JELD-WEN Holding, Inc.

Q3 2021 Earnings Conference Call

11/1/2021

spk10: Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the ChildWin Holding Inc. Third Quarter 2021 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. If you'd like to ask a question during this time, press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Chris, Director of Investor Relations. Please go ahead, sir.
spk12: 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 am joined today by Gary Michel, our Chairman, President, and CEO, and John Linker, our CFO. Before we begin, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10-K and 10-Q file with the SEC. GELDWIN does not undertake any duty to update forward-looking statements including guidance we are providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Gary.
spk13: Thanks, Chris. Good morning, everyone, and thank you for joining us. I'll share how our team quickly implemented a number of measures to counteract global headwinds related to supply chain challenges, labor constraints, and inflation pressures. How our well-defined business operating system is driving productivity, cycle time improvements, and capacity expansion to meet high customer demand, and how we expect our recent actions will improve performance in the fourth quarter and give us confidence for continued growth in 2022. Please turn to page four. Over the last several years, our teams have proven their agility to operate and deliver for our customers through uncertainty while staying focused on the long term. And we once again demonstrated that agility in Q3. It's why I wouldn't trade our position with anyone. Our values-based approach to business, coupled with the discipline of our GEM business operating system, the Gelwyn Excellence Model, has separated us as a supply partner and employer. Our commitment to constant improvement is why I continue to be so amazed by this team. I have never been more confident in our leadership and teams around the world as we accelerate our long-term strategy and deliver for our customers in this dynamic external environment. No matter the challenge, labor constraints, supply chain disruptions, operating limitations due to certain COVID-19 lockdowns and adverse weather events, this team responds with solutions. We adjust and we deliver. In the third quarter, demand remained strong in all of our end markets, supporting our belief in the long-term strength of new housing and replace and remodel our R&R markets. Fulfilling that high demand was affected by universal challenges that rapidly accelerated across the industry. Orders and backlog grew in each segment, and North America posted record book-to-bill results, driven by an increase in orders throughout the quarter. highlighting the underlying strength in housing demand in our largest market and the result of our innovation and commercial excellence initiatives over the last few years. Our global team took swift and decisive action to address these challenges, leading to improved results in the month of September and our confidence going forward. As we shared in October, these short-term external driven factors impacted our full-year business outlook for revenue growth and EBITDA. However, we remain steadfastly committed to the financial targets we set for 2025 at our investor day in May to accelerate growth, expand margin, deliver cash, and allocate capital to deliver exceptional shareholder returns. In fact, the way in which our associates throughout the enterprise have approached these near-term challenges head-on, proactively seeking creative solutions to rapidly evolving obstacles, has only reinforced my confidence in our ability to deliver our 2025 commitments. Now, on page five, I'll turn to specific performance highlights for the quarter. In the third quarter, consolidated revenue grew 3% and core revenue grew 2%. Every segment delivered core revenue gains, led by continued price realization, which accelerated to 7%. For over 12 consecutive quarters, we have realized pricing in excess of material inflation, which is particularly impressive in the face of accelerated raw material inflation that is a multiple of what we originally expected at the beginning of the year. We have announced and deployed additional pricing actions that we expect to realize during the fourth quarter and into 2022. Labor supply chain challenges and mandated operating restrictions in certain regions were a headwind to volume mix and productivity, despite strong order and backlog growth that was broad-based across the segments. While we were unable to meet all the demand this quarter, it was our fifth consecutive quarter of core revenue growth. In North America, core revenue grew 2%, including a 10% contribution from price. Order and backlog growth were strong and accelerated throughout the quarter. September experienced the single greatest order rate of 2021. Focus on operational excellence initiatives is mitigating near-term labor and supply chain challenges, which continue to result in industry-leading lead times that have delivered share gains. In a few minutes, I'll highlight actions that we implemented in the quarter to attract, develop, and retain operations talent, which led to improving direct labor metrics and ultimately improved backlog conversion in September. Europe and Australasia posted solid growth as well, despite facing many of the same external challenges as North America. In Europe, core revenue grew 2% driven by a 4% contribution from price realization. Demand remains robust in key markets, and we're beginning to see signs of a recovery in the UK and France, which have experienced the most severe restrictions related to COVID-19. Despite facing significant supply chain disruptions and raw material inflation in the quarter, the Europe team continues to execute on GEM and commercial excellence initiatives to reduce cycle time, drive capacity expansion, and gain market share. Australasia core revenue grew 3% to segment's fourth consecutive quarter of core revenue growth. This includes a 2% contribution from price. The home builder incentive program, low interest rates, and solid economic growth continues to fuel a