JELD-WEN Holding, Inc.

Q1 2023 Earnings Conference Call

5/9/2023

spk02: At this time, I would like to welcome everyone to the Jeldwyn Holding Inc. First Quarter 2023 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one. I would now like to turn the call over to the Vice President of Investor Relations, James Armstrong.
spk05: Thank you and good morning. We issued our first quarter 2023 earnings release last night and posted a slide presentation to the investor relations portion of our website, which can be found at investor.jeldwin.com. We will be referencing this presentation during our call. Today, I'm joined by Bill Christensen, Chief Executive Officer, and Julie Albrecht, Chief Financial Officer. Before I turn it over to Bill, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. GELDWIN 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. 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 measures calculated under GAAP can be found in our earnings release and in the appendix of our earnings presentation. With that, I would like to now turn the call over to Bill.
spk01: Thank you, James, and thank you everyone for joining our call today. I'm happy to report that we are making solid progress on our short-term measures to simplify the business, improve our cost structure, and strengthen our balance sheet. Thanks to our employees around the world, our first quarter came in better than we expected. During the quarter, we reduced costs while improving service to our customers, all during a very uncertain macro environment. Turning to our first quarter highlights on slide four, we began the year with both sales and earnings coming in above our expectations. During the first quarter, Demand was down year over year, however, not as soft as expected, and we outperformed our plan for price-cost. We also took steps to right-size our inventories while still improving customer satisfaction metrics like on-time, in-full deliveries. Julie will talk more in depth about our financial performance in a few minutes. Turning to slide five, We continue to focus on a two-pronged approach, paying close attention to both the short as well as the long term with a transformation framework structured around people, performance, and strategy. We're making good progress in strengthening the foundation of our business with an emphasis on both culture and capabilities. This is augmented by the active deployment of value creation plans to deliver on margin expansion through operational and organizational efficiency initiatives. We are pushing down line of business accountability, rationalizing our global footprint, and establishing detailed improvement targets around our sourcing and commercial excellence activities. And finally, we are focused on delivering improved cash flow to fund the value creation projects that will support our margin improvement. We are planning to focus future investments in areas such as factory automation, demand management, and digital commerce. We're also developing a plan to deliver more consistent profitable growth. As I have said before, we need to simplify our long-term strategy, establishing clear deliverables designed to drive improved market performance and shareholder returns, while giving customers more of what they value. Although we are not insulated from the weakening macro conditions in housing across the globe, we are gaining momentum from actions we already have in progress. One of the most significant near-term actions we have taken relates to our Australasia business, and this is seen on slide number six. On April 17th, we announced the completion of our strategic review, resulting in a sale to Platinum Equity for approximately 688 million Australian dollars. This was an important step towards executing our near-term strategy of simplifying our business and strengthening our balance sheet. We plan to use the net proceeds of approximately 450 million US dollars to repay debt and expect our leverage to be below three times net debt to EBITDA on a pro forma basis by the end of this year. In addition, we expect minimal tax leakage and anticipate the deal closing in the third quarter. I personally want to thank our entire Australasia team for their continued hard work. We have an active separation management office, which is currently working with Platinum Equity on the transition plan and relevant closing details. Last quarter, we noted that we are focused on strengthening the foundation. And on slide seven, you see the three key areas for our work. We have a tremendous amount of activity underway that we expect will deliver notable profitability improvements in the near and medium term. Our teams are consolidating numerous ideas that range from just do it improvements to more complex projects that are run through a review process and then sequenced. Knowing that we are in the early days of improving our profitability, I wanted to provide some insights into a few of the projects that are helping drive approximately $100 million in lower costs in 2023. These activities are incremental to actions we've already taken in late 2022 and early this year to improve our cost base across our operations and in SG&A. First, we're improving our operating efficiency and driving costs out of the system. For example, we have recently started to implement a centralized logistics program in North America that will allow us to better optimize our transportation network and improve shipment visibility for us as well as our customers. This program, we expect to drive 15 million of annual costs out of our system. Further, we are scoping similar programs that leverage the enterprise to reduce costs through sourcing and centralized order and supply chain management. Second, we are focused on commercial excellence throughout the organization. In Europe, we are reviewing our go-to-market structure, including people, process, and systems, as well as end markets served. Expected results include sales and customer service efficiency targets, as well as country level details to better calibrate pricing actions. Finally, we continue to optimize our network footprint, which includes improving how we plan and execute our production. In North America's interior door business, we have reallocated production to sites to be closer to customers and to optimize production efficiencies. As we move forward, we anticipate expanding such opportunities across additional product categories. Additionally, in another step towards rationalizing our footprint in January of this year, we announced the ongoing closure of Atlanta doors facility, which we expect to deliver cost savings of about 11 million annually. As you can see from these examples and our results in the quarter, we are focused on delivering cost reduction and profit improvement initiatives. To reiterate, these are a few of the projects we are working on to drive improved performance, and I look forward to sharing more examples in the quarters and years to come. As we implement our plans laid out on slide eight, we have significant self-help opportunities that we expect to drive improved performance in the quarters and years to come. We are in the process of setting clear targets and will actively monitor them to ensure accountability. As we develop these plans, we are focusing on investment returns and a longer-term runway of innovation to drive future growth. On capital allocation, we remain committed to reducing our leverage below three times which we expect to achieve on a pro forma basis by the end of this year and includes the completion of our pending Australasia divestiture. We are also prioritizing investing in strong payback projects to further improve profitability. And finally, we continue to focus on transparency with investors to help you understand the drivers and underlying fundamentals of our business. We are underway with developing our long-term goals. We're also committed to sharing more information when appropriate and giving mile markers to these goals so you can evaluate our progress along the way. However, in the near term, our focus is on detailing our transformation plan that will reduce operating costs, rationalize our footprint, improve our commercial excellence, and deliver on the large actions that we have already laid out. I'll now hand it over to Julie to discuss our detailed financial results.
