Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Jeld-Wen Holding, Inc. Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. 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 the star one. Thank you. Christopher Teachout, Director of Investor Relations, you may begin your conference.
Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, which we will be referencing during this call. I'm joined today by David Nord, Chair of the Board of Directors, Kevin Lilly, Interim CEO, and Julie Albrecht, CFO. Before we begin, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements including the guidance we are providing with respect to certain expectations for future results.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Dave.
Well, thanks, Chris, and good morning, everyone. Thank you for joining us today. As Chair of Jeld-Wen's Board of Directors, I'd like to start this morning's call with some brief remarks about our third quarter performance and share some of the board's area of focus before I turn it over to Kevin and Julie to walk you through more detailed results. In summary, in the third quarter, we delivered solid revenue and EBITDA improvements over the prior year. I'm pleased that management has been able to deliver this performance really in light of challenging macroeconomic environment and some significant internal changes, as you're probably aware of. The board is clearly supportive of management's actions to drive change and ensure that Jeld-Wen reaches its full potential. We're committed to improving the financial performance of the business and delivering more value for shareholders.
We've already taken a number of actions in the past few months to help us achieve this goal. First, as I'm sure you are aware, we appointed Kevin Lilly as Interim CEO whom you'll hear from shortly. The search for a permanent successor is progressing well. We've identified a short list of qualified internal and external candidates and we're working closely with an executive search firm to further narrow our list. We expect the new CEO to be an exceptional operator who possesses strong knowledge of both the capital markets and shareholder value creation. You know, while I can't speculate on timing, we're actively moving through the process, but making sure that we find the right leader for the future success of Jeld-Wen. Part of the board's responsibility is to build on Jeld-Wen's core of senior leaders by continuing to strengthen the management team as well.
To that end, we've made several leadership appointments this year, including Julie Albrecht, our new CFO who some of you may have talked to. She joined us in July, so you'll have a chance to hear from her shortly. We've also refreshed our regional leadership in all our business segments. Both Julie and our regional leaders have extensive management experience, and we'll utilize their expertise to refocus their respective areas of the business, and improve performance. One of the actions in the area streamlining the company, we initiated the strategic review of our Australasia business with a goal of maximizing value for both Jeld-Wen and the business. The process is well underway, but of course, no assurances can be made regarding the outcome or timing of our review. With that said, we have some strong interest in the business thus far.
As we move forward, we're certainly committed to sharing any meaningful updates with you as they materialize. Finally, we continue to seek out and add fresh perspective to the board, recently appointing Kathy Halligan as a new director in September. Kathy's diverse skill sets will be a great asset to our board, particularly in digital transformation, marketing, and e-commerce. As these actions demonstrate, the board and management team are fully committed to improving our results and maximizing the full potential of the company. As a recognized leader in the global building products industry, JELD-WEN's brands, manufacturing capability, and broad customer partnerships position the company for its long-term success. Despite near-term headwinds in markets we serve, we know there are attractive and durable drivers of long-term growth.
With that, let me turn the call over to Kevin to expand on these areas and provide more details about some of our near-term actions before Julie takes on and describes a little more of the detail of our operating results. Kevin?
Thanks, Dave. Good morning, everyone, and thank you for joining us today. Since stepping in as interim CEO of Jeld-Wen. It's been my mission to help guide our team through a period of market uncertainty and organizational transition. I care deeply about the company and my teammates and believe in our potential to succeed. My objective is to drive focus across the organization to improve execution and performance w hile laying the groundwork for further strategic action so the new JELD-WEN CEO can hit the ground running.
I firmly believe that this company has a strong foundation that will help deliver our long-term success. For more than 60 years, JELD-WEN has grown through building strong partnerships, making investments, both organic and inorganic, to serve new customers and markets, and embedding innovation and sustainability into our strong portfolio of high-quality brands. While there are challenges in the near term, we are positive on the intermediate and long-term demand potential in each of our end markets that remained underbuilt for both new residential homes and existing homes that are increasingly in need of renovation. We remain confident in our ability to drive profitable growth through innovative products and services that meet the unique needs of our customers.