recovery in residential new construction with record housing starts in the quarter and in the repair and remodel of existing homes. However, strong underlying demand government-imposed operating restrictions and labor and supply chain constraints are extending the build cycle and leading to delays in backlog conversion. Please turn to page six. To reiterate, market fundamentals are favorable and customer demand is strong and accelerating in all three segments. And while not at historically commercially acceptable levels, Our product lead times are industry leading and proving to be a competitive advantage. We believe how we are managing the short term challenges relating to labor, supply chain and inflation will separate our performance. To mitigate the global supply chain challenges, we believe our global sourcing capabilities and self-sufficiency in key manufacturing processes are competitive advantages, as well as ensuring more reliable and consistent delivery for our customers. In North America, we insource supply of certain door components by investing in new production capabilities, which helped offset industry supply shortages, inflation, and tariffs. In many locations around the world, we were able to quickly substitute alternative materials for critical components that were temporarily not available. In Europe, when one plant was unable to procure standard sizes and thicknesses of certain components, we used our machining capabilities to rework the product to meet production requirements and continue supply. Globally, our logistics teams have dynamically modified shipping routes to avoid high congestion ports and logistics centers. We also have a robust pipeline of strategic sourcing initiatives focused on ensuring material availability, driving productivity, and mitigating raw material inflation. Most notably, during the quarter, using our value analysis, value engineering efforts, we reduced our material usage and signed new and longer-term agreements with strategic supply partners to lower costs on key commodities. The benefits from these initiatives are ongoing and will benefit operations across the enterprise. To address the widespread industry labor challenges, particularly in North America, we deployed gem problem-solving capabilities. By listening to and co-creating solutions with our frontline workforce, we deployed a hyper-local approach to recruiting, which included more flexibility in our shift structures, enhancements to our employee referral program, deployment of innovative local advertising, and ensuring competitive pay relative to market demand. We're seeing considerable progress in a short period of time. Just in September, we closed our North American staffing gap by 80 percent, experienced a 15 percent reduction in voluntary turnover, a significant reduction in daily absenteeism, and an increase in associate engagement. This has resulted in a meaningful increase in backlog conversion and customer satisfaction. Based on this progress, we expect sequential improvements in throughput in the fourth quarter. These are just a few examples of the immediate actions we've taken to minimize these external headwinds and accelerate our capacity to meet high customer demand. We've also made great progress on the deployment of our GEM model value stream sites, which are demonstrating performance separation through the deployment of GEM and the acceleration of problem solving and rapid improvement events. In all, we completed 12 RIEs in the quarter at these sites, delivering improvements in cycle time, leading to capacity expansion, and 25% direct labor productivity. We believe the early results from these model value streams provide greater visibility to the value drivers that, when extrapolated across our operations, support our long-term financial targets, including capacity expansion for growth and productivity. Some of the other perceived valuation overhangs in our business have now been eliminated as well. This includes the resolution of longstanding material litigation, including Whiskeys and Sons, which is now closed. The divestiture of our Tawanda plant is moving forward as planned, and when completed, we'll conclude this chapter in our history. Earlier in the quarter, as previously announced, Onyx sold its remaining stake in Gelwyn, affording us the opportunity to repurchase a significant amount of our shares at attractive valuations. Page seven, please. We continue to believe our shares represent a great investment for us and an excellent use of our cash. We repurchased 7.8 million shares for $220 million during the quarter and 9.7 million shares for $278 million year to date. The 9.7 million shares repurchased so far this year represent roughly 9.6% of outstanding shares at the beginning of the year. Before I turn it over to John Linker to give more detail on the quarter financials, I'd like to close out this section as I began, highlighting our values-driven premier performance culture. In October, Navex Global named Jeldwin the North American recipient of its 2021 Customer Excellence Award for Corporate Culture Impact. This award recognizes the processes, systems, and training we've instituted to proactively drive a values-based culture and build the business ethically and safely. Not only have we made great progress in our commercial and operational capabilities, but we are also building this company the right way. We thank Navex for the recognition and congratulate the 23,000 Gelbin Associates who live our values every day. Finally, as we continue to navigate this global pandemic, I want to reinforce that the health and safety of our people remains of utmost importance and a key pillar of our environmental, social, and governance strategy. This past quarter, all global leaders recommitted themselves to our core values by signing a new leadership safety pledge outlining the expectations for prioritizing associate health and well-being. As we continue to attract, hire, and retain talent, we're reinforcing a values-based culture built on personal responsibility and leadership accountability. And now I'll hand it over to John, who will provide additional detail on our financial performance.