spk03: Thanks, Bill. Turning to slide 10, you see our consolidated results for the first quarter of 2023. As a reminder, all of our first quarter financial results include Australasia as the announced sale was a subsequent event to the quarter end. We delivered both sales and earnings that were ahead of our internal expectations mostly driven by volume and price cost results that were better than our original outlook. More specifically, market conditions in North America benefited our top and bottom line results, while lower cost inflation in Europe was a tailwind for earnings. Our first quarter revenue was approximately $1.2 billion, up 4.4% from year-ago levels. Our core revenue growth was a solid 7%, while foreign exchange translation had an adverse top line impact of 3%. I'll provide additional comments about our first quarter sales versus the prior year when I cover the next slide. Our adjusted EBITDA was approximately $94 million in the quarter, leading to an adjusted EBITDA margin of 7.7%. With our margin improvement year over year and sequentially, we view this as a validation of our near-term cost reduction activities. In a few minutes, I'll provide more color about the drivers of our year over year EBITDA improvement. On slide 11, you see that our increased first quarter revenue was driven by higher selling prices that added 10% to sales year over year which primarily reflects our price increases in the second half of 2022 to offset cost inflation. Our volume mix declined by 3% with a further negative 3% impact from foreign exchange translation. You'll find a first quarter revenue walk including segment details in the appendix of our earnings presentation. On slide 12, we have added a new adjusted EBITDA bridge to improve transparency for our investors. Year over year, our adjusted EBITDA improved by approximately $14 million, driven by positive price cost and productivity gains that were partially offset by reduced volume mix and headwinds from non-recurring other income and realized foreign exchange gains. As inflation continues to be a major topic, I want to give you more detail on what we have experienced. During the first quarter of this year, we recognized an increase of approximately $70 million in total cost inflation compared to the prior year period. Of this, approximately 85% was driven by raw materials, energy, and freight costs, with the remainder driven by labor. While our total material and labor inflation were in line with our expectations, we experienced lower inflation rates in energy, mostly in Europe, and in outbound freight in North America. Moving to our segment results on slide 13, in the first quarter, our North America segment generated $768 million of sales, up 6% from year-ago levels. Additionally, The segment had adjusted EBITDA of $79 million, up 18% year over year, while margins increased a solid 100 basis points to 10.3%, driven by positive price cost results. While demand was down year over year, first quarter market conditions were better than expected, and our sales mix improved year over year. all of which supported North America's top and bottom line results. Specifically, interior doors, wood windows, VPI, and La Cantina performed well, as did our Canadian business. Meanwhile, we experienced some softness in the vinyl window market, and weather negatively impacted the West Coast market. We've delivered a number of operational efficiency improvements in North America. Examples include being more proactive with flexing our operations to meet demand, to implementing standardized and data-driven processes to reduce inventory levels. These improvements positively affected first quarter results, driving both improved cash flow from inventory reduction and an 8% year-over-year improvement in units per labor hour. Europe generated $312 million in revenue and $18 million in adjusted EBITDA. Adjusted EBITDA was 20% higher year-over-year, leading to 110 basis points of EBITDA margin improvement due to positive price cost and productivity gains. Core revenues increased in the quarter, driven by higher price realization of 10%, partially offset by lower volume mix of 7%. And in addition, Europe had a negative top line impact of 6% from foreign exchange translation. During the quarter, Europe continued to suffer from weak macroeconomic conditions across most of the region. New residential construction rates are down 15 to 30% depending on the country. However, we have had opportunities to capture market share as certain suppliers in the region have struggled to serve customers. And in addition, despite the headwind from lower volumes, Europe delivered improved productivity from operational excellence initiatives focused on both labor and material savings. Australasia had solid first quarter results reporting revenue of $142 million and adjusted EBITDA of $13 million with margins at 8.9%. As a result of the announced sale of our Australasia business, the segment will move to discontinued