comp expenses. I mean there are various drivers there. When you look at kind of year-over-year and quarter-over-quarter, as you can imagine.

Obviously, in each quarter, we're assessing what our expected payouts are under our various incentive plans. And so when we look at this Q3 versus what we were doing last Q3, there were just higher expense this year due to different dynamics. The other thing is really higher medical claim expenses.

Just trends and increased activity there, a little bit of, obviously, inflation continuing in medical costs as well. But really, those are the two kind of main drivers to the higher SG&A. We are taking cost out of our SG&A line as part of our cost reduction initiatives.

Those are kind of ramping up in Q4, and then we've got additional actions that will be taken kind of rolling into 2023. So generally speaking, I don't expect anything really unusual going forward there. Obviously, earlier this year, right, we've had some other income that was higher than we would have expected.

That's normalized more in Q3 and so I'd probably expect Q3 levels, maybe a little bit lower as we wrap up this year..

That's helpful. Thank you.

And then, Dave, in your CEO search, are you looking for individuals with building products or industrial experience in addition to sort of the characteristics that you mentioned before?.

Yeah. Certainly, that's one of the characteristics. It's not an absolute necessity. Certainly, that's an advantage. But the right level of broad experience, leadership capabilities, capital markets experience, it really depends. We've seen a great list of candidates, a lot of interest.

And there is a number of candidates who have building products experience in various areas, including in some past experience in doors and windows. But it will really - that's one element that we'll consider along with many others..

Got it. Thank you, guys..

Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open..

Hey. Good morning, everyone. Thanks for the color so far. So trying to understand the back half EBITDA guidance a bit better. The walk down the midpoint by $30 million and you all have in your slides, you know, higher inflation, reduced expectations for in productivity savings.

Any chance you can just break out the magnitude dollar amount based on those two buckets? And with incremental inflation, just trying to see if you can quantify the incremental pressures between North America and Europe?.

Yes, sure, Truman, good morning. Yeah. I guess the inflation impact in the second half is slightly more negative, I'll say that the negative impact from the lesson productivity, that inflation headwind versus our prior expectations is higher by around kind of that $20 million to $25 million range.

And I will tell you that energy both in Europe and North America is, you know, gosh, $15 million or so of that increase, just - I mean I think you can imagine, in both regions, energy prices, there's just been upward pressure, right, as we move through this year.

And it was - while we expected some of that, we absolutely didn't expect what we're really looking at here. And again, I guess I will say - and a lot of that is in the fourth quarter, right? So that's really where we're seeing more of a drop off in our margin expectation than what we experienced actually kind of broadly in the third quarter.

The other big bucket there would be just continuing pressure on certain of our raw material costs. So kind of energy and raw materials are what's driving that higher inflation expectation. When it comes to productivity, again, that's kind of probably in that $15 million to $20 million range.

A lot of that was in the third quarter, although a little bit in the fourth quarter as well. And I'll kind of just speak to that for North America. One of the drivers was ramping up a couple of our new products and really for various reasons, just a little more inefficiency in those ramp-ups than we were forecasting.

And so that was just one specific item driving some of that weaker productivity. So I guess what I'd say generally speaking is, as we entered the second half, we expected second half margins really - again, for the second half to be closer to 9% and we're looking at closer to 8%.

And so and again, a lot of that has been - you can see that drop off there in the fourth quarter..

Okay. Okay. Thank you for that. And then in the prepared comments, you mentioned European volumes are down 3%, and the conditions were deteriorating a bit given the kind of energy crisis going on. I'm just hoping you can give a little more color on the countries that you all operate in.

And since we're a month in October, just what you all are expecting how volumes trend in the fourth quarter?.

Truman, I'll kind of start, and then I'll hand off to Kevin. I will say in Europe, in the fourth quarter, I mean, we're looking at around that 15% range of year-over-year volume decline. And so that is a pretty big drop off versus what we had in the third quarter and what we've had so far this year.

So that really, again, does reflect that really continuing weakness that we've already mentioned. But for really additional color, I'm going to hand off to Kevin..