spk04: Thanks, Gary, and good morning, everyone. I'll start on page nine. Third quarter net revenue increased 3% to $1.15 billion. The increase was driven primarily by a 2% increase in core revenue as well as a 1% favorable impact from foreign exchange. Notably, all three segments delivered core revenue growth with broad-based acceleration in pricing, demonstrating improvements both year-over-year as well as sequentially from the second quarter. Third quarter gross profit declined 6.9%, primarily a result of lower revenue volume from the external operating environment challenges and throughput limitations discussed by Gary. Additionally, labor efficiency was unfavorably impacted by labor market constraints and the ramp-up in onboarding and training of new manufacturing associates to meet demand. Finally, third quarter material and freight inflation was sharply higher than what we expected at the time of our last earnings call in August, as well as meaningfully higher than prior year. To put the magnitude in context, inflation in material and freight was approximately $80 million higher than third quarter of last year, or approximately three times higher than we saw in all of calendar year 2020. Despite this significant inflation headwind, our commercial and excellence initiatives demonstrated results. as our third quarter price realization was sufficient to offset the inflation. On a year-to-date basis, gross margin expanded 40 basis points compared to prior year, from favorable operating leverage on volume, positive productivity, and pricing that more than offset material and freight inflation. Third quarter SG&A declined $8.2 million, Excluding the impact of legacy litigation related expense in the prior year, third quarter SG&A increased as we lapped the benefit of 2020 COVID-19 cost reduction actions. Income tax was a benefit of 2.9 million compared to an expense of 16.0 million in the same period last year. Several discrete items contributed to the tax benefit in the quarter, the largest of which was associated with our election of the high tax exclusion under the GILTI legislation. Based on these impacts and the ongoing impact of tax reform, for 2021, we now expect an effective tax rate in the high teens, while the underlying gap book tax rate will be in the range of 26% to 28%. Page 10 provides detail of our revenue drivers for the third quarter. I'll highlight the record pricing realization of 7% in the quarter and 6% on a year-to-date basis. Pricing improves sequentially as we realize the benefit of additional rounds of price actions to offset inflation. North America led the way with 10% pricing in the quarter, Europe with 4%, and Australasia with 2%. Volume mix declined 5% due to the throughput limitations that we discussed earlier. Please move to page 11, where I'll take you through the segment performance in more detail. Net revenue in North America for the third quarter increased 2.1% driven by pricing, partially offset by the throughput-related volume headwinds. Continued housing demand and strong order growth contributed to a healthy backlog exiting the quarter. North America's 10% price realization rate was a sequential improvement from the second quarter as we implemented additional rounds of pricing in August to offset accelerating inflation. With the level of our backlog, however, we did not see the full benefit from this August price increase in the third quarter results. Moving into the fourth quarter, we expect a full quarter impact of this recent increase and a sequential improvement in pricing, which should more than offset inflation. Additionally, we expect a sequential improvement in volume in the fourth quarter, as we are already seeing the benefit of the work we have done to overcome labor constraints and supply chain disruptions. North America adjusted EBITDA declined 16.8% as favorable price cost was more than offset by lower volume and reduced labor efficiency. Europe revenue increased 3.7% overall and 2.0%, excluding the impact of foreign exchange. Strong pricing contributed 4% to revenue growth. This was partially offset by a 2% headwind from volume mix, which primarily consisted of throughput constraints related to supply chain disruptions for critical components. To a lesser extent, we continue to see a slight channel mix revenue headwind. Europe adjusted EBITDA declined 40.5%, due primarily to a sharp acceleration in inflation that was not fully offset by pricing in the quarter, as well as the mixed headwind I mentioned where we saw greater activity in the retail channel as compared to our higher margin project-oriented business. From a pricing standpoint, we took additional actions in the third quarter that we expect will result in sequentially improved pricing to fully offset inflation in the fourth quarter. Australasia revenue in the quarter increased 5.8% overall and 3% in local currency versus prior year. Volume benefited from accelerating housing demand. However, this strong demand was offset by revenue volume headwinds from government-mandated operating restrictions related to COVID-19. Pricing improved both year-over-year as well as sequentially. Australasia's segment-adjusted EBITDA declined 5% as positive volume growth and productivity were offset by higher inflation and lower absorption of overhead costs due to the government-mandated operating restrictions. Similar to the other segments, based on recent pricing actions, we expect to improve Australasia price-cost realization in upcoming quarters. Please turn to page 12. Year-to-date adjusted operating cash flow totaled $181.6 million, a decrease of $45.9 million. The decrease in cash flow from operations was primarily due to higher seasonal working capital investment and higher cash taxes. Adjusted free cash flow declined $52.7 million due to lower cash from operations and slightly higher CapEx. The balance sheet and liquidity remain in fantastic shape. Our cash balance declined to $443.9 million as we used $221 million to repurchase stock in the quarter. Liquidity sits at $832.8 million as of the end of the third quarter, and net debt leverage was 2.8 times, which gives us operating flexibility to invest in initiatives that will drive future revenue and earnings growth. Net leverage stepped up slightly in the quarter, above our target range of 2 to 2.5 times, due to the compelling opportunity to repurchase our shares in an attractive valuation. We expect net leverage reduction in upcoming quarters as we execute on our margin improvement plans and generate free cash flow. We remain focused on deploying our cash in a disciplined, returns-focused manner and compounding the returns on that cash over time. With that, I'll turn it back over to Gary, who will provide closing comments. Gary?