operations and this will be the final quarter we break out its segment detail within our continuing operations. Now turning to the market outlook on slide 14. We've updated our outlook to exclude Australasia, but it is very similar to what we expected at the beginning of this year. In North America, higher interest rates continue to impact single family starts and permits, and we expect new construction declines of 15 to 20% year over year, as well as a decline in repair and remodel activity at a mid to high single-digit rate. All of this combines for an expected low double-digit reduction in volume for our North America business, consistent with the outlook we discussed in February. In Europe, which is also consistent with our previous outlook, we anticipate that demand will be down by high single digits as the market remains soft due to the region's ongoing macroeconomic challenges. On the residential side, we see declines of 15 to 30 percent in new residential construction, depending on the country. Commercial construction is expected to be flat in the near term. Construction on current projects has continued, but there is evidence that new commercial projects are being delayed or put on hold in a number of markets, which may impact demand in the medium term. On slide 15, we provide our updated full year 2023 outlook for sales and adjusted EBITDA. Our updated outlook accounts for our stronger than anticipated first quarter results and ongoing cost reduction activities, while also removing the Australasia segment from our continuing operations. We've included a slide in the appendix of our earnings presentation that shows how the Australasia divestiture impacts our guidance change. When we gave our original outlook in February, we were prudently cautious and we remain so given the continued uncertainty in the operating environment. We now expect full-year 2023 revenues to be between $4 and $4.4 billion and full-year adjusted EBITDA to be between $330 and $370 million. After removing Australasia from continuing operations, we are raising the midpoint of our adjusted EBITDA guidance by $30 million. Now turning to slide 16, you can see how our first quarter results, combined with our outlook for the remainder of this year, to result in our updated 2023 full-year guidance. Again, reflecting our Australasia segment as a discontinued operation. As I've described in my comments this morning, our first quarter volume mix and price cost were better than our expectations. However, we do remain comfortable with our original outlook for the balance of this year based on what we know today. Our updated sales guidance reflects our expectation that core revenue is down 4% to 8%, driven by the low double-digit reduction in demand that I've described, partially offset by carry forward price realization. Our revised EBITDA guidance reflects the impact from lower volume mix, which drops through at a 25 to 30% decremental margin. Most of this earnings headwind is expected to be offset by both new and ongoing productivity and cost savings actions, as well as slightly improved price cost results versus our original guidance. Due to the strong EBITDA in the first quarter and excluding Australasia, we now anticipate first half and second half EBITDA to be split roughly equally. Now shifting to cash flow, we remain keenly focused on improving our cash flow generation over our 2022 results. In addition to generating high quality earnings, each segment continues to actively work on its action plan focused on reducing our networking capital by at least $100 million, with more than half of this coming from inventory reduction. I'll now turn it over to James to move to Q&A.
spk05: Thanks, Julie. Operator, we are now ready to begin Q&A.
spk02: And at this time, I would like to remind everyone, in order to ask a question, press star and then number one on your telephone keypads. And our first question comes from the line of John Lovello with UBS. Your line is open.
spk06: Good morning, guys. Thank you for taking my questions. The first one is, you know, how should we think about the cadence of the cost-saves realizations from the $100 million of programs that you put in place? So sort of the timing of the realization there. And also, it appears that $50 million was attributable to the first bucket. Just curious how the second two buckets sort of split out.
spk01: Yeah, so, John, thanks. Julie can go into some of the details. As we talked in the Q4 call, this is obviously a combination of what we started last year, which is rolling forward into 2023, but also additional measures. We gave a couple examples today in the prepared remarks. The Atlanta closure, some of the things we're doing around managed transportation and our freight systems in North America. So those are things, obviously, that are being realized as we speak and will have an impact in the year. Julie can talk through kind of some of the buckets and more of the detail on that.