Yeah. Thanks, Julie. We're pretty much seeing with Europe, the problems in pretty much all countries. And with some of that, we're seeing some of the volumes dropping pretty significantly just due to those pressures, especially on energy. There is a lot of folks just worried about heating their house as well.

So some of those pressures and what we've tried to do through this is providing that transparency of where we see some of those markets going forward and trying to be accurate and transparent on where we see some of those volumes dropping from a demand side in Europe..

All right. Thank you all for your time and good luck in the coming quarters..

Thank you..

Thanks, Truman..

Our next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open..

Morning. Thanks for taking my questions. My first question is actually a follow-up on the response to Truman. So if we look at the fourth quarter guide in total, you've got revenues, I think, implied down low single digits to up to 10% decline and you have been running comfortable double digits on pricing. So it implies quite a large decline in volume.

I think you just talked about Europe.

Maybe could you talk about North America volume expectations for 4Q? And if it's possible, can you split out what the impact is in your view of kind of customer destock versus sell-out?.

Yeah, sure, Mike. I'll start with that. So yeah, so maybe just to kind of put it in context. And so the fact that we're not changing our total sales guidance, 4% to 6%. And then core within that at about 10% growth.

As we've mentioned in our second quarter call, that the reduction was driven by pricing being better than we had expected, but volumes being lower, and we mentioned volumes being flat to down 2%.

I will say at this point, while we're continuing to expect that 10% core revenue growth for the year, we do see pricing being a little bit stronger than we had expected three months ago and volumes being overall a little bit weaker. And so now I've put us more at that kind of like 2-ish to maybe 3% down kind of year-over-year.

So that just kind of grounds us in the year. When we look at the fourth quarter, pricing continues to be, call it, low double-digit growth. Volume at the company level is kind of - we expect to be down kind of in that 5%, 6%, 7%, and so that really is across the regions.

And so Europe is the leader there, I've already mentioned an expectation of down around 15%. But we do expect North America and Australasia to be down kind of in that low to mid-single-digit range as well. And so we are seeing really global weakness in demand..

Yes. Just to add on to Julie's comments regarding North America, a lot of this has to do with kind of some of those challenges we're seeing everything from a slowdown in the residential with slowness in applications, permits, starts, et cetera. That's what we're kind of seeing.

It's pretty widely known that those market conditions are softening in North America. So some of those adjustments, but as far as about taking related to that, we are seeing some of that in certain products. Overall, I think we're adjusting - working with customers and suppliers to balance that out at this point.

In fairly decent shape, but something we like keep our eye on..

Got it. That's really helpful color. And then my second question, in the opening comments, you talked about kind of this resource exercise with respect to featuring how to resource customers and pursuing just profitable growth, optimizing what you're targeting there in terms of the right - customers, the right sales.

I'm curious, as you embark on this exercise, is this something where and it could involve just walking away from certain customers or product lines? And any initial thoughts on what a potential revenue impact could look like from this?.

Yeah, I'll take that one. I think it really gets into honing down looking at all of our lines of business kind of independently and together. To your point, in areas that we do see low profitability, we're going to focus on a fix or repair process.

But to your point, as we evaluate those, if we find that there are certain products or lines of business that are not sustainable, we're going to evaluate those and determine working with customers, et cetera on how we mitigate that, whether it's how we improve repair or fix or how we may exit. But some of those, it's still in process.

We don't have any definitive decisions on that. But I think it's fair to say that we're looking at everything - all things around the table..

Got it. Okay, thank you..

Your next question comes from the line of Michael Rehaut from JPMorgan. Your line is open..

Hi, everyone. Thank you for taking my question. This is Andrew ph for Mike. I just wanted to ask, would you be able to give us a rough quantification of how you expect raw mats inflation to impact the P&L next year.

And any product launches that might help drive mix or top line growth?.

Yeah. Good morning, Andrew. We're not really prepared to comment yet. I think to share externally on really detailed on our outlook for next year. We're working through our more detailed budgeting process right now. And so I think it would be premature to comment, especially specifically about raw materials as we move into next year..

