JELD-WEN Holding, Inc.

2024 earnings release last night and posted a slide presentation to the investor relations portion of our website, which can be found at investors.jeldwin.com. We will be referencing this presentation during our call. Today, I am joined by Bill Christensen, Chief Executive Officer, and Samantha Stoddard, Chief Financial Officer. Before I turn it over to Bill, I would like to remind everyone that during this call, we will be making 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. 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 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 hand the call over to Bill.

Thank you, James, and thank you, everyone, for joining our call today. I'm pleased with our progress on the transformation journey and remain committed to strengthening Gels Wins Foundation. While facing various near-term market challenges, we are confident in our ability to achieve enhanced performance going forward. Firstly, I'd like to express my gratitude to our associates for their ongoing dedication in quite a dynamic macroeconomic environment. As we strive to meet our customers' expectations, we're also taking important steps to improve our financial performance. Today, I'll initially share a brief overview of second quarter results and discuss some of the actions we've completed. I'll then hand it over to Samantha to discuss our financial results in more detail before returning to discuss future actions in our transformation journey, talk about our 2024 financial guidance, and take your questions. I'll begin with our second quarter highlights on slide four. Second quarter sales and EBITDA were in line with our expectations as a positive impact from our ongoing productivity actions helped mitigate the anticipated headwinds from softer demand in both North America and Europe. In the quarter, we also announced that Samantha Stoddard was promoted to CFO as Julie pursues other opportunities. We're thrilled to welcome Samantha to the call in her new and expanded role and look forward to you getting to know her in the months and years to come. I want to wish Julie all the best in her future endeavors and thank her for her contributions to Gelduan during a pivotal time for the company. Finally, we repurchased approximately 1.6 million shares at an average price of $15.18 per share. This move allowed us to offset dilution from the past 18 months at an attractive price, utilizing existing authorization to execute the buyback quickly. Although we do not currently plan to repurchase more shares, we will remain opportunistic with available cash to maximize shareholder value. Turning to slide five, we continue to make progress with our transformational journey and our focus on people and performance remains the same. In the second quarter, we further advanced our culture transformation. Since launching, approximately 1,400 of our leaders including both Samantha and myself, each spent four hours on leadership alignment training. This training sets the groundwork for desired communication and behavior expectations for our leaders, creating a uniform language that is applicable across the company. Additionally, our network of approximately 250 change agents continues to make culture-improving strides. We recently completed two project sprints that aim to drive both transparency and accountability across the organization. I also personally met with these change agents, allowing some of our most influential team members to provide direct feedback. Moving on to performance, during the second quarter, we remained focused on delivering cost savings. As I mentioned on our last earnings call, we decided to close two facilities. the Vista California Composite Windows Facility, and the Hopkins Wisconsin Wood Windows Facility. These closures are part of our strategy to simplify and streamline the business, concentrating on sales quality and asset utilization. Collectively, these facility closures are expected to generate at least $11 million in annual EBITDA savings. We are on track with both projects to deliver results as per our internal business plans. Additionally, and as announced, we are increasing our CapEx spending to support operational improvements. In the second quarter, our CapEx rose by about $16 million year over year, mainly funding projects linked to our transformation journey. These include efforts to use materials more efficiently and increase automation which will reduce costs and improve quality. Although we are still in the early phases of our transformational journey, we are encouraged by the progress today. I'm proud of our team's continued hard work and dedication in making GELDWIN a stronger and more profitable company. I'll now turn it over to Samantha to discuss the financial results.