However, as we've assessed recent financial performance, our results are not reflective of the full potential of Jeld-Wen. In recent quarters, we suffered from taking on too much without sufficient alignment and accountability at every level of the organization. The result was inconsistent execution and not enough bottom-line impact. We understand that prioritization and execution must improve, and progress must be reflected in our bottom line. To this end, we're taking decisive actions to improve results that ensure the fundamental strengths of the business lead to meaningful shareholder value creation. Now before I discuss the current actions we're taking to improve execution and financial performance, let me first start with the highlights of our third quarter results. We generated revenue of $1.3 billion and adjusted EBITDA of $116.5 million, an increase of 13% and 18% year-over-year, respectively.
All segments were positive in core revenue growth with price realization contributing 15% and volume mix adding 3%. North America led our regions with a 23% increase in core revenue in the third quarter. EBITDA margins expanded this quarter by 40 basis points to 9% due to favorable price cost, improved operating leverage from volume mix, and positive productivity. Julie will provide more detail on our financials and outlook shortly. As we head into Q4 and next year, we're facing an increasingly challenging macroeconomic environment with persistent inflationary pressures and a softening housing market in North America and Europe. We're taking a fresh look at our business to find new ways to reduce the impact on our financial results while positioning the company for success.
As Dave shared, we're taking steps to streamline and strengthen the company to improve our bottom line over the short and long term as we continue to navigate these near-term challenges. Now let me share several actions we're taking to improve our cost structure and profitability. First, we continue to right-size the organization in line with our customer demand as the housing market continues to soften. This includes reallocating resources to where demand is strongest while scaling back in areas where we are seeing softness. We have also reduced management layers to lower costs and improve agility of decision-making. Second, we've taken an end-to-end look at our supply chain to better manage our raw material and freight spend while ensuring improved security of supply to our customers.
We've taken steps to optimize our supplier partnerships, in some instances, moving to multi-source, and in others, reducing the number of suppliers to take advantage of our purchasing power. In both scenarios, however, we're taking the opportunity to reengage with our suppliers to create mutually beneficial outcomes. To that end, this past quarter, we hosted a two-day supplier summit in the U.S. with approximately 75% of our partners. We also held one-on-one meetings in Europe with key strategic suppliers. The purpose was to strengthen our partnerships by better understanding each other's respective needs, discuss collaboration opportunities, and identify ways to take costs out and improve sustainability of the value chain. Third, we're also taking steps to simplify and streamline our business to focus resources on our core assets and product lines. The strategic review of our Australasia business that Dave mentioned earlier falls into this category.
Also, the closing of our Milton, U.K. stairs and windows business that will conclude by the end of the year is another good example. From a day-to-day execution perspective, this is about prioritizing initiatives and aligning the appropriate resources to deliver quality execution. Lastly, our segment leaders are taking a customer-centric, data-driven approach, assessing profitability and growth potential across product lines, channels, geographies, and facilities. Julie and I have worked together with our senior leaders to institute more process discipline and governance to deploy appropriate resourcing and execution oversight. Our goal is to ensure the organization can more quickly implement measures to accelerate profitability and growth. Before I hand the call over to Julie, I'd like to take a moment to recognize our global associates and their continued dedication to the company and our customers, especially during this time of significant change and external challenges.
In our recent annual employee engagement survey, we had extremely strong participation rates and experienced improvement in nearly every key measure year- over- year. The strength of our engaged and talented global workforce is what gives me tremendous confidence in our potential as an organization. I'll now hand the call over to Julie to share more detailed financial results.
Thank you, Kevin, and good morning, everyone. I'm excited to join you all for my first call as Jeld-Wen's CFO. I'd like to begin with some perspective on my near-term priorities to improve our financial results. Since joining in mid-July, I've spent considerable time getting to know my finance team, and many other associates, and have also visited several of our manufacturing facilities. I feel strongly that we have a team eager to win and ready to help develop and implement a framework to improve our operational and our financial performance. I'm focused on four areas that will drive shareholder value and strengthen Jeld-Wen for the benefit of all stakeholders and you see these on slide seven. First is improving our cost structure to address both cyclical and structural opportunities to enhance profitability.