spk13: Thanks, John. Please turn to page 14. The actions we've taken to attract and retain talent, improve labor productivity, and fortify our supply chain produced tangible results in September and into October. Demand continues to be strong, and we have seen acceleration in North America order rates from August to September and again from September to October. And average shipments per day have been sequentially and significantly improving since August. And we expect this trend to continue throughout the quarter. Our healthy backlog, accelerating order activity, and improving throughput give us confidence that we will deliver revenue and earnings growth in the fourth quarter, consistent with our updated full-year outlook shown on this slide. While inflation remains a headwind, we expect that our pricing actions will more than offset material and freight inflation in both the fourth quarter and full-year 2021. Please turn to page 15. Looking ahead, we continue to expect supportive housing fundamentals in each of our segments to drive strong demand for our products. In North America, underlying demand trends, including supportive interest rates, underbuilt housing stocks, and the favorable shift in buyer sentiment will continue to drive growth in new construction and R&R. In Europe, R&R has moderated slightly from elevated levels, but overall residential demand remains healthy, and we are beginning to see an increase in commercial demand as well. In Australia, residential housing demand continues to recover from a multi-year housing recession. As COVID-19 restrictions are being lifted, we see demand continuing and eventual reopening of borders to immigration is expected to support recovery in the multifamily new construction market, a key driver of long-term housing demand. The benefits of our operating system and approach to solving problems is addressing our ability to meet the accelerated demand we are seeing. Please turn to page 16. Our innovation engines are fired up as well. We have over 120 ideas in our innovation funnel, some big and some small, which are the foundation of our growth. Some of these ideas are delivering now and are the platform for accelerated growth in 2022 as well. These ideas relate to the pillars of our universal strategy for growth that we presented at our investor day earlier in the year and include connected products, energy efficient, sustainability, and creating a differentiated and superior customer experience. Our VPI investment is paying off as well as we are now shipping product from our new East Coast facility and expect significant growth in 2022. New product introductions will also spur growth, including the new composite window product lines, energy efficient platforms, sustainable and connected door and window products. We look forward to sharing even more innovation with you in the coming quarters. The continued benefits of our operating system and premier performing culture coupled with our internal investments in innovation and new product offerings give us confidence in our ability to accelerate growth in 2022 and achieve our 2025 growth targets set forth in May, including 6% to 8% annual organic growth and 15% to 17% adjusted EBITDA margin. Thank you for joining us today. John and I will now take your questions.
spk10: 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. We'll pause for a moment to compile the Q&A roster. And your first question comes from Deepa Raghavan with Wells Fargo Securities. Please go ahead.
spk01: Hi. Good morning, Gary-Jan. Thanks for taking my question. Just focusing a little bit on your sales guidance, Your Q4 sales growth implied has a wide range. You kept your full year sales outlooks, even though you pulled down your EBITDA a little bit, understandably so. But looking at your Q4 sales growth range of low single-digit to high single-digit, what does your current throughput and conversion indicate? Does it indicate revenue growth at the midpoint, at mid-single digits, for example, for Q4?
spk04: Morning, Deepa. Yeah, so in terms of the full year guide, on the revenue side, we've left unchanged, as you noted. What I would say around your question is we do expect a sequential improvement in pricing moving from the third to the fourth quarter, and we do expect a sequential improvement in volume mix moving from the third to the fourth quarter. probably still a slight volume mixed headwind versus prior year in the fourth quarter, and then FX being relatively neutral in the fourth quarter.
spk01: Okay, that's fair. Thanks for that. Let me just switch gears and ask about your lowered CapEx output. What kind of projects are you eliminating at this point in time, And is that pretty much because of the material and labor constraints that you're seeing, or did something else change over the course of the quarter?
spk13: Yeah, I wouldn't characterize it as we're not investing in something. It's really just a timing issue of when the projects are ready to be invested. Quite frankly, we're investing in a lot of growth opportunities, and we continue to invest in our gems. productivity and operational pieces. What we're finding with GEM in particular is we're at that point where we're in that virtuous cycle now where it doesn't take as much investment to continue to get productivity and throughput improvements. because we're continuing to do rapid improvement events. We're focused on our model value streams, and we're starting to get the benefits without the necessity of significant capital investment there. But also, as we pointed out at the end of the prepared remarks, we are investing quite a bit in innovation, and we have been for the last several years. And we're starting to see that come into its own as we're beginning to launch projects and products around VPI and multifamily, our composite windows, energy-efficient products to meet regulations around the world, but also to continue to move that forward and our Energy Star. And then some really nice new products. in the connectivity space as well as sustainability. So we're continuing to invest. It's really a matter of timing and just our view of where the capital spend is at this point in the year.