spk03: Yeah, sure. Hey, John. Yeah, well, I guess back to the first part of your question, as far as the phasing, I'd say that we're probably like 40, 60 between first half and second half of the $100 million. So we're delivering roughly $20 million a quarter Q1 and Q2. And then that leaves, again, roughly 60% in the second half of the year. And then when it comes to, I think we're looking at slide seven, the three boxes there, I'd probably say it's 70-30 when it comes to improving operating efficiency. And that's both lower cost of goods sold as well as lower SG&A, kind of from an expense perspective. And then that leaves, again, in that optimizing the network between you know, the wrapping up the year-over-year benefits from the site closures of last year and then things we've already announced this year and things we're continuing to evaluate and potentially action in the second half of this year, all of that network footprint is roughly, again, I'd say around 30% of the reductions.
spk06: Okay, that's helpful. Thank you. And then, you know, as you guys talked about, new construction in the U.S. has held up better than feared. which should benefit you guys given your exposure there. What's your latest kind of what you're hearing from your builder customers in North America? And then quickly on Europe, curious how you're thinking about the consumer there. I mean, could there actually be a benefit to consumer spending given declining energy costs and still pretty good wage growth there? So just curious about those two markets and how you're thinking about the consumer.
spk01: Yes. John, so obviously it's a very mixed picture. I'd say builders in North America, you see different views. I was recently in the southeast. There's strong demand expected through the building cycle, so I'd say the typical summer build and starts are progressing as expected, but there's obviously a geographic benefit to that region of North America. Just when we look at it from a broader standpoint, there's still caution around for a couple of reasons. Number one, inflation is an issue and also affordability of homes is an issue. Just in general, we have higher interest rates, which are clearly creating more reflection on people when they start thinking about purchasing homes and that adds to the affordability challenge. And the third point is that there's I think mixed views on how long rates will stay where they are and kind of the runway rolling forward is one of the things that we see creating some pretty significant views on how things will play out in the back half of the year in this market in North America. So it's very mixed. There's not one clear view. We remain very cautious. 15% to 20% down is what our view is, and that hasn't changed since the beginning of the year. Europe is different. So there's still a risk that interest rates can and will go higher in Europe. There's still significant inflation. If you just think about labor inflation or inflation in certain Eastern European countries, which are delivering a lot of the products into the building product sector, that's double digit and has been there for a period of time. So we see starts in Northern Europe down as much as 30 or 40%. So some markets are really in pretty bad shape. I think it's going to take a while for the consumer to really take a step back and figure out when will the turbulence in Europe decline. There's unfortunately no end in sight for the conflict in the Ukraine. Energy costs and headwinds are softer than expected, which is good news. However, we need to remember Russia shut gas off last year in the summer. And this is now when the European Union needs to start reloading the reserves. So there's also an additional potential threat on energy that the gas reserves and the reload needs to be progressing as expected. So there's still a lot of uncertainty. And I think the general sentiment that we're seeing in Europe is people are cautious and waiting. The good news is that the commercial projects, as Julie noted, are still being finished because there's a pretty long gestation period. but the new projects are fewer and the pricing activity around acquiring those projects is getting more competitive. So that's why we also remain very cautious in Europe for the back half of the year.
spk12: Thank you, guys. You're welcome.
spk02: And the next question comes from the line of Susan McQuarrie with Goldman Sachs. Your line is open.
spk09: Good morning, everyone. This is Charles Perronin for Susan today. Thanks for taking my questions. Sure. First, you maintain your volume mix guide for North America and Europe unchanged despite the better-than-expected first quarter volume versus what our expectations were. Have you seen any change maybe that leads you to be more cautious on the balance of this year, or is it more conservative given, like, obviously the uncertainty out there in the markets?
spk01: Yeah, so what I just said based on John's question, I think kind of rolls into this question. Where we are seeing some additional clouds on the horizon is in R&R in North America. Typically, summer is the building season, especially when we're looking at retail, sellout, and R&R volumes. And clearly, we're seeing limited destocking. We would actually expect loading of inventory in the channel at this point in time during the kind of pre-loading for the summer build, and we're not seeing that yet. And we're seeing obviously retail partners that remain pretty cautious. There's a lot of signals out there, spend rates, savings, credit card bills, et cetera, that would lead us to believe that it's still going to be a pretty challenging R&R environment. So we feel that our expectations of kind of down mid to high single digit is very reasonable, and we're seeing...
spk09: Additional signals that would support that so that's why we remain cautious In our expectation for the next I'd say two and a half quarters of this year Now that's helpful color bill and then following up on this aren't our point I just mentioned have you shit have you noticed any change in the tone from the channel partner about the stress in the banking system over the last month and also the access for financing for windows and door projects and How important is this basically for your end market? And do you have a sense of how much your end market products sold are financed versus paid cash more specifically?
