JELD-WEN Holding, Inc. (JELD) Q2 2024 Earnings Call Transcript

Good morning and welcome to the JELD-WEN Second Quarter 2024 Earnings Conference Call. Please be aware that this call is being recorded. I will now hand the call over to James Armstrong, Vice President of Investor Relations. You may begin your conference.

Thank you, and good morning. We issued our second quarter 2024 earnings release last night and posted a slide presentation to the Investor Relations portion of our website, which can be found at investors.jeld-wen.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. JELD-WEN does not undertake any duty to update forward-looking statements including the guidance we are providing with respect to certain expectations for future results. Additionally, during today's call we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial 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 JELD-WEN's 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 4. Second quarter sales and EBITDA were in line with our expectations as the positive impact from our ongoing productivity actions helped to 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 and 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 JELD-WEN 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 5. 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 Hawkins 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 JELD-WEN 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 JELD-WEN 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 JELD-WEN 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 7. Our second quarter revenues were $986 million down 12% from the prior year. This decrease 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 mix 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-priced products. I'll provide additional comments about our North America and Europe market trends shortly. On Slide 9, 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 contribution 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 revenue 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 weakened, 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 decline 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.

Thanks, Samantha. 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, JELD-WEN 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 risk caused by portfolio complexity. The second project I want to highlight on Page 15 is the further automation of our bifold door assembly operations. Currently, when producing bifold 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 billion to $4.1 billion with core revenues down 5% to 9%. As with our revenue guidance, our adjusted EBITDA guidance remains $340 million to $380 million and reflects the impact of the lower expected revenue at a 25% to 30% decremental rate. Furthermore, we now expect price cost 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 carryforward 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 million to $50 million. Let's turn to Slide 19. Before I conclude, I would like to give a brief update on Towanda. 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 the divestiture of Towanda 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 JELD-WEN 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. Our first question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi. Good morning. I 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?

Yes. Thanks for the question and 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 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 or 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 into early 2025, as you work through incremental projects?

We have observed some inflation on labor and benefits that is slightly above our expectations. Given the challenging environment mentioned earlier, we are accelerating some additional projects. We anticipate adding around $10 million to $15 million in benefits to the $100 million target for this year, highlighting the strength of our project portfolio. Our focus is on prioritization and resource allocation, allowing us to bring in identified projects that can add value. We regularly review our project pipeline, which currently includes about 500 active projects, with 350 already completed. We sequence these projects based on resource allocation and available opportunities. While growth initiatives take longer, cost initiatives remain a significant priority. As we advance these projects, we expect to see the additional $10 million to $15 million impact in the latter half of the year. As we plan for 2025, we will reassess the current 500 active projects to ensure they align with our business priorities and needs, and we will continue to adjust our pipeline over the next six to twelve months.

So Steven, 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 color. Thank you both.

You’re welcome.

Thank you. Good morning, everyone.

Hi, Susan.

Good morning.

Good morning. I want to discuss the margins. Your outlook suggests a sequential expansion in the second half of the year despite the ongoing challenges you've mentioned regarding revenue. Could you explain some of the factors that are supporting this, including any company-specific efforts? Also, does this confidence give you the expectation to return to a double-digit EBITDA margin once volumes improve?

Yes. 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 million to $15 million of additional upside and lift is something that you should expect later this year based on measures that we're currently implementing and we have line of sight to. 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, 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 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? Just how do you think about each of those pieces I guess — the volume versus the price?

Yes. 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. 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 different 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 proves 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. We are 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.

Thank you.

Good morning, guys. Thanks for taking my questions as well.

Hi.

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 low double digits year-over-year; prior it was mid-single digits. But the big chunks single-family new construction and R&R remained 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?

Yes. 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 were 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 will be our VPI 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 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. And 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?

Yes. So as I said before pricing is competitive, but generally stable. If you look at it from a macro standpoint across the enterprise we are seeing some cost inflation. Specifically, I referenced labor and benefits and that's one of the reasons why we're ramping 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 we're talking about a 1% decline on that price cost lever and fairly neutral in Europe.

Okay. Thank you, guys.

Yes. You’re welcome, John. Have a good day.

Hey, guys.

Hi, Philip.

Solid quarter there. Choppy environment so it seems executing well.

Thank you.

I guess a question for Samantha. Typically 3Q is seasonally higher than the fourth quarter, but you got some onetime nuances with that $10 million cost you called out in 2Q getting pushed out to 3Q and perhaps some of the $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 the 3Q versus 4Q EBITDA contribution?