Okay. Great. Yes, that goes in line with what a lot of companies are saying right now in our space.

Would you be able to give us an update on any of the labor challenges or the absenteeism you guys saw last quarter and trends within the plants?.

Yeah. I'll take that one. It's kind of unique by region. But overall, I think some of that has leveled out. It's still a challenge as far as just labor shortages across the board. But I think from what we saw last year, we've mitigated some of that and it stabilized to a certain degree.

Those challenges will continue, but we're looking obviously at not just the labor but also how we modernize some of our facilities and you invest in a little more automation as well/.

Okay. Great. That's all for me..

Thank you..

Thank you..

Your next question comes from the line of Matthew Bouley from Barclays. Your line is open..

Good morning, everyone. Thank you for taking the questions. Back on that topic of inventory destocking. I'm curious, I think, Kevin, you mentioned something around specific categories.

I just wanted to pull on that thread a little bit more? Just which categories within the distribution channel do you think either have excess inventory or maybe over ordered in recent quarters? And sort of as you look forward, what do you think that destocking impact might look like? Thank you..

Yeah. I'll give you a couple of examples. It's kind of a mix. But I think in the area of exterior doors and also interior doors, we're seeing some of that pulling back. So I would say as far as where we see some of that with retail and traditional, those are probably some of the major areas we're seeing.

And obviously, we're trying to adjust working with customers and our suppliers balancing that. But I would say those are the two that we're probably seeing some of that destocking and inventory focus..

Got it. That's helpful.

And then second one, just on the topic of pricing, given the level of pricing that has been implemented and clearly a strong number there in North America, I mean, I guess it's kind of a follow-up to the prior question, but can you speak to sort of which categories and channels are better positioned to kind of hold price where it is? Or in those categories where there might be some excess inventory, should we expect to see sort of more promotional activity going on? Thank you..

Yeah. I think we're still seeing, as Julie mentioned, some challenges with inflation, et cetera. But overall, it's pretty dynamic. I would say that what we are trying to do is make sure that kind of we're focused on the value that we provide to customers and hope the price reflects that.

But of course, it does mean that we're going to be working with suppliers and customers. As always, balancing out to make sure that it's mutually beneficial of how we manage that. So I think price, it's been a dynamic. We've been a little bit kind of behind, but it's also something we're trying to do to work on inventory as well..

All right. Thanks for the color..

No problem..

Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open..

Thank you. Good morning, everyone..

Good morning..

I wondered - for my first question, can you talk a little bit to the mix shift that you're seeing? Has there been any noticeable change there as you think about custom versus stock products or anything that you're expecting as we go into year-end?.

Yeah. I think mix is very dynamic. I do think that for us, working with a lot of our customers on the Pro custom segment is obviously desirable. I think we're seeing with some of the pullback, it's happening kind of across the board. I don't have specifics as far as if we're seeing some of our more the custom or traditional versus retail.

It's kind of been a mix across the board, but it's something that we're trying to balance..

Okay. And then perhaps taking a step back and thinking about things bigger picture, there's obviously been an intense focus on the operations side of the business in the last couple of years and really driving some efficiencies and some improvements there.

As you think about the go forward and positioning a new team in place, how are you thinking of some of those efforts there where they sort of fall within your priorities? And anything that we should be looking out for or thinking about from that perspective?.

Yeah. I think it's a really strong focus as always. You've heard us talk about the JELD-WEN excellence model or our GEM which we've been implementing over the years. And a lot of that has provided us some additional capacity and some optimization.

I would say going forward, one of the things we focused on is really pushing that accountability within the region down to the plant and function level. So I think what you're going to see in future quarters is a little more definitive plans of how we're managing some of that productivity as well as rationalizing and optimizing our footprint.

So we have a lot of work going on in that area. But I do think that what's different to me is driving that accountability within the region, the businesses down to the plant level, but also the function level as well. So we've got some plans in place. It's too early to comment.

But going forward, we expect to provide stronger updates and progress on how we're doing in future updates..

Okay. Thank you. And good luck..

Thank you..

Thank you..

Your next question comes from the line of Phil Ng from Jefferies. Your line is open..