spk01: Okay, so maybe on the last point, I don't know. There's too many layers between us and the install to really understand what's the financing mix of cash versus kind of a debt financing or mortgage. And it's hard for us to predict. Has the banking... turbulence kind of rolled over into the retail space. You guys are probably closer to that from a macro view than we are, so I wouldn't want to comment on that. I just say that retail partners are cautious, and typically summer is a build season. We're not seeing that, and I think that ties into the macro environment. Interest rates are high. They're going to stay sticky for a while. Inflation is still a challenge. Affordability is an issue. So we don't see any direct impact or correlation
spk11: currently thank you for the time you're welcome and the next question comes from the line of matthew boolee with barclays your line is open hey good morning everyone uh thanks for taking the questions um so uh morning guys so north america the the volume mix you know the down three in q1 I just wanted to get a better sense of, you know, it's obviously a difficult operating environment out there. And so that, as we just spoke about, was a better result than I think most of us expected. And the genesis of my question is, you know, what did drive that? Because we're trying to figure out as we go forward, you know, what could be the potential, you know, upside or downside, you know, as we kind of build out the model through the year. Thank you.
spk03: Yeah, Matthew, I'll start, and then Bill can add some color. You know, I mentioned in my comments already this morning that North America did have a positive impact from sales mix. And so when we look at their true volume decline, it was more in that like 6% to 7% down, which was still below our expectations for the quarter. But they were positively impacted by, call it 2%, 3%. from MIX. I mentioned in my comments, Woodwindows, BPI, La Cantina, some of our stronger performing products and lines had pretty strong quarter Q1s, a little bit better than expectations. And so I think when you dig a little deeper, you do see that when we look at unit volumes and just volume dollars, they were down kind of in that, call it mid to upper single-digit range, but positively impacted by mixed to get us down to that net 3%.
spk01: And, you know, Matt, let me just maybe add something in more on a broader level on what we're really trying to achieve here at GELDWIN. You know, we've talked a number of times about pushing down responsibility and authority into lines of business. So John Krause and his team in North America, Nigel Dose and his team in Europe, are really starting to get a couple layers down into the organization. And we're identifying pockets and areas where our performance is actually strong. But we're also seeing areas where we think we're maybe not at a level of competitiveness that we require. And so currently we're saying, all right, how do we strengthen the areas that we're doing well? To Julie's point, Woodwindows is something where we have, I think, pretty appealing lead times right now. And some of the other players in the market are struggling. And this is an area where we know how to make wood windows exceptionally well, and we're good at it. So we really want to force those things. So this is some of the things that getting lower into the organization gives us the ability to really start identifying with our teams in the different regions, you know, what they really want to focus on and how we can drive that profitable growth and not just push everything out the door.
spk11: Got it. All right. Thank you for all that color. Very helpful. Second one, the price – the majority of that was the result of carryover from actions taken in the second half of 22. I'm curious – – additional pricing taken, you know, perhaps at the beginning of this year and, you know, sort of how we should think about pricing flowing through the model over the next three quarters?
spk01: And Matt, you dropped at the beginning of your question. Can you just repeat that for us just so we're clear specifically what you're asking?
spk11: Yeah, sorry about that. So the price, and I'm curious if there was additional pricing taken at the beginning of this year. I know you said most of it was from 22. And then how do we think about pricing over the balance of the year?
spk01: Yeah, so it was carryover. from 22 into 23 as we had signaled and anticipated on our Q4 call, if you remember. The second thing what we're doing is we're starting to look on the commercial excellence side in more details at specific countries, specific segments, just to make sure that we feel we're in the right position, number one, with the data and the visibility, but number two, with the pricing actions. But there is very limited new price. almost all of what's dropped in Q1 was carried through from 2022 pricing actions. And obviously, we're starting to get into the quarters where we're going to have pretty tough comps on the pricing side. So that's also something you need to kind of think through when we're looking at the back half of the year.
spk11: Got it. All right. Thanks, Bill. Thanks, Julie. Good luck, guys.
spk12: You're welcome. Thank you. Have a good day, Matt.
spk02: And the next question comes from the line of Stephen Ramsey with Thompson Research Group. Your line is open.
spk04: Hi, good morning. Maybe you talked about in the past couple of quarters portfolio pruning, clearly Australasia, a big move. And you had talked about some moves taken in the Europe segment. Can you talk about the benefits you've seen from pruning so far and how that builds into the second half?