Second is data availability, quality, and analysis, so we can better use data to guide our decision-making on the commercial side as well as to improve our operations. Next is increased rigor and alignment around capital expenditures with a clear linkage to our strategy and optimizing returns. Lastly is promoting a culture of engagement and accountability with finance being a strong business partner that helps Jeld-Wen achieve its financial targets. You'll hear me talk more about each of these in detail in the coming quarters and in our conversations and please feel free to ask me any questions you have on these topics. I also want to highlight that I am committed to providing useful information that helps you better understand Jeld-Wen's overall business and financial results. Now to our consolidated results for the third quarter, which you can see on slide eight.
As Dave and Kevin have mentioned, we delivered solid revenue and adjusted EBITDA improvements over the prior year period. Our revenues were approximately $1.3 billion and our adjusted EBITDA was nearly $117 million, which resulted in a 9% EBITDA margin, a 40 basis point improvement compared to the prior year. Adjusted EBITDA benefited from favorable price cost, the impact of positive volume mix, and improved productivity, which were all partially offset by higher SG&A expense. Shifting to our GAAP results, we reported a third quarter GAAP net loss of $33.2 million compared to net income of $40.5 million in the same period last year. This quarter's loss was primarily due to a $55 million pre-tax non-cash goodwill impairment charge in our Europe segment reflecting their challenging operating environment.
There is additional information in the appendix about our GAAP results and our non-GAAP financial measures. Now, as you see on slide nine, our 13% sales growth was driven by core revenue growth with price realization having a 15% positive impact and increased volume mix growth contributing 3%. These positive drivers were partially offset by the impact of foreign exchange from the stronger U.S. dollar. On this slide, you also see a breakdown of key revenue growth drivers by segment. Core revenue growth was positive and improved sequentially across each of our segments. Price realization was again strongest in North America at 17%, followed by Europe at 13%, while Australasia increased 10%. As we realized the full- quarter benefit of price increases implemented during the second quarter to combat persistent inflation.
Moving to volume mix, North America and Australasia volume mix grew by 6% and 4% respectively while Europe decreased 3% reflecting the increasingly difficult operating environment in that region. I'll now review our segment highlights for the third quarter, which are on slide 10. Beginning with North America, net revenue increased over 23%, driven by strong price realization and positive volume mix partially due to an easier comparison due to the labor challenges experienced in the third quarter of last year. Increased demand in this quarter was strongest within windows, exterior doors, and company-owned distribution. Adjusted EBITDA margin in North America increased 120 basis points to 12.6% due to favorable price realization and positive volume mix, all partially offset by higher SG&A expense.
Net revenue in the Europe segment decreased 5.5% driven by foreign exchange headwinds partially offset by 10% core revenue growth. During the third quarter, macroeconomic conditions deteriorated in Europe driven by the continued war in Ukraine, significant inflation, and rising interest rates. All of these factors are negatively impacting the performance and near-term outlook of our Europe business, which is reflected in the goodwill impairment we took this quarter. Europe's adjusted EBITDA margin decreased 150 basis points to 5.9%. The decrease in margins was driven by significant cost inflation including a more than 80% increase in energy costs year-over-year and t he negative impact from lower volume mix partially offset by productivity savings.
Australasia revenue increased almost 6% including a 14% increase in core revenue, partially offset by the negative foreign exchange impact from the stronger U.S. Dollar. Demand was strong for windows and doors and generally remained healthy overall despite persistent labor challenges in our building customers. Australasia adjusted EBITDA margin increased 90 basis points in the third quarter to 12.8% due to strong price realization and positive volume mix partially offset by higher SG&A expense. Now looking at slide 11, operating cash flow used during the first nine months was $73 million compared to operating cash flow generated of $135 million during the same period a year ago. We generated positive operating cash flow during the third quarter of $92 million, which was in line with the prior year.
Free cash flow used was $131 million during the first nine months of the year but was positive by approximately $70 million during the third quarter. We are focused on improving working capital in our segments and expect to generate positive free cash flow in the fourth quarter while positioning ourselves to significantly improve cash generation in 2023. Our balance sheet and liquidity remain in good position. We ended the quarter with total cash of $200 million and liquidity of $560 million. Our net debt leverage decreased to 3.6x from 3.8x last quarter, but does remain elevated from 2.8x at the end of last year.