Hey, guys. I guess, sorry to harp on this. Julie, you mentioned that pricing is holding up pretty good. I am still a little surprised the big step down in margins, anything you want to call out because it is a little short of the drought than we expected.

How should we think about decremental margins across the regions would be helpful as well?.

Yeah, absolutely. Yes. So as I mentioned earlier, we have entered the second half, expecting our second half margins to be around 9%. And again, we've had a really significant drop off in our outlook really specifically to the fourth quarter. That really is most dramatic in Europe when you think about just absolute margin deterioration.

And so that is really driven by, again, in that region, the dramatic drop-off in demand but as well as this inflation I've talked about as well.

So that - when you look at margins in Europe, I'd expect them to be in the fourth quarter better than what we saw in Q3, but still pretty significantly down versus the prior year and generally more in this range that we've delivered throughout 2022, obviously, this year.

And then just talking then about North America, really, I think they'll be able to deliver pretty consistent margin levels kind of Q3 into Q4. And so while that is lower than we had expected earlier - well, a few months ago, we're not expecting as dramatic of a drop-off versus our expectations as we are in Europe.

And then a little bit of weakness when it comes to Australasia. But - not as much. And again, their numbers since they're only about 10%, 15% of our business really just overall have less of an impact. So hopefully, that helps.

But really, Europe is kind of the leader when it comes to how margins have deteriorated from what we were expecting and especially in the fourth quarter. and a little bit less dramatic, absolutely in North America..

And then decrement how should we think about decremental margins by segment?.

Decremental?.

Volumes decline as leverage?.

Yeah. I mean, yes, it's - I mean, I don't know that I have the specifics there. I mean volumes are -- I mean, again, we're expecting volumes to be down like I've already mentioned in Q4, and again, most dramatically in Europe.

So - but I can't really comment right now on how specific that is, again, really a combination, especially in Europe, of the lower volumes and more significant inflation..

And then I guess for 2020 and , I don't know if you guys are prepared to talk about this. You've been very successful in taking price even in a softer demand environment. How should we think about your ability to kind of maintain price and push price to offset inflation.

Any updates, any potential major line reviews on the horizon, particularly in North America in the retail channel? Thanks a lot, guys.1.

Yeah. Yeah, I think that's always an area of focus, you know, working closely with our customers, especially on the retail side. Overall, as far as price, as I mentioned before, it's something that we're going to have to balance. We're still seeing some of those inflationary pressures and also some of the recovery. We've been behind on that recovery.

But like I mentioned, too, it does really involve our close relationships with suppliers and customers to kind of talk through that. We think price is one component that we need to measure, but also gets into the overall value for our customers, and that's a conversation that happens really customer to customer about what warrants the price.

So we're going to do our best to manage that, but it's going to be an ongoing dynamic..

And your next question comes from the line of Tim Wojs from Baird. Your line is open..

Yeah, everybody. Good morning.

Maybe just on the backlog, just exiting the quarter, where does your backlog sit maybe just in North America versus what would be kind of typical at this point in the year?.

Yeah, this is - I would say that we're not a real heavy backlog business. But I would say that we are seeing some of those reductions year-over-year, it's not so much, but definitely quarter-to-quarter, we're seeing some of that draw down.

I think from an overall perspective on backlog, in some places, we're pretty healthy in our Australasia business, but North America, specifically to your question. That's one we're seeing a little softness, but that's the one we're trying to balance with inventory levels and working with our entire supply chain going forward.

But we are seeing some pressure on the backlog just because of the demand softening because of the overall reductions in residential new construction..

Okay. Okay. And then, I guess, you've got the strategic review in Australasia that's ongoing.

I mean, how are you thinking about maybe the rest of the portfolio? And if there could maybe be kind of a larger strategic review that could be on the table? Just Europe and Windows and the distribution business here in North America and doors and components of things just not clear that all those businesses need to kind of strategically be together.

So I'm just kind of curious what your opinion on that is..

Yeah, I'll start and Dave can jump in as well. But at this point in time, Australasia is the only part that we're doing the formal strategic review. We are focused on reviewing all segments, to your point, -- but at this point in time, it'd be premature to discuss any other options.