Thanks, Bill. It's an honor to be on my first earnings call as CFO. While I am new to the CFO role, my tenure with Jeldwin spans four years, during which I have held various key positions. Most recently, I led the North American Finance Organization and oversaw corporate financial planning and analysis. During my time in North America, I met with large customers to understand their needs and sat with critical suppliers to gain insights into our supply chain. In addition, I have spent time in our business to learn how our operations work, and understand the areas of opportunity. These experiences have provided me with a comprehensive understanding of GELDWIN and I am confident that this background equips me with a great foundation, allowing me to effectively contribute from the onset. As I reflect on my priorities in this new role, I see opportunities to enhance our financial performance and position our company as the global leader it has the potential to be. My immediate focus areas will be leading the organization to adapt to market challenges, managing controllable factors, and driving accountability. I am confident in our team's capability, and they are already making notable progress in strengthening our foundation despite market challenges. Now, turning to the financials and looking at slide seven, our second quarter revenues were $986 million, down 12% from the prior year. This decreased was driven by a reduction in our core revenues due mostly to the expected market-driven volume declines in both North America and Europe, combined with a mixed shift from higher-priced to lower-priced products as customers focus on affordability. Our adjusted EBITDA was $85 million in the second quarter, down $24 million year-over-year, leading to an adjusted EBITDA margin of 8.6%. As you see on slide 8, Our second quarter revenue decline was driven by lower volume mix of 12%, with about 60% of the decline due to the mix shift from higher average selling price products, such as wood windows and exterior doors, into lower price products. I'll provide additional comments about our North America and Europe market trends shortly. On slide nine, you see that our second quarter adjusted EBITDA decreased by $24 million year over year. Despite significant volume mix and slight price-cost headwinds, we generated solid profit contributions from improved productivity and significantly lower SG&A costs. We are on track to achieve our targeted cost savings of approximately $100 million this year. Additionally, due to timing, a small portion of the $10 million one-time costs associated with the previously announced plant closures are being incurred in the third quarter versus the second quarter. As a reminder, these $10 million of closure costs are not being added back to adjusted earnings. Moving to our segment results on slide 10. In the second quarter, our North America segment generated $711 million in sales, which was a decline of 13% from prior year. This was driven by a reduction in core revenues of 13% due to lower volume mix. North America's adjusted EBITDA decreased to $76 million from $109 million year over year. This decline was due to the lower volume mix I just referenced, as well as slightly negative price cost in the quarter. In Europe, we generated $275 million in revenue and $20 million in adjusted EBITDA in Q2. Core revenues decreased by 10% year over year, driven by lower volume mix of 12%. Adjusted EBITDA declined $4 million, leading to margins of 7.4%. The decremental impact from lower volume was mitigated by solid productivity improvements and slightly better price cost. Now, turning to the market outlook on slide 11, I'll provide some high-level comments. Starting with North America, as interest rates remain elevated and consumer confidence weakens, we now expect North America volumes to be down by low double digits in 2024. The market is trending moderately worse than our previous guidance. We still anticipate that new single-family home construction will be higher by low single digits. However, the outlook for repair and remodel activity remains challenging, and we expect R&R activity to be down by mid to high single digits, which is trending slightly worse than we previously disclosed. Furthermore, though our multifamily exposure is relatively small, the pace of market declines has accelerated. We now expect the combined multifamily and Canadian market to be down more than 25% year over year. The European market remains under pressure and is also trending towards the weaker end of our previous guidance due to the ongoing macroeconomic and geopolitical challenges. However, over the last quarter, the rate of decline has slowed. Overall, we continue to anticipate volumes in the region to be down by low double digits. I'll now turn it back to Bill to talk about our transformational journey.