Sure, Phil. When discussing the plant costs, most of those expenses occurred in Q2, with about two-thirds in that quarter and the remaining one-third in Q3. While we have some extra costs, they are not significant. Additionally, we usually experience a noticeable seasonal increase during the spring and summer building season, but this year it was much less pronounced due to lower consumer confidence affecting spending on large items. However, as Bill mentioned, we are accelerating some of our transformational initiatives, which we anticipate will start providing returns in Q3 and Q4, helping to offset some of the additional expenses. The $10 million to $15 million that Bill mentioned is on top of the $100 million cost savings target, and most of this will be realized in Q4. Therefore, when considering the phase-out, Q2 and Q3 will be similar, with Q3 being slightly more profitable before a larger increase in Q4.

Okay. That's helpful. And then I guess 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 potentially more a more favorable interest rate environment we get rate cuts this fall. 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.

Yes. There are a couple of points to consider, Phil. Firstly, when the Federal Reserve adjusts rates, there is a delay in how banks process these changes to reprice mortgages and generate some transaction activity. We can expect this delay to be at least a month or two before resale homes start benefiting from lower rates. We've discussed previously the optimal rate at which people will begin to reengage, but I won't make any predictions on that. Our view is that it will take about a month or two for resale activity to increase, which would boost renovation and repair traffic, as every sale or resale generates some interest in R&R. The second factor to consider is new construction, which typically has a lag of three to six months regarding product availability. Once prices decline, transactions should pick up, but we expect at least one to two quarters of lag time before JELD-WEN doors and windows are delivered and installed. Hence, we will likely see results one to two quarters after rates normalize. The discussion on what constitutes a normalized rate will be lengthy. Additionally, for multifamily and commercial projects, there's a much longer lag time. We have multiple projects lined up in our pipeline, but it may take over six months for those to begin, considering the necessary permitting and other processes involved.

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 timing?

It's a delay. It's kind of the 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, permitting for multifamily and getting that teed up that takes a while. So, 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 color.

You're welcome.

Hi. Thanks for taking my questions today. So it sounds like higher-end window and door categories continue to be challenged while the lower end is benefiting from production builder growth. So has the variance between these demand trends widened since the start of the year or has it been pretty stable at this point?

I would say it depends on what you're looking at. The volume growth in lower-end new construction is solid, which we observe in our interior door business. As I've mentioned, we're under-indexed in Windows, so we're making efforts to improve our position and sell our great range of products to the builders we already have strong relationships with. We're not tracking share of wallet as we would expect, but this is the one area where we see volume, and it may even be increasing slightly. Particularly with the top builders, they are effectively managing land, buying down mortgages, and creating products that consumers are eager to purchase.

That's very helpful both. Thank you. And then 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. So 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 — 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 suggest that's going to change in the short term.

Okay. Great. Thank you.

You're welcome. Have a good day.

Good morning, everyone. Thank you for taking the questions, and welcome, Samantha to the conference call.

Thank you.

It seemed like the SG&A control was very tight in the quarter. My question is whether the cost reduction actions are translating into the SG&A side. More broadly, how do you view the distribution of these reduction actions between productivity, SG&A, and other areas? Thank you.

Sure, Matt. When I consider SG&A, there are a few factors at play. We began to closely manage our SG&A at the end of 2023 and the start of 2024, and we're beginning to see the effects of that in the quarter. Additionally, our variable-based compensation is a bit lower due to this year's reduced revenue. This year's SG&A is significantly lower than last year's, and we anticipate that this trend will continue into 2025. Regarding productivity, we have more of a gradual increase. The capital expenditures we've been investing in are generating substantial savings in the coming years, and we're beginning to see those benefits now. This is contributing to a sequential increase in productivity throughout the quarters of 2024, which we expect to carry into next year. The capital expenditures are crucial for advancing our profitability, and we're committed to this strategy despite the 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 that's kind of — 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. I understand. Perfect. Secondly, regarding the cash flow guidance, you mentioned there may be slightly higher inventory at the end of the year. Does this reflect the softer top line? How does this affect your production plans? Is there a chance you might need to reduce production, and what would 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 to previously.

Okay. That makes sense. Thank you for clarifying. And good luck guys.

Thanks Matt.

Thank you.

Hi. Thanks for taking my question.

Hi Mike.

Given the current situation in new construction and the single-family market, I understand that you've acknowledged your slower growth in this area and that improvements will take some time to materialize. However, I am seeking more clarity on how you would describe your success in gaining market share to improve your position. It's a very competitive market right now, and single-family starts are still somewhat low. I would appreciate any updates on your progress in this area.

Yeah. So obviously I talked about the 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 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. 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 customers' 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've put the win 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 Bill. And then, second just on cash flow. Just a specific question, so legal costs I think related to Towanda ticked up quite a bit in the quarter. I understand your line and 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, is what 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 the incremental or 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 costs are again related to the transformation. The legal is not driving a majority of that.

Got it. Okay. Thanks Samantha.

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.