spk01: Yeah, so obviously with the Australia Asia strategic review, there was a couple of things that we wanted to achieve with that divestment. Number one was we wanted to make sure we had the right partner to continue the strong growth and really support the carve out. So we wanted to have a partner who's done it and understands that, which we feel we found in platinum equity. Number two, we wanted to deliver and strengthen our balance sheet, which I think we will achieve once we close the transaction in the back half of this year, so in Q3. And the third point, obviously, we want to focus on our core regions. So that's North America and Europe, and there's a lot of opportunity to do things differently and better, we believe, in those two remaining regions. So some of the things that we're already doing And I'd say in a smaller dimension, you know, we talked last year about closing some sites in Melton, UK, which were window related, big drag to earnings. So those are closed and concluded. We're closing our Atlanta or we're in the process now of closing our Atlanta facility that will have an impact. So some of the broader footprint actions that we're taking are going to help us strengthen the foundation. And we're more focused now on kind of the road ahead and how do we make sure that we have the right asset base with the right levels of investment to serve our customers. And I said before, you know, we're really pushing down into the line of business logic to make sure that the owners of these areas of the business, together with John in North America, Nigel in Europe, are, you know, letting us know what do they want to do to improve because clearly we need to improve. We need to make sure also that we have capital available. to fund those improvement projects. And so that's gonna be a key focus for us. In addition to de-levering our balance sheet, we're gonna wanna make sure that the free cashflow that we're generating, we're going to be able to invest in what are pretty attractive return profile projects this year, but also next.
spk04: Okay, helpful. And then thinking about the guidance and how North America Channel Inventory affects that. You talked about the lack of retail stocking thus far. Is that embedded in the guidance already that they do not restock, or is there some rebuild of inventory in the retail channel? And similar, curious to hear how you think about distribution inventory. Will that channel run light through the year, or do you think they start to restock at some point to a greater degree?
spk01: So it's all baked in is the short answer. The longer answer is clearly we remain cautious. There's a lot of uncertainty. We've gone through it in a number of different topics today, whether it be Europe or North America. Clearly, we're watching and monitoring the R&R channel closely, but the expectations of this kind of mid to high single digit down, that is baked into the guidance that we've shared with you last night. So we're effectively focused on really controlling what we can control. And I feel we're doing a pretty good job coming off of Q1. Regarding distribution inventory, we're not expecting any significant changes and feel that would be kind of matched to what our expectations are for volume down in the back half of the year. Of course, we have our homework to do and we are balancing obviously labor loads in factories depending on where we see kind of stronger demand or weaker demand. So John in North America, Nigel in Europe are doing a good job of kind of balancing costs to the market reality, which remains quite volatile.
spk12: Thank you for the color. You're welcome, Stephen. Have a good day.
spk02: And our next question comes from the line of Michael Rehout with JP Morgan. Your line is open.
spk10: Hi, everyone. Congrats on the quarter. This is Andrew Ozzie from Mike. Thank you for taking my questions. Hey, I just wanted to ask if you could provide any more details on sales trends in this quarter and maybe in April between maybe the traditional and retail channels between your businesses and then how does that help us think about sales growth in next quarter and the back half?
spk01: So coming back to kind of where we're guiding, I mean, we're thinking that new construction is down 15% to 20% in North America. We were a little better than those expectations, obviously, in Q1 for the topics that Julie has talked through on the price cost. And we're controlling costs as we expected that we would during the year. So it's tough for us to make a more detailed guide on a quarterly basis just because it's a very tough environment. We do see and we've shared that clearly clouds on the retail R&R horizon are here and that's something that we're watching carefully because obviously that will have a big impact not just on us but I think on the economy in general in North America. we are seeing some strong pockets of growth. We talked about wood windows. We talked about the southeast region where clearly building continues to roll. So it's very mixed. Hard for us to kind of talk through in detail on a quarterly basis what we see. But our volume, I mean, as we've said in the past, is kind of mixed 50-50 between R&R and new construction. So that should give a pretty good feel on kind of where we think will end up at the end of the year.
spk12: Thank you for that.
spk10: And then could you speak a little bit to the mix shift that you're seeing and any noticeable change between custom and stock or anything you're expecting as the year goes by?
spk01: I'd say nothing significant on the mix side. You know, we have pockets of business where we're extremely happy with the way things are progressing. For example, multifamily homes, we still have a strong backlog, but I think that's a market topic, not necessarily a GELDWIN topic, so that remains solid. Within the retail side of the world and also traditional, we're seeing pockets, as we said, wood windows continues for us to be a very promising area where our Lead times are in a pretty good place compared to what we think the market reality is. In Europe, it's more of a mix between residential and commercial. Residential is struggling significantly, as we know, to the tune of 50% down, 40, 50 down in certain northern European markets. Commercial is still there. And a lot of the commercial projects that were released a year or two years ago are being built out and coming to completion. We do see the pipeline tightening. So we expect that commercial also in the back half of the year will create some additional headwinds into the European market. And that's why we also feel that we need to remain cautious because there are, I'd say, more uncertainties than optimistic signals right now in general as to where the market could go.