Thanks, Tomasa. On slide 13, you'll see that my three key focus areas continue to be people, performance, and strategy. Our current transformational journey phase emphasizes both people and performance. Our investment in culture is focused on training of key topics such as safety, continuous improvement, and accountability. This included health and safety 101 courses that were given to plant managers, maintenance personnel, and group managers as well as the leadership alignment training that I mentioned earlier in this call. Focusing on performance, we are implementing numerous initiatives that are balancing growth with cost reductions. We began with approximately 800 projects in the pipeline and have completed about 350 today. Our disciplined process ensures that we continually refresh our project pipeline, keeping various opportunities for improvement in view. we currently have about 500 active projects. As we have done in previous quarters, I would like to highlight a few more specific examples in the subsequent slides. The first project I want to highlight on slide 14 is our initiative to align door specifications across our network. Historically, Gelwyn grew through acquisitions and not all the businesses were integrated or aligned. As a result, we produced our doors differently at various locations using different components, fasteners, and even dimensions in some cases. We are now standardizing our production across the entire North American distribution network, which brings numerous benefits. We will be able to better load balance our network as all sites will be making the same products. Additionally, by producing the same product across multiple locations, we can better track and improve quality as well as efficiency. By implementing these actions, we anticipate more than $4 million in direct benefits over the next five years. More importantly, these measures will help us consolidate our footprint and mitigate supply chain risks caused by portfolio complexity. The second project I want to highlight on page 15 is the further automation of our bi-fold door assembly operations. Currently, when producing bi-fold doors, an operator manually loads two slabs and three hinges into aging equipment. After the machine drills holes and places the hinges, the operator manually unloads the product to the packaging line and then manually stacks the finished product. This project will establish an assembly station that automates the process of loading, drilling, applying the hinges, unloading, and stacking the finished product. By reducing labor, improving quality, and increasing throughput, we can achieve significant cost savings. Additionally, similar to the previous project mentioned, this initiative will standardize the bifold door assembly process across our operations. In addition, the project is expected to enhance safety by reducing the manual handling of large awkward door panels. With these automation projects, we anticipate a five-year savings of over $2 million with a capital investment of approximately $1.6 million. I'd now like to discuss our 2024 guidance. As you see on slide 17, we are maintaining our revenue and adjusted EBITDA guidance for the year. We anticipate results at the lower end of our range with increasing softness anticipated across most of our end markets. Specifically, our revenue guidance remains $3.9 to $4.1 billion, with core revenues down 5% to 9%. As with our revenue guidance, our adjusted EBITDA guidance remains $340 to $380 million and reflects the impact of the lower expected revenue at a 25 to 30% decremental rate. Furthermore, we now expect price costs to be down approximately 1% year over year, partially offset by further actions we're taking to reduce SG&A and improve productivity. We do expect to deliver $100 million of cost savings this year, which is a combination of approximately $50 million of carry-forward benefits from last year's actions and new initiatives that will be completed this year. As we look at the phasing of earnings this year, we continue to expect benefits from our cost savings actions and investments to ramp up throughout the year. However, with the continued weakness in our markets, we expect EBITDA phasing to be 55 to 60% in the second half versus the 60% we mentioned in last quarter's call. On slide 18, you see our updated cash flow outlook for the year. Due to continued market softness combined with inventories expected to be slightly higher at the end of this year, we now anticipate that this year's operating cash flow will be approximately $200 million. This is after we incur an estimated $100 million of non-operating cash expenses to fund portions of our transformational journey. With the update, we expect our free cash flow to be approximately $25 to $50 million. Let's turn to slide 19. Before I conclude, I would like to give a brief update on Tawanda. As of this time, there are no new developments to share with investors, and we continue to work through both the court mandated divestiture process and associated objections. We continue to believe that divestiture of Tawanda is no longer warranted, but there are no assurances that our motion will be granted. As this is an ongoing legal matter, I will not be able to provide any further details at this time. Despite the difficult macroeconomic conditions facing our sector, we continue to make strong progress on our transformation journey, which will set Gelwyn up for success as the market improves. While our near-term demand outlook is challenged, our long-term view has not changed, and we believe the underlying fundamentals for North America and European housing remains very positive. I remain confident and optimistic about the number of long-term value-creating opportunities available within our business. We appreciate your continued interest and I'll now turn it over to James to move to Q&A.

Thanks, Bill. Operator, we're now ready to begin Q&A.

Thank you. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. To withdraw your question, simply press star one again. If you are dialed in and listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Our first question comes from the line of Stephen Ramsey with Thomson Research Group. Please go ahead.

Hi, good morning. Wanted to hear more thoughts on the growth part of your improved performance plan the sales force efficiency go-to-market processes and pricing optimization can you talk to priorities within those areas and how much you can achieve in these areas when volumes are pressured yeah thanks for your question steven good morning so let me start with pricing i mean obviously it's competitive in the market environment that we're in but we're we're holding

and feel comfortable in the progress that we've made this year. So I'd say that's the first point. Regarding sales efficiency, we have win rooms that are part of our transformational project streams where we're really digging in in different segments and different geographies to really get down to the details on project volume pipelines, conversion rates, win rates, looking at lost projects and really trying to assess how we can get better. One of the areas that we talked about on the last call, if you remember, is we're under indexed with windows on the large builders in North America. And that's one of the areas that we're working hard to try and increase our share. But remember, once you win the project, you're still three to six months out for our product to get built in. So there is a lag. until we're going to start seeing some of that great work that our organization is doing. So that's why we expect later this year, early next year, to see some of those wins materialize. So we're happy with the progress that we're making. But again, growth, maintaining price and sales efficiency is the one lever. The other, obviously, that we've talked a lot about is making sure that we're managing the costs. And I'm sure we'll go through some details on the call on that lever as well. So hopefully that answers your question, Steven.

Yes, it does. And then my quick follow-up would be the 500 plus projects you're working through. Maybe talk to how you feel about it being backfilled with new improvement projects and how that can roll through second half and even in the early 25 as you work through incremental projects?