This increase in leverage compared to last year was primarily due to lower earnings, increased working capital reflecting both inflation and supply chain challenges, and from repurchasing $132 million, or approximately 7.6% of shares outstanding as of year-end 2021. This is a good place for me to comment on our capital allocation priorities. First, we will continue to invest organically specifically in projects that exceed our internal return set hurdles and strengthen the financial position of Jeld-Wen. We're developing new processes and tools that create more rigor around our capital expenditure process while ensuring alignment with our segment strategies. In addition, we are focused on reducing our financial leverage and we are targeting a net leverage ratio of less than 3x in the near to medium term.
We will also continue to evaluate smaller acquisition opportunities and other capital allocation options depending on a number of factors including our net financial leverage and our cash generation as well as the returns achievable from these capital deployment opportunities. Now moving to slide 12, I'll provide our current view of market conditions in each segment. In North America, looking at almost any leading indicator of activity, the housing market is slowing and is likely going to continue moderating. While repair and remodel or R&R activity is impacted by many of the same factors. Si milar to prior housing cycles, we do anticipate R&R activity to fare better than residential new construction.
We started to see orders moderate during the third quarter particularly in our traditional channel and this softness has persisted through October as residential new construction activity slows and our distribution partners align their inventories to end market demand.
While demand is likely continuing to soften in the coming months, I do want to express our optimism over the intermediate and long term. North America remains significantly underbuilt relative to demand for new residential homes, while the average age of existing homes continues to increase. In Europe, the economic situation continues to deteriorate largely due to the effects from Russia's invasion of Ukraine. This conflict has driven broad inflation and rising interest rates across the region. Within the residential portion of our business in Europe, for the past few quarters, we have felt softening demand in residential new construction dating back to the beginning of the COVID-19 pandemic given the lengthier build cycles compared to North America. More recently, demand has significantly slowed for repair and remodel projects as consumers pull back on discretionary purchases in response to higher energy costs and the uncertain macroeconomic outlook.
Our channel partners, particularly within retail, are also aligning their inventory levels to softening demand. In Australasia, demand for residential new construction and repair and remodel largely remains healthy and we continue to see good demand for our products given the backlog of existing homes and extended build cycles. While visibility for residential new construction is limited, we expect repair and remodel demand to remain healthy and for the backlog of existing homes to drive good demand for our business through at least the first half of 2023. Now going to slide 13. After assessing current market conditions and our financial forecast, we are reaffirming our full- year core revenue guidance of 10% growth, including 4% to 6% consolidated revenue growth.
However, given persistent inflation pressures and lower than expected productivity savings, we are revising our full- year adjusted EBITDA expectations to be between $400 million and $420 million from our previous guidance of $430 million to $450 million. On this slide, you see the primary drivers underlying our updated guidance expectations for the year. Increased inflation, particularly for raw materials and energy, is the biggest factor, followed by lower than expected productivity improvements. This reduced expectation for productivity cost savings is primarily due to underperformance in North America in the third quarter due to labor and material usage inefficiencies. Partially offsetting these negative drivers are lower SG&A expense and favorable foreign exchange, both relative to our prior guidance. We've also taken a fresh look at our CapEx guidance.
Based on our run rate and CapEx pipeline, we've updated this guidance to be between $85 million and $95 million of CapEx spending this year. As Kevin has described, we are taking necessary actions to lessen the impact on our financial results, softening end market demand and persistent inflation while positioning the company for longer term success. While we have not overcome the negative earnings impact from these headwinds this year, we have taken cost actions that we expect to deliver total annualized savings of more than $80 million. However, we have not been able to take costs out as quickly as we need to and we continue to actively identify and develop additional actions to improve margins. In closing, I'd like to reiterate what Dave and Kevin said earlier.
We have the foundational elements in place to drive significant improvement in our financial performance including a talented and engaged workforce, a strong portfolio of brands and customer partnerships that we have established through over 60 years of business. I'm confident that the initiatives we have in place and others that we are developing will help Jeld-Wen deliver its potential for long-term growth and profitability. We'd now like to take your questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of John Lovallo from UBS. Your line is open.
Good morning, guys. Thanks for taking my question. The first one is, you know, Julie, maybe you could talk about what drove the elevated SG&A and overall corporate expense in the quarter. Do you think this will normalize as we move, you know, further into the fourth quarter?