What we are focused on is how we adjust to the challenges in Europe and reviewing plans of how we kind of rightsize that business. North America as well, like I said, doing a line of business reviews to make sure we got good visibility and transparency across our product lines. So we can kind of build that into our future plans.

I don't know, Dave, there's anything else you want to add?.

Yeah. No, I think that's right. I think one of the things to keep in mind, as Kevin talked about one area of focus for us is simplifying the business. But that includes, as Kevin mentioned, that we probably took on too much the team took on too much to execute effectively.

So we're focused right now on the Australia business, improving Europe, and there's still a lot of work to do within the North American business even on things that we have talked about and had in executing on, but when you look at the footprint rationalization.

But your point on product lines that's come up before, I mean there'll be ongoing evaluation as there always is. but some of that might be more medium term or longer term..

Okay. Okay. Appreciate the thoughts. Good luck on the rest of the year here..

Thanks..

Thank you..

Your next question comes from the line of Joe Ahlersmeyer from Deutsche Bank. Your line is open..

Thank you. And good morning..

Morning, Joe..

Yeah.

In response to an earlier question, I don't think I heard this covered, but can you talk about the relative pricing in the quarter within North America for doors versus windows?.

Yeah. We don't - I mean, we don't really get into that level of detail. So I think you can assume nothing terribly unusual there, but we - that's not information we typically provide..

Okay.

Even just on a directional basis, not maybe a number, but was doors stronger than windows or anything like that?.

I don't think there was anything unusual there between the different kind of market segments. So I think you can assume that it was pretty reasonably balanced across the North American portfolio..

Okay. Great.

And then, Julie, on cash flow, can you maybe just walk us through a couple of different scenarios that could play out for sources and uses of cash over the next year? You talked about working capital management you have the potential asset sales out there? And then just how you might prioritize the uses of that cash, specifically as you look to bring down leverage below that target?.

Yeah, absolutely. And you're spot on that we're keeping a close eye on different sources of funds as we move through 2023 and obviously, our - one of our main focus areas is what we do control, and that is obviously our earnings generation and our management of working capital.

And so those are really top priorities because we obviously have room for improvement in 2023 over what we've delivered this year. So that's kind of like number one, when you think about sources of cash. But you're also spot on that we have potential divestitures out there that are kind of all a part of the activity that we're working on.

So then when you get to uses, if we can deliver whatever amount of sources, I mean, as I mentioned in my prepared comments, continuing to invest in ourselves, and I think we have some improvement for how we manage kind of front to back of our CapEx processes. But obviously, we'll continue to invest in the business.

Again, in the spirit of kind of control what we can control. I mean we can control how we spend our CapEx dollars and generally, are we getting the returns on those that we expect. Absolutely deleveraging as a top priority. We do want to get down to that less than 3 times net leverage. We could have a path to that absolutely during 2023.

And so that's, again, kind of co top of the list with CapEx. And then you kind of move into other opportunities, right, as we move beyond.

I mean we've got various potential for how do we want to say, invest in ourselves when it comes to footprint rationalization, other types of, call it, kind of transformation, profit improvement activities that are beyond what we would be doing just in the normal course.

And so that's another potential use of funds as we look at really driving improvements to our profitability next year and beyond. Then M&A, care repurchase, all those are things that we will just review very opportunistically as we move forward..

Thank you very much..

Your next question comes from the line of Ruben Gardner from The Benchmark Company. Your line is open..

Thank you. Good morning, everybody. Most of my questions were answered, but I do have one on next year. I'm hoping you guys can help us with kind of a bridge. Obviously, there's a lot of moving parts with savings and cost initiatives and pricing actions to keep up with inflation and then now the potential volume headwinds.

Can you kind of - I mean normally, we would take volume decline to put the decremental margin on it to kind of figure out what the downside is.

But can you talk about what the offsets are to that next year and kind of how to think about a downside earnings scenario?.