spk01: Great. Thanks for the call. I'll pass it on.
spk10: And your next question comes from Truman Patterson with Wolf Research. Please go ahead.
spk11: Hey, good morning, everyone. Thanks for taking my question. So in the third quarter, the EBITDA margins were down a decent amount. And in the fourth quarter, you're expecting a rebound both year over year and kind of atypically up quarter over quarter. Just hoping you can run through some of the major parts there, why that is. Is it primarily pricing flowing through, easing of some of the supply chain constraints, some of the internal initiatives that you've done? Just trying to understand the confidence level there.
spk04: Thanks, Raymond. Yeah, I think in terms of the pieces of the Q4 implied sort of Q4 guidance, and maybe we'll walk kind of Q3 to Q4 sequentially as a way to think about it. I would say price cost will be more favorable in Q4 than it was in Q3, just given the comments we made around additional pricing actions that we put into place. So inflation is still a very significant headwind. for us, but the favorable contribution from price-cost will be more in Q4 than it was in Q3. And then I think the other piece is that we've made a lot of progress on our staffing levels and our productivity and getting new associates in that we hired over the course of the summer to meet demand. And the longer that those associates are with us, the more productivity we see and more stability in the workforce. And so we've done a great amount of work in kind of closing that headcount gap, filling positions, and so moving sequentially from the third to the fourth quarter, we see benefits both just in terms of throughput that we're, as Gary mentioned, we're already seeing that in October, kind of sequentially over what we saw in the third quarter, just as well as some more productivity on the labor efficiency side of having a more stable workforce. Those are really the big drivers in terms of that sequential improvement and margins that you're looking for. But I'd say a high level of confidence in being able to deliver that.
spk11: Okay. Okay. No, understood there. Clearly demand is not the issue right now. When I'm thinking through, John, you called out, I believe it was $80 million of raw material and freight inflation in the third quarter. Could you run through when you think kind of the peak pressure, inflationary pressures will peak? Will it be kind of fourth quarter or first quarter? And then hoping you can run through some of the major buckets of inflation or pressure points.
spk04: So, sure. Tough to call when we're going to see the peak, Truman. I don't know in terms of when inflation is going to peak. It seems to change every day. And I'd say at this point, as I just indicated in your first question, I mean, inflation is going to be worse on a dollar basis in Q4 than it was in Q3, but we've got more price in place to offset it. You know, when does it peak? I don't know. Can't call that all. But in terms of where are we seeing it, the most significant acute issues right now are around freight, particularly ocean freight, which has been pretty well advertised in terms of freight surcharges that are coming in from Asia on containers. Logs and lumber, we don't buy a lot of true lumber per se, but we do buy a lot of logs. And while lumber has come off, still seeing inflation on the log side that go into our sawmill. Packaging, millwork, and really metals would be sort of the other categories where we're seeing the big inflation right now. But on a percentage basis in the quarter, I'd say the most acute was that sort of freight and logs millwork piece is kind of where we saw the most increases on a percentage basis.
spk11: All right. Thank you all. Thank you.
spk10: And your next question comes from Matthew Boulay with Barclays. Please go ahead.
spk06: Hey, good morning, everyone. Thanks for taking the questions. I want to ask about that comment you made on accelerating order activity in North America. It sounded like September was particularly strong. Was that sort of across end markets and channels and, you know, thinking new construction versus R&R products? Where exactly are you seeing that order acceleration? Thank you.
spk13: So thanks for the question. We're really seeing a pretty broad base, particularly in North America. We have been focused with our commercial activities over the last several years and really focused on improving our customer experience. We've updated a number of our product lines and really, really been improving our relationships in those markets and coupled with the operational excellence piece where our lead times are actually like I said earlier, not necessarily commercially acceptable from a historic level, but they are still industry-leading, particularly in the window space and in exterior doors, for example. So we've been able to pick up some share. We've been able to drive that, but we're starting to see demand, which was very strong into the quarter, at the end of the quarter continue to accelerate. And, you know, the first signs even in this quarter is that continuing. So we're seeing it, like I said, you know, kind of broad-based, but very much in the areas that we focused on gaining share, improving our product line, and our customer experience.
spk06: Got it. No, thank you for that call there, Gary. Second one, back on the price-cost side, it sounds like you do expect to remain competitive. price-cost positive in Q4, and it sounds like there's, you know, that's reflecting sort of shipping, the higher-priced product you've got in backlog right now. I wasn't quite clear. Are there also additional pricing actions being contemplated or is part of that, or just how should we think about kind of the next leg of pricing actions into 22? Thank you.