Yeah, sure. Hey, John. Yeah, just really a couple of things driving that. I mean, one thing is timing and amounts related to incentive comp expenses. I mean, there are various drivers there when you look at kind of year-over-year and quarter-over-quarter, as you can imagine. Obviously in each quarter, we're assessing what our you know expected payouts are under our various incentive plans. When we look at this Q3 versus what we were doing last Q3, there were just higher expense this year due to different dynamics. The other thing is really higher medical claim expenses, y ou know, just trends and increased activity there, a little bit of obviously inflation continuing in medical costs as well but, r eally, those are the two kind of main drivers to the higher SG&A.
We are taking costs out of our SG&A line as part of our cost reduction initiatives. Those are kind of ramping up in Q4 and then we've got additional actions that'll be taken kind of rolling into 2023. Generally speaking, you know, I don't expect anything really unusual going forward there. Obviously earlier this year, right, we've had some other income that was higher than we would have expected. That's normalized more in Q3 and so I'd probably expect, you know, Q3 levels maybe a little bit lower as we wrap up this year.
That's helpful. Thank you. Dave, you know, in your CEO search, are you looking for individuals with building products or industrial experience in addition to sort of the characteristics that you mentioned before?
Yeah. Certainly, that's one of the characteristics. It's not an absolute necessity. Certainly that's an advantage, y ou know, but the right level of broad experience, leadership capabilities, capital markets experience, it really depends. We've seen a great list of candidates, a lot of interest and, you know, and there is a number of candidates who have building products experience in various areas including in, you know, some past experience in doors and windows. That's one element that we'll consider along with many others.
Got it. Thank you, guys.
Your next question comes from the line of Truman Patterson from Wolfe Research. Your line is open.
Hey, good morning, everyone. Thanks for the color so far. Trying to understand the back half EBITDA guidance a bit better, the walk down the midpoint by $30 million, and you all have in your slides, you know, higher inflation, reduced expectations for GM productivity savings. Any chance you can just break out the magnitude dollar amount based on those two buckets? With the incremental inflation, just trying to see if you can quantify the incremental pressures between North America and Europe.
Yes, sure, T ruman, g ood morning. Yeah, you know, the inflation impact in the second half is slightly more negative, I'll say, than the negative impact from the lessened productivity. That inflation headwind versus our prior expectations is higher by around kind of that $20 million to $25 million range. I will tell you that energy, both in Europe and North America is, you know, gosh, $15 million or so of that increase. I mean, I think you can imagine in both regions, energy prices, there's just been upward pressure right as we've moved through this year and it was. While we expected some of that, we absolutely didn't expect what we're really looking at here. Again, I will say, a lot of that is in the fourth quarter, right?
That's really where we're seeing more of a drop-off in our margin expectation than what we experienced actually, you know, kind of broadly in the third quarter. T he other big bucket there would be just continuing pressure on certain of our raw material costs, y ou know, kind of energy and raw materials are what's driving that higher inflation expectation. When it comes to productivity, you know, again, that's kind of probably in that $15 million to $20 million range. A lot of that was in the third quarter, although a little bit in the fourth quarter as well, and I'll kind of just speak to that for North America.
One of the drivers was ramping up a couple of our new products and really for various reasons, just a little more inefficiency in those ramp-ups than we were forecasting. That was just one specific item driving some of that weaker productivity. W hat I'd say generally speaking is, as we entered the second half, we expected second half margins really for, again, for the second half to be closer to 9%, and we're looking at closer to 8%. Again, a lot of that is then you can see that drop-off there in the fourth quarter.
Okay. Thank you for that. Then in the prepared comments, you mentioned European volumes are down 3% and, you know, the conditions were deteriorating a bit given the kind of energy crisis going on. I'm just hoping you can give a little more color on the countries that you all operate in, and since we're a month into October, just what you all are expecting, you know, how volumes trend in the fourth quarter.
Truman, I'll kind of start and then I'll hand off to Kevin. You know, I will say in Europe in the fourth quarter, I mean, we're looking at, you know, around that 15% range of year-over-year volume decline. That is a pretty big drop-off versus what we had in the third quarter and what we've had so far this year. That really, again, does reflect that really continuing weakness, that we've already mentioned. For really additional color, I'm going to hand off to Kevin.