Yeah. I think there's not a lot of guidance to provide for next year. But just to your point about things we're going to do on the cost side and the productivity side it's a balance. Some of the things we need to do have our longer-term initiatives, but we're also trying to balance that with the short-term stuff that we can do.

A lot of it has to do with the day-to-day stuff we do in the gen side as far as driving productivity across our plants and operations.

But also, as Julie mentioned, strong look at our SG&A as far as from a cost structure, we're looking to make sure that we scale, but also with an eye on the ability to scale back up in the future if demand goes the other way.

So I think that's one of the challenges we have is making sure we can scale appropriately and we have better indicators as far as making sure we're moving faster as the market adjusts..

Okay. And just a follow-up, maybe a different way to ask it. I mean, I think you guys were doing kind of in 2017 through 2019, you were kind of in the low 400s from an EBITDA perspective with single-family starts in the $800,000 to $900,000 range.

Is that - is there a downside to that right now just because of some of the issues that have gone on or any changes in share or anything else? Or can you just kind of frame it from that perspective?.

We're really not going to get into that level of detail right now. I think as we've already talked about and is pretty clear from the market, especially as we start '23, there's going to be volume decline.

I think looking at second half, I think it's a big TBD right across the region, what's going on with interest rates, where is the conflict in Ukraine, where is that landed, what's the status. And so I think that demand on a full year basis next year is going to be really dynamic.

I mean I think we kind of know it's going to at least start the year weaker. And I think as far as Kevin has mentioned, you know what we're very, very focused on how do we mitigate on the bottom line, the demand weakness that we're going to see, so anyway, I think we've kind of got to leave it at that right now..

Understood. Thank you, guys..

And your last question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open..

Good morning. I wanted to think about the growth areas of Oreline [ph[ and BPI. Can you talk about how that is trending now, both from a demand and operations perspective. I think you shared something about inefficiencies in the ramp-up phase. Maybe share more on that.

And lastly, was the lower CapEx related to those two product lines?.

Yeah. I'll take that one. On BPI, we're still seeing strong demand and backlog and we've been adjusting for that demand and have mitigated a lot of that, so that's - we're good to see as we've kind of expanded to the East Coast, that business continuing to grow and giving us the right problems to work with, which is how we expand capacity.

On the Oreline side, that's one that we still are confident in that product from a long-term viability and sustainability standpoint and energy efficiency. That product has, I would say, it's ramped up slower than any of us would have liked.

So we're still getting good demand, but from a production side and volume side, we're kind of in line with some of the forecasts. I would say some of the stuff we're probably hoping to do here in Q4 is probably going to push into Q1..

And there's really no connectivity between those new products and our lowered CapEx guidance. Those are - there are other drivers around taking a fresh look at priorities in CapEx, some supply chain delays here and there. So kind of just a few different factors, nothing really unusual with the lower CapEx for this year..

Okay. Helpful. And then last quick one for me. You've talked about volume mix range for Q4, maybe to focus on North America or if you want to talk other segments.

Does that imply that pricing is still positive in Q4, but down from levels in the previous quarter, thinking about the impact of solely the pricing line?.

Pricing, kind of year-over-year pricing growth in the fourth quarter probably is a little bit below kind of what we've delivered. When I look at year-to-date pricing, I think it's like kind of in that 13% range year-to-date through. And so yeah, I think Q4 is it more in that kind of 8% to 10% range.

So yes, slightly down year-over-year, but still very solid..

Great. Thank you..

And I will now turn the call over to Kevin Lilly for some final closing remarks..

Thank you, and thanks for spending some time with us today. As you heard, we've delivered on expectations in a pretty challenging environment. And some of those challenges are reflected in our near-term outlook. It's something that we've looked at going forward, and I think we're confident and we have a very capable team to deliver.

And on the personal side, just from somebody from the inside, I can tell you there's kind of a renewed sense of urgency and energy to drive forward. We know we have a lot of work to do.

But as far as the alignment, the accountability and the focus that we have as we simplify and move the operations forward, we're looking forward to providing more updates on our progress in future calls. But thank you very much for your time today..

This concludes today's conference call. Thank you for your participation. You may now disconnect..