Yeah, so we've a couple of comments, maybe a broader answer to your question. We've seen some incremental inflation that's been a bit higher than we had expected on labor and benefits. And obviously, with the tougher headwind, as we alluded to in our prepared remarks, we're also pulling ahead. some additional projects. So we expect probably to tack 10 to 15 million of benefit onto the 100 for this year, which is, I think, starting to show the strength of the portfolio of projects that we have. It's all about prioritizing resource allocation and bringing projects in that we've already identified, our organization has already identified that they can add value. We just haven't focused on them based on priorities. So we are constantly refreshing our pipeline of projects. As we said, we currently have about 500 active, 350 are completed, and we continue to sequence projects based on resource allocation and where we see the opportunities. As we said just in my prior comment, growth initiatives are a little longer. Cost initiatives is a pretty significant focus. But as we ramp these projects up, you're going to see a late kind of H2 impact of the additional 10 to 15. And we will be at the end of this year, as we are planning through our annual process for our 25 plan, really, again, looking at a bottom-up organizational view of priorities and making sure that For example, the 500 that we currently have active are still the right projects aligned with the business priorities and needs. And then we will continue to calibrate and reset for the next six to 12 months our pipeline.

Stephen, this is Samantha. Just to add a little bit more color when you think about that phasing. You can see already in our overhead kind of corporate unallocated costs, we are already seeing the structural cost reduction flow through the P&L. So when you think about going into Q3, Q4, think about Q3 as a step up slightly from Q2 with an additional incremental step up in Q4 as some of those projects that Bill mentioned start to pay back into our P&L.

That's helpful, Taylor. Thank you both. You're welcome.

Our next question comes from the line of Susan McClary with Goldman Sachs. Please go ahead. Thank you.

Good morning, everyone. Hey, Susan. Good morning. I want to talk a bit about the margins. Your outlook seems to contemplate a sequential expansion in the back half, even with the ongoing headwinds that you talked to on the revenue line. Can you just break down for us some of the factors that are supporting that, including some of the efforts that you have from a company-specific perspective? And is that confidence giving you, or is that giving you confidence to return to a double-digit EBITDA margin when those volumes do recover?

Yeah, so let me give you the high-level message, and then clearly Samantha can share some details on splits. As I just answered with Steven's question, we have pulled ahead some additional benefit into our transformation pipeline, which we feel will drop definitely in 4Q. So that 10 to 15 of additional upside and lift is something that you should expect later this year based on, you know, measures that we're currently implementing. And we have line of sight too. So I think that's why there's some conviction that we're trying to control our destiny as much as we can. And as you have heard in our prepared remarks, we don't expect significant changes in the market as we get into the back half of the year. So it's all about the measures we can control and what we're trying to do about that. But Samantha can share some more details on splits.

Sure. So, Susan, you know, the way I think about it is, again, this 100 million approximately that we announced in 2023. We have carryover effect from that about half and half, with 50% carrying over into 2024. Then we have the new projects. We have the new transformation initiatives that we kicked off earlier this year, which will be incremental into 2024, and of which we are actually accelerating more to pull that in. So from a phasing standpoint, you've got to think maybe one third in the first half, two thirds in the back half. And again, it's more of a timing of when those initiatives start to realize. And then the similar instance will happen into 2025, expecting approximately half of that carrying over into 2025.

Okay, that's very helpful color. And then maybe turning to the demand side a bit, can you talk about how you think of the balance between growing volume relative to holding price that you mentioned to offset the inflation and protect those margins? How do you think about each of those pieces, I guess, the volume versus the price?