spk13: Yeah, so you kind of hit on it. We took a number of actions throughout the year, and we took some more in the third quarter that are really what we're expecting. We're going to see hit in the fourth quarter. It's going to be part of the benefit as we shift through the backlog and those price increases start to be reflected in our shipments. We are in the process of announcing additional pricing actions that go into effect for 2022, kind of on the normal cycle, and really trying to stay ahead of the inflation where we are. So some of the benefits John walked through a little bit earlier of the pricing that we'll see in the fourth quarter is really already implemented and just needs to work its way through our shipments.
spk06: Great, great. All right. Well, thank you very much.
spk10: And your next question comes from Susan McClary with Goldman Sachs. Please go ahead.
spk09: Thank you. Good morning, everyone. My first question is, you know, touching on Europe, can you talk about the factors as we think about the fourth quarter and perhaps the cadence of that margin as we think about where you ended this quarter going into the end of the year? Sure.
spk04: That would be an area where we've As Gary was just talking about sort of pricing actions, I'd say in Europe specifically, that's an area where we've got sort of new actions that were implemented in the third quarter that we did not see any benefit of, and we would expect as we move into the fourth quarter that price cost to be favorable. but in Europe specifically, we did not. So, you know, if you think about margin improvement going from 3Q to 4Q, the profile there, a lot of that pickup is really on the price-cost side of getting the benefit of the pricing and then just improved throughput as we've been able to manage through some of the supply chains disruptions that were a headwind in Q3. We've got those behind us and throughput is improving and so we'll get better operating leverage on the throughput and productivity from that as well. That's what will drive the March improvements in 4Q in Europe.
spk09: Okay, that's helpful. And then, you know, just going back to North America in the last couple quarters, you've talked about those share gains. And I know Gary kind of mentioned that in his previous response. But can you touch a little bit more on where you think you are in terms of share? Do you think that the operational headwinds this quarter caused any shift in that? Or are you actually continuing to on a relative basis outperform a lot of your peers, despite all the headwinds that are there?
spk13: Yeah, I mean, product by product, we've made some great investments, and we talked about our exterior fiberglass business, for example. We know that all of the product is very popular. Our customers and our channel partners really like it, and we've been able to outpace the market in growth, particularly in exterior. In those lead times, while they've stretched out competitive or commercially, are still competitively at an advantage. I think you can look across the market and see that. So we've got a winner there with our exterior. It's a great example. Several years ago, we had problems in our Windows market space, and Windows right now is very tight across all markets. But our operational improvements have put us in a position where we remain better, at least commercially, you know, than much of the market. We're picking up some share there as we're able to segment, use our segmentation work and ensure that customers that are buying Gen1 products generally across the board are benefiting from the ability to get better lead times on Windows where they need them. So we've been able to pick up some some additional share of wallet, and some market share in that particular case as well. So there's two examples of one being a product, really a product view, and the other one being an operational view.
spk09: Gotcha. Okay, thanks for all that color.
spk10: And your next question comes from Stephen Ramsey with Thompson Research Group. Please go ahead.
spk07: Hi, good morning. I wanted to make sure I understood the backlog situation in Europe in light of the UK and France demand coming back. What are backlogs there like versus normal times? Are the constraints similar to here? And then will the incremental demand in the UK and France coming back, will that exacerbate any issues there?
spk13: Yeah, so we're seeing, you know, we're seeing order rates in the UK and France kind of bounce back. In fact, you know, we're starting to see them, you know, they were kind of the areas that were most hit by COVID shutdowns and the like over the last several periods. So we've seen order rates in the UK and France, I think something, you know, running like two times what the rest of Europe was running. And that certainly stresses our operations a bit, but we're keeping up with that demand. We've got more of an issue of the supply chain side in Europe than on labor constraints. So it's really been around ensuring that we're able to meet that demand based on shoring up the supply chain, which is where our work has really been in Europe.
spk07: Excellent. And then to make sure I understand kind of the overall labor improvement story that you guys are driving, is it mostly North America so far? And then if I think about the labor improvement now and where it's going, how much of that is attracting new labor and how much of that is the efficiency of new labor that came maybe earlier in the summer versus in the fall?
spk13: Yeah, it's kind of a little bit of a variation on the same theme when you look at the different segments. But in North America in particular, we saw some labor issues in the beginning parts and kind of to the middle of the third quarter. We really feel like we hit the trough and have turned that corner. We worked with our own folks and really went to, as I call it, a hyper-local approach to to attracting new personnel to work within our plant, but we also worked on the retention piece as well. So we've turned that, kind of stemmed that tide into September with like 80, 85% of that gap being filled, and we've managed to improve that into October. The work then is to retain the folks and make sure that we get the best productivity When your average tenure in the plant goes down, obviously productivity suffers a little bit in throughput. So our GEM initiative, focused on training, focused on retention, is really paying off for us. We're starting to see the benefits of throughput on a daily basis improve day over day. in those plans. So that's where, you know, as John reached out earlier, that's where part of that benefit comes from in the fourth quarter and will continue to work for us going forward.