spk12: Thank you for that, Bill. That's all for me. Good luck in the next quarter.
spk01: All right. Thanks, Andrew. Yeah, take care.
spk02: And the next question comes from the line of Phil Ng with Jefferies. Your line is open.
spk00: Hey, guys. Congrats on a really strong start to the year.
spk02: Thank you, Phil.
spk00: On the price-cost side, you guys did an incredible job. Carries through May. Have you seen any increased competition on the pricing side? You've called out certainly some. uncertainty on the R&R side via retail. And then on the inflation side, Julie, you highlighted energy and at least freight in North America has been a good guy. Can you kind of size up how you're thinking about inflation, what you thought coming the year and how it's kind of shaping up relatively at this point? So any color on price costs and how things are progressing?
spk01: Yeah, let me, Phil, I'll take the price side and maybe I'll ask Julie to jump into the inflation. So on price, so the short answer is no, we're not seeing any significant changes to kind of our expectations and where things are tracking. What we do see, and I think this is normal, as the market gets tighter, the projects coming into the market are going to have a greater competitive bid pressure. So we need to be very careful that the deals that we're taking have appropriate margins. And that's one of the reasons why we're working hard on kind of strengthening our foundation to make sure our cost structure is in line so we can be competitive and win some of the projects. But we're being selective. And coming back to wood against vinyl, we're really focusing on delivering strong value in the wood window business, and we think we have a great value proposition. And as we said, there's significant pressure on volume and price in the vinyl area, so we're really being cautious and careful as to what we're doing there. But I'll hand it over to Julie on inflation.
spk03: Yes, sure, Phil. Yeah, I mean, it's a good news story, and we highlighted this morning, especially in Europe, with energy definitely being well below our initial expectations. But we were expecting inflation in the first quarter all in to be around 10%. We came in at around 8%. And that, again, was driven by the lower outbound freight and the lower energy. Noting, however, that those are relatively smaller pieces of our total inflation. and spend, but nonetheless, those two items kind of, again, brought our 10 down to eight from an expected to actual basis. So all in, I think in February I mentioned we thought our inflation this year would be in that eight to 10% range, and so we have dialed that back a little bit to be more like six to eight. Again, mostly still driven by these trends in outbound freight and energy, although as Bill's already talked about a lot today, still a lot of uncertainty in this macro environment and in our two core regions. But nonetheless, that's what we saw in Q1 and what we're looking at for the year.
spk00: That's great color, guys. And then from a capital deployment standpoint going forward, Bill, you're pretty clear that you want to get under three times by the end of this year. When we kind of work through 2023 and beyond, what are some of the core priorities? How do you want to keep leverage going forward? And you talked about you want to invest in what's core to you, and clearly North America's, North American Europe's core to you, but are there any products and areas where it's core to you and there's a void that you wanted to kind of get bigger in where you see more opportunities from a growth and return standpoint going forward?
spk01: Yeah, so we're thinking about capital allocation the following way. Clearly debt repayment is top of our list and we've shared that view and we feel pretty solid. We can go through the math if appropriate, but we think we're going to get to around three times by the end of the year and we need to be below three times, which is clearly our aspiration. Then we need to invest in ourselves. So we need to kind of balance the debt repayment versus the investment to strengthen the foundation. And obviously as we improve EBITDA, the leverage ratio will decline. We're continuing to screen the market for bolt-ons. I mean, you know, we're not silent here, but we do have some homework to do on the capital structure before we get back into the market. But we are looking and share repurchase is clearly a lower priority for us on the list of actions when we just kind of go through available capital. If we think about, you know, where we want to play, how we want to win, these are the discussions that we're now starting with the organization. So the first thing we're doing is we're pushing down and creating clear visibility on the lines of business. Second is that we're working together with the North American and the European team to really understand how do they see developing their portfolio. And as we know, we have a very broad portfolio, so we have a lot of fantastic opportunities. Our view clearly is that we need to pick some of those opportunities and really go at them. with the appropriate resources, capital allocation, and innovation pipelines. So that's what we're working on. It's too early to share detail and specifics, but we're seeing a lot of great things that we're doing. And our challenge as a leadership team is really going to be around the sequencing and funding to really strengthen those two core areas, North America and Europe, and obviously the line of businesses in each of them.
spk00: That's great color and glad to hear you guys are narrowing your focus. Sounds like a great strategy.