Yeah, so obviously this is something that we're constantly monitoring. The price cycles are long in our industry, and there's a couple of things that I think We need to think through. Clearly volume is one lever but mix is the other. As Samantha noted in her comments, there is a mix down currently. We continue to see softness in the R&R sector in North America. Consumers are waiting with discretionary large ticket items. There was not a significant, I would say, seasonal reload. Inventories are very thin. And that signals to us that there's a lot of caution on the spend side and people are waiting. And as we monitor this reality, we still have a lot of homework that we need to do. So we are really working hard on getting ourselves ready for a recovery, which will arrive. And the question is when, and that's probably something that people have very differing views on. Our position is We have 500 projects that we are actively knocking down to improve our cost structure, our service levels, our quality to our customer base, and that improves our value proposition as a supplier. We feel comfortable right now on the pricing side because the measures that we are taking internally are allowing us to really manage our cost structure effectively. And we don't think that's going to change dramatically for the rest of the year. Hence our guide that we're going to be a little light in North America, but we're doing what we can to offset that with the additional cost measures. So I'd say that's probably from a big picture how we're looking at it. We've done, I'd say, probably a little bit of a better job in Europe of holding price. more spec driven. If you look at our portfolio mix across Europe and clearly there's softness on the project side of the business, but we are able to hold and we continue to see, which is an interesting dynamic. Some of the smaller competitors that have been a bit less structured on price, let's put it like that, are having significant troubles in this market environment. And we've seen some of them actually collapse. So that's leading to some pickup of volume in certain markets where we've just been managing ourselves more effectively for a longer term platform and growth trajectory.

Okay. That's very helpful color. Thank you both. And good luck with everything.

Thank you very much, Susan. Have a good day.

Our next question comes from the line of John Lavallo with UBS. Please go ahead.

Good morning guys. Thanks for taking my questions as well. The first, Hey, good morning. The first one is just, if you could help me better understand just the North American volume expectations, you're now expecting them to decline, you know, low double digits year over year. Prior, it was mid single digits. But the kind of the big chunks, single family new construction and R&R remained, you know, basically unchanged, maybe towards the lower end now versus mid end. But it seems like multifamily in Canada, which are smaller pieces of the business, are what moved. So what was really kind of the big driver? Because that is a fairly big move from down mid-single digits now down low doubles.

Yeah, so if you kind of look at our mix, if you look at new single family, which is comping slightly better than what we saw, we're underrepresented in windows. So there's clearly a share of wallet issue there. We're not participating equally on the upside. So if there is an upside in the segment today, that's it. We see dramatic declines in our multifamily and project driven business, which would be our windows business, but also our Canadian business. And when I say dramatic, we're talking close to 30%. And if you look at those two buckets, John, we're roughly at about 10% of our North American business. So that, that really small share, but a significant decline is dragging us into that low double digit. expected decline. And the project market, as you well know, is something that is very connected to interest rate and forward financing. And everyone is waiting, as many others are, to get a clear view on what the interest rate environment will look like for future financing.

Okay, understood. And then price cost expected to be about a 1% headwind now versus flat, I think, before you're kind of thinking of pricing being up low single digits to offset inflation. How should we sort of think about the price versus cost pieces of this new outlook?

Yeah, so as I said before, you know, pricing is competitive but generally stable. You know, if you look at it from a macro standpoint across the enterprise, we are seeing some cost inflation. You know, specifically I referenced labor and benefits. And that's one of the reasons why we're amping up and pulling ahead some of the cost measures in our transformation package that should have an impact in the back half of the year to offset that. So in general, if you mix those two in, which is mainly going to be North America, you know, we're talking about 1% decline on that price-cost lever and fairly neutral in Europe. Okay.

Thank you, guys.

Yeah, you're welcome, John. Have a good day.

Our next question comes from the line of Philip Ng with Jefferies. Please go ahead.

Hey, guys. Solid quarter in a choppy environment, so it seems executing well. I guess a question for Samantha. You know, typically 3Q is seasonally higher than the fourth quarter, but you got some one-time nuances with that $10 million cost that you called out and 2Q getting pushed out to 3Q and perhaps some of those $10 million to $50 million savings, a little more weighted in the fourth quarter. Can you give us a little more perspective of how to think about three key versus four key EBITDA contribution?

Sure thing, Phil. So when you think about, maybe I'll address the plant costs first. When you think about the phasing of that, the majority of those costs did fall in Q2, probably about two-thirds, with another third happening in Q3. So yes, we have some additional costs, but not significant. The other piece that we have to really look at is that normally we do see a pretty strong seasonal uptick in conjunction with the spring and summer building season. We saw much less of that this year. With lower consumer confidence to spend on big ticket items, that is getting pushed out. However, we are accelerating, as Bill mentioned, some of our transformational initiatives, which we now expect to start paying back in Q3. and Q4. So again, that's kind of offsetting additional amounts. Now, the 10 to 15, the bill referenced, that is over and above, kind of that $100 million cost savings target, that will hit almost all of it in Q4. So when you think about phasing, Q3 and Q2 will be similar with Q3 being slightly more profitable, with then a larger uptick in Q4.