spk07: Excellent. Thanks.
spk10: Your next question comes from Phil Ning with Jefferies. Please go ahead.
spk02: Hey, guys. Encouraging to hear throughput is up sequentially. Any color, how much is it up sequentially? How far are you from normal in the fourth quarter, whether it's North America and Europe? And then just given how strong your backlogs sound, when do you actually expect volumes to flip positive year-over-year? Because if I heard John correctly, it's probably still going to be a modest negative on a year-over-year basis in the fourth quarter.
spk04: Yeah, Phil, that's correct. The last part of your question was correct, is we're still expecting a volume mix headwind in the fourth quarter. So while we've made a lot of improvements, we're still not back to where we can be and meeting all the demand that's in our backlog. You know, obviously it's early in the third quarter at this point, but what I would say is, you know, in North America specifically, in terms of sort of average shipments per day, we're seeing improvements in the sort of sequentially from October to over September in the high single digits, close to 10% ballpark in terms of sort of average shipments per day. So hopefully it puts in magnitude, you know, that we are seeing meaningful results. Clearly with the level of our backlog, though, There's more work to do there.
spk13: Yeah, and you think about it, Australia is just opening back up. So after quite a bit of mandated shutdowns due to COVID, we've had great order rates in Australia as well. So the backlogs are pretty nice there, but we're just opening back up in a lot of areas there. So that's going to be a significant spike in capacity there. and throughput as we ramp back up. And it's also going to be dependent on how fast contractors can actually take off what they've ordered. So we expect that to be a tailwind on throughput for quite some time as well.
spk02: Got it. That's helpful. And appreciating inflation is really hard to predict. Are you seeing any stabilization in any of your pockets of inflation? And if it's stable from here on out, do you need additional pricing actions to stay favorable from a price-cost standpoint when we look at the 2022? The reason why I ask is because it sounds like fourth quarter, you should be in a pretty good spot where margins are expanding. So just trying to get a better feel of the pricing you guys are potentially going after for next year. Will that have a bigger impact on margin drop-throughs? Thank you.
spk13: Yeah, I think the – you know, any stabilization that is happening is happening at the higher level, and there's still a bit of tailwind or headwind, excuse me, in the fourth quarter that we're overcoming. But you're right in that, you know, we will have a favorable price cost in the quarter, and we expect that to carry into the new year. So new pricing, as we look at it, continues to look at, you know, the various inflationary commodities and freight, and looks to cover that, we expect that the new pricing will start to be added on top of that, you know, kind of getting more into that normal cycle, but at a more accelerated level of cost.
spk02: Got it. Okay. Appreciate it, Carla.
spk10: And your next question comes from Josh Chan from Baird. Please go ahead.
spk00: Hi. Good morning, Gary, John, Chris. I guess my first question on the guidance EBITDA change between now and October, could you just kind of ballpark for us what got worse? And am I right to assume that the incremental headwind is relative to Q4 versus your expectation?
spk04: Morning, Josh. It really comes down to inflation and more specifically on freight in terms of When we gave an update in early October until now, it's just a very dynamic environment in terms of what we're seeing. And yes, in terms of the, you know, call it the $7.5 million or so at the midpoint that was implied reduction for the full year of EBITDA, that primarily came out of Q4 in terms of what we were expecting about a month ago.
spk00: Okay, that's fair. And then on the supply constraint side of things, it sounds like labor is getting better. Could you talk about the ability to get supplies, components and things of that nature? And then overall, do you feel that your ability to produce has really kind of troughed and that maybe becomes less and less of a constraint going forward? Thanks.
spk13: Yeah, I think you're right. I think we've dropped and we're on the upswing. For the most part, on the supply chain stability piece, it's been in different places and it's been somewhat discreet. We've been able to insource our flexibility and the way that we're structured. We've been able to insource certain components to make sure that we're able to continue to supply. We've been able to resource, and we've also been able to do what, you know, to be fairly clever, look at the parts that we have. We can do what we call cut from or cut to, which is an opportunity for us to look at components that we currently have and cut them to the right size or to modify them to ensure that we take care of customer supply. Of course, there's some There's some implied cost to doing that, but it takes care of customers, and the throughput and leverage is clearly a lot better for us than sitting idle. But for the most part, I think we've been able to address most of that. Our bigger constraint in North America was the throughput piece that we talked about. I think that's behind us. I know that's behind us. And as we continue to see the sequential improvements in throughput, There, we see the improvements that we'll see in Australia as that opens up, and the same work in Europe. I think we're starting to see, you know, sequentially improved results going forward as we're able to get that revenue reported.