spk01: All right. Thank you, Phil. Have a good day.
spk02: And as a reminder, if you would like to ask a question, please press star then the number one on your telephone keypad. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.
spk07: Good morning. Thanks for taking my questions. Good morning, Mike. Good morning, Mike. The first question, it's still on Europe. I guess when I take a step back and look at this, the market structure is different there. You've talked about the current pressures, the risks ahead. If I look back at the profitability over the last five years, it's been lagging both on an absolute basis and relative, even with some of the actions that you're now taking. You're looking at another restructuring here. Why is this core to your business at this point? You've already jettisoned Australia-Asia. Why not take a strategic look at Europe and say, hey, maybe this isn't really the right place for our capital anymore?
spk01: So thanks for the question, Mike. So clearly, we need to delever and we need to simplify. And these are two of the key things that we've been able to achieve by signing the Australia-Asia agreement. And we're anticipating, obviously, getting to a close. So that will be a big step forward for us. And we don't have then three legs on the chair. We have two. And both need to be strengthened. There's no question. If we look at Europe, Europe, we have some leading brands and leading markets. So we have a very strong platform. And I believe, as does our team there, that we can do a lot more. So clearly, we're working now through the plans, the lift, the work streams, the cost to achieve to get ourselves into... I'd say a level of profitability that we feel is appropriate. And clearly with the platform and the baseline that we have, we really need to deliver first. And that's also for North America. And then we'll assess after we have kind of our plan to achieve what we really think are the viable, bigger picture options. But again, great brands in great markets and a strong portfolio, good local teams. So we're really focused on self-help and controlling what we can control. And I believe personally that we haven't done a great job of that in the past. And that's what we want to prove to the capital market that we're capable of doing and delivering.
spk07: Okay. That's helpful. Thanks, Bill. My second question Yeah, I know you're always limited on what you can say about Tawanda, but just kind of an update, that process has still been dragging out. Where do we stand? And should we also think about, you know, given your stated capital allocation targets, when that ultimately comes to fruition, you know, that that capital that you receive would also be funneled towards that pay down? Just any thoughts you can provide on that process?
spk01: I appreciate the question, Mike. Obviously, this is a court-ordered divestiture. It's an active process, as we've shared in the past. Unfortunately, currently no new news to report, and I'm not in a position to say anything more outside of as soon as we have more detail that's relevant to share with the market, we will do that.
spk12: That's where we are on the Tawanda divestment process currently. Okay. Understood. Thanks. All right, thank you, Mike. Have a good day.
spk02: And the next question comes from the line of Truman Patterson with Wolf Research. Your line is open.
spk08: Hi, this is Trevor Allenton on. Thank you for taking my questions. First one, previously I think you just talked about reducing inventories by at least $50 million from where you guys were at in 4Q. Looks like you've made some pretty good progress on that already. Wondering if there's any update, if you're going to take that down further or if $50 million is still a good target.
spk03: Yeah, we're still, you know, our outlook remains lower working capital by kind of roughly $100 million during this year. So adding, and it's really a key part of our cash flow generation. And yeah, I'd just say inventory is a big part of that, and we still are targeting roughly 50% of that coming from lower inventory. So we did have a pretty solid start to the year. I mean, Q1 does tend to build working capital for various reasons. A lot of seasonality there as we start the year, but coming out of the kind of slower year end typically. But yeah, still on track, a lot of activity. Really one of our top priorities along with profit improvement is cash flow generation, including lower working capital.
spk08: Okay, thanks for that. And then a quick one on Oralign and VPI. You guys are ramping those businesses throughout 2022. Just provide any color on what kind of benefit those provided in 1Q or maybe what you're expecting on a year-over-year basis in 2023 in North America from those businesses.
spk01: Yeah, so we're ramping. I was in one of our plants here locally a few weeks back just to see the progress of the lines that we're putting in. So we're still in the process of ramping up. We have a very robust pipeline, kind of six months out is where we have visibility and we're locked in. So we continue really to like the business. Obviously, it's a small piece that we're growing rapidly today. So, you know, we won't share details and kind of size, but It's an overproportional growth rate in a very interesting area of the market that we like a lot. So we're going to continue that growth just based on the good multifamily market dynamics currently and our good position to serve that.
spk12: Okay. Thank you. Good luck on the upcoming course. Okay.
spk02: Thank you. And there are no further questions at this time. James Armstrong, I'll turn the call back over to you.
spk05: Thank you for joining our call today. If you have any follow-up questions, please reach out. I would be happy to answer any of your questions. This ends our call, and please have a great day.
spk02: And this concludes today's conference call. You may now disconnect.
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