Okay, that's helpful. And then I guess, you know, rates have obviously come down pretty hard already in the last few weeks with the Fed signaling rate cuts. It sounds like your customers have inventory pretty low at this point. So, Bill, if you had to envision, you know, potentially a more favorable interest rate environment, we get rate cuts this fall, you know, what's the lag you see in your business, whether it's the R&R side, new construction, or the multifamily side, which obviously is under a lot of pressure right now?

Yeah, so a couple of points here, Phil, maybe first comment is, you know, there is when rates reset at the Fed, there is a lag to get it through the machine room of the banks to reprice mortgages and create some transaction volume. So let's assume that's, you know, at least a month or two for resale homes to start kicking in with lower rates. you know the question that we've debated in the past is what's the right number for people to really start reengaging on rates and I don't want to you know make a call on that but our position is it's probably going to be a month or two until resales start going and that'll kick R&R up for you know for every sale or resale there is some R&R traffic that's created so I think that would be the first pocket that we should expect to see some volume upturn and Second would be then obviously with the new construction and our lag is three to six months on product being built in. So once prices come down, transactions and starts start to pick back up, expect, you know, at least a quarter, if not two lag until product from GELDWIN doors and windows are built in. So, you know, it's a quarter to two quarters out once rates get back down to a normalized level. And I think there's going to be a long discussion about what is the normalized level. And then, of course, multifamily and the commercial project base that has a much longer term lag. We have a lot of projects that we see in our pipeline, but probably six months plus for that to get going with all the permitting and everything else that needs to happen and then our projects being built in.

On that note on multifamily, the weakness that you're seeing now, it sounds like you still have some projects in the pipeline. Have you seen any cancellations or more of this is just getting pushed out from the timing?

It's a delay. It's kind of the whole principle, which is, I think, never a good thing. I do think a lot of people are waiting and kind of looking for a signal that we've hit top on the rate World, and once we start moving back down, I think it's just a question of time until the economics start working. But again, you know, permitting for multifamily and getting that teed up that takes a while. So, you know, if you bottle this all up, we're still in a challenging environment for the back half of this year. And I would suggest probably the first half of next year.

Okay, appreciate the call.

Yeah, you're welcome.

Our next question comes from the line of Jeffrey Stevenson with Loop Capital. Please go ahead.

Hey, thanks for taking my questions today. Hey, Jeff. So it sounds like higher-end window and door categories continue to be challenged, while the lower ends benefit in from production builder growth. So has the variance between these demand trends widened since the start of the year? Has it been pretty stable at this point?

I would say it's pretty... It kind of depends what you're looking at. I mean, the volume growth on the lower end, new construction, is solid. We see that on our interior door business. And as I've said, we're under-indexed on windows, so we're working hard to build a better position and sell the great package of products that we have into those builders who we already have strong relationships with. So we're not tracking that. share of wallet as we would expect, but that is the one area where we see the volume and it actually is maybe increasing slightly, especially with the top builders. They're doing a great job with land and buying down mortgages and building products that consumers really want to get into.

That's very helpful, Bill. Thank you. Just wondering if you could provide an update on retail channel inventory levels. You previously highlighted that seasonal trends were delayed in the second quarter as restocking was pushed back due to soft large-ticket R&R demand, and just wondered if that occurred in line with expectations during the quarter, or maybe it was pushed back more than anticipated.

Yeah. Message number one, Jeff, no significant reload of channel inventory that we saw. So our conclusion is still that inventory is very thin. And the seasonal uptick that you would typically see in the summer has not occurred. So the market remains relatively flat and the same trends are very visible. You know, big ticket items and discretionary spends are being pushed because there's a high level of uncertainty and mortgage rates are relatively high. So we would expect when demand picks up on the R&R side, a pretty quick pull through. just based on where inventories are but we're not seeing any signals today that would suggest that's going to change in the short term okay great thank you yeah you're welcome have a good day our next question comes from the line of matthew boule with barclays please go ahead good morning everyone uh thank you for taking the questions uh and uh welcome samantha to the conference call um thank you the the uh

It seemed like the SG&A control was very, you know, tight in the quarter. And my question is, if you're thinking about the cost reduction actions, are we seeing a lot of that actually flow onto the SG&A side? And I guess just more broadly, how do you think about how these reduction actions would split out between sort of productivity and SG&A and other? Thank you.