spk00: Okay, great. Thank you both for the color.
spk10: And your next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.
spk08: Hi, this is actually Chris from RBC Capital Markets. Thanks for taking my questions. Can you help us quantify the impact of the channel mix headwind you guys saw this quarter and when that dynamic is going to abate? And if you exclude that, does your fourth quarter guide still assume that core volume growth is negative on a year-over-year basis?
spk04: Good morning. The channel mix segment that we talked about was really specific just to Europe as it relates to that retail versus project business on a year-over-year basis. That was in the, call it, $3 million to $4 million of EBITDA range in the third quarter. As we think about moving into the fourth quarter, I'd say we're assuming that gets better. but it's not fully behind us in the fourth quarter. So it's not hugely material to the total company, but the comment was specific to Europe.
spk08: Got it. That makes sense. And for my second question, just going back to the implied EBITDA margin outlook, Clearly, there's been a decent amount of variability in margins on a regional basis, so I was hoping you could flesh out some of the assumptions in terms of margin performance across your regions and whether or not you expect year-over-year margin expansion across all your segments.
spk04: Sure. I would say that in the fourth quarter, so what's implied in our guidance would be that North America would be the strongest margin improvement. Europe, call it close to flat, and then probably still a slight headwind in the fourth quarter in Australia, given some of the shutdowns that we had coming into. We started the quarter with still some of those shutdowns in Victoria and some other locations where we were just unable to get product out the door, so we're absorbing all the overhead without getting all the throughput. I'd say North America would be sort of the strongest margin profile of the three in terms of year-over-year improvements in the fourth quarter.
spk08: Understood. Appreciate the color.
spk10: And your next question comes from Michael Riott with JPMorgan. Please go ahead. Hi. Good morning.
spk09: This is Maggie on for Mike. First question on share repurchase following the 8 million shares repurchased in the third quarter. Could you remind us how much is left on your authorization and talk about the potential for further share repurchase going forward versus maybe other areas of capital allocation?
spk04: Sir, in terms of the most recent authorization that was updated earlier in the year, it was about 150 million approximately. left on that authorization. And I'd say that as we think about capital allocation, we look at it through a sort of disciplines returns focused lens. And we're certainly prioritizing investments that would have the highest return on a risk adjusted basis to us. And here in the third quarter, we saw a very compelling opportunity given valuation or expectations for future growth to make an outsized investment and As we move forward, it'll be balanced between M&A, share purchases, internal investments, depending on what opportunities we have in front of us. But we're committed to drive improvements and return on capital from that perspective.
spk09: Got it. Thank you. And then second, going back to the last question, so you mentioned that the channel mix headwind was specific to Europe. As I look at the volume mix component of North America, was that entirely volume-driven? And then as I look forward over the next few quarters and some of those new products that you've highlighted begin to flow through, can you talk about how you're thinking about the potential for any mix shifts in the North America segment? Yeah.
spk04: Sure. In the third quarter year over year in North America, there actually was a slight pickup and mix as we started to see special order activity resume. So that was favorable. Unfortunately, that was dwarfed by the amount of the volume headwinds that we had just from a throughput standpoint of not being able to get product out the door from some of the labor and COVID issues. So there was a slight mixed benefit that was in there, but we just didn't really get to see the benefit of that in the reported results given the throughput side of things.
spk09: Okay. Thank you.
spk10: Your next question comes from Ruben Gardner with Benchmark. Please go ahead.
spk03: Thank you. Good morning, everybody. Most of my questions have been answered. I just have one clarification on the backlog. Did the time of the order or when the product is shipped?
spk13: Sorry, did you ask if pricing was – when pricing was set? We missed the first part of that.
spk03: Yeah, on the backlog, the product that's in backlog is the pricing – for those products set at the time of the order or when the product is shipped?
spk13: Yeah, thank you for that clarification. Yeah, for the most part, it's set at the time of the order. You know, typically we have relatively short order cycles. You know, they've been protracted, you know, in this particular period, which is a little bit unusual. So for the most part, that pricing needs to work its way through that backlog, and we'll see that. That's why we see the benefits. the third quarter.
spk03: Got it. Thank you. Good luck navigating through the rest of the year.
spk05: Thank you.
spk10: And there are no further questions at this time. I will turn the call back over to Gary for closing remarks.
spk13: Well, thank you all for your interest in GELWIN and for participating this morning in our call. We look forward to catching up with you all over through the quarter and talking about our performance in the fourth quarter. our growth trajectory for 2022, and our commitment to our long-term targets and strategy that we put forth at our investor day earlier in the year. Again, thank you for joining us this morning. Look forward to catching up.
spk10: This concludes today's conference call. You may now disconnect.
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