sure matt so when i think about sgna you know there's a couple of different factors that we have we did start taking actions around managing our sgna a little more closer i would call it end of 2023 beginning of 2024. so we are seeing that materialize in in the year or excuse me in the quarter in addition you know our Variable-based comp is slightly lower based on this year's lower revenue. Last year's SG&A is significantly, or excuse me, this year's SG&A is significantly less than last year, and we do expect that trend to continue into 2025. From a productivity standpoint, this is where we have more of a ramp up. The CapEx that we have been investing in is driving significant savings in the coming years. And we're seeing that start to pay off now, which is driving that kind of sequential productivity ramp up throughout the quarters of 2024. And that will carry us into next year. The CapEx is truly what gets us to the next level in terms of our profitability. And so you can see we're still committing to that despite more challenging market conditions.

Okay, got it. And then just so I understand, so what you're doing with SG&A, and I understand the variable comp as well, but everything going on in SG&A, is that incremental to the $100 million, or like the $100 million is entirely on the productivity side?

No, it's a good question. The $100 million is inclusive of both, let's call it more of a COGS productivity as well as SG&A.

Okay, got it. Perfect. And then secondly, the... Just in terms of the cash flow guide, I think you spoke to a little bit higher inventory at the end of the year. I don't know if that just kind of simply reflects the softer top line. But I mean, how does that impact how you think about production? And is there a scenario where you might have to pull back on production a little bit? And what could that mean for the margins? Thank you.

So let me start off with talking about the cash flow and the inventory. The inventory is actually intentional for us to increase our inventories slightly in order to drive higher service levels to our customers. So that move was actually more of a strategic move than anything dealing with the softer volume. From that perspective, we do expect the inventory to bleed down throughout the remaining part of the year. But we do have slightly higher than expected inventory as opposed to what we guided you previously.

Okay. That makes sense. Thanks for clarifying. And good luck, guys. Thank you. Thanks, Matt. Have a good day.

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Thanks for taking my questions. Hey, Mike. That's on the new construction or the single-family dynamic. I know you've been clear about your – that you've under-indexed there and that even as you make strides, it takes some time to kick in. But I guess I'm just looking for more clarity on – so on the front end, how would you characterize your progress on actually winning share to re-index higher? Obviously, it's a pretty competitive environment out there. It's still somewhat subdued. single family starts. So we'd love to hear what's been happening on the front end there in terms of progress.

Yeah, so obviously, I talked about a win room concept, which is to get the commercial organization very focused on specific levers. And that's kind of drilling into sales efficiency. Where do we want to play? How are we going to win? And really measuring and monitoring our progress with the appropriate granularity. So, you know, I'd say we're in the phase of building relationships, winning orders, developing portfolios, but this is the start of the process. And with a lag of three to six months, this is something that will not have an impact in 2024. This is something that we'll see in 2025, so we're investing in the future. But with all the foundational work that we have done in Windows, now we're starting to get ourselves really focused on the commercial side of the business and really meeting the customer's expectations. In order to do that, we have to obviously understand what they are, but also then have the right commercial setup in place. And that's one of the reasons we put the wind rooms in, because that really helps focus the organization around what needs to be done and creates visibility so we can look in at any point in time and really see how everyone's doing.

Got it. Okay. Thanks, Phil. And then second, just on cash flow, it's a specific question. So legal costs, I think, related to Tawanda, it ticked up quite a bit in the quarter. I understand you're limited in what you can say about the actual process, but that is, while being backed out of EBITDA, it is a cash cost. So in the new cash flow guide, what's You've got the transformation journey expenses. What's embedded in terms of then just continued things like elevated legal costs and what's kind of incremental there versus the prior guide?

So when I think about this, Mike, from a cash flow perspective, the recurring costs are going to be mostly in the investments we're making in ourselves. And when you think about the year-over-year, we don't expect the transformation cash to be as high next year as we do in 2024. So we don't expect the same levels of elevation. On the legal standpoint, the majority of this cash cost are, again, related to the transformation. The legal is not driving a majority of that.

Got it. Okay. Thanks, Amanda.

All right. Thanks, Mike. Have a good day.

There are no further questions at this time. I will now turn the call back over to James Armstrong for closing remarks.

Thank you for joining our call today. If you have any follow-up questions, please reach out. I'll be happy to answer anything you have. This ends our call, and please have a great day.

This concludes today's conference. You may now disconnect.