Yeah. Thanks, Julie. W e're pretty much seeing, you know, with Europe, the problems in pretty much all countries. With some of that, you know, we're seeing, you know, some of the volumes dropping pretty significantly just due to those pressures especially around energy, y ou know, there's a lot of folks just worried about heating their house as well. Some of those pressures and what we've tried to do through this is providing that transparency of where we see, you know, some of those markets going forward and trying to be, you know, accurate and transparent on where we see some of those volumes dropping from a demand side in Europe.
All right. Thank you all for your time and good luck in the coming quarters.
Thank you.
Thanks, Truman.
Your next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.
Morning. Thanks for taking my questions. My first question is actually a follow-up on the response to Truman. If we look at the fourth quarter guide, in total you've got revenues, I think, implied down low- single digits to up to 10% declines. You have been running comfortable double- digits on pricing, so it implies quite a large decline in volume. I think you just talked about Europe. Maybe could you talk about North America volume expectations for Q4? If it's possible, can you split out what the impact is, in your view, of kind of customer destock versus sell out?
Yeah, sure, Mike. I'll start with that. Yeah, maybe just to kind of put it in context and so, y ou know, the fact that we're not changing our total sales guidance 4% to 6%, and then core within that at about 10% growth. As we've mentioned in our second quarter call that then reduction was driven by pricing being better than we'd expected but volumes being lower. We mentioned volumes being flat to down 2%. I will say at this point while we're continuing to expect that 10% core revenue growth for the year, we do see pricing being a little bit stronger than we'd expected three months ago, and volumes being overall a little bit weaker.
Now I'd put us more at that, you know, kind of like 2%-ish to maybe 3% down kind of year-over-year. That just kind of grounds us in the year. When we look at the fourth quarter, you know, pricing continues to be, call it low double-digit growth. Volume at the company level is, you know, kind of we expect to be down kind of in that, you know, 5%, 6%, 7%. That really is across the regions. You know, Europe is the leader there. I've already mentioned, you know, an expectation of down around 15%, but we do expect, North America and Australasia to be down kind of in that low- to- mid single digit range as well. We are seeing really global weakness in demand.
Yeah, just to add on to Julie's comments, regarding North America, you know, a lot of this has to do with, you know, kind of some of those challenges we're seeing, everything from the slowdown in the residential with, you know, slowness in applications, you know, permits, starts, et cetera. That's what we're kind of seeing. It's pretty widely known that those market conditions are softening in North America. Some of those adjustments and a s far as about stocking related to that, you know, we are seeing some of that in, you know, with certain products. Overall, I think, you know, we're adjusting, working with customers and suppliers to balance that out, at this point, y ou know, in fairly decent shape, but something we've got to keep our eye on.
Got it. That's really helpful color. My second question, i n the opening comments, you talked about kind of this resource exercise with respect to figuring out how to resource customers and pursuing, you know, just profitable growth, optimizing, you know, what you're targeting there in terms of, you know, the right customers, the right sales. I'm curious, as you embark on this exercise, you know, is this something where, you know, it could involve just walking away from certain customers or product lines? Any initial thoughts on what a potential revenue impact could look like from this?
Yeah, I'll take that one. I think it really gets into, you know, honing down, and looking at all of our lines of business kind of independently, and together. To your point, you know, in areas that we do see low profitability, you know, we're going to focus on, you know, a fix or repair process. To your point, as we evaluate those, if we find that there are certain products or, you know, lines of business that are not sustainable, you know, we're going to evaluate those and determine, you know, working with customers, et cetera, on, you know, how we mitigate that, whether it's, how we improve, repair, or fix, or how we may exit. Some of those, you know, it's still in process. We don't have any definitive, you know, decisions on that.
I think it's fair to say that, you know, we're looking at everything, a ll things are on the table.
Got it. Okay. Thank you.
Your next question comes from the line of Michael Rehaut from JP Morgan. Your line is open.
Hi, everyone. Thanks for taking my question. This is Andrew Azzie on for Mike. I just wanted to ask, would you be able to give us a rough quantification of how you expect raw materials inflation to impact the P&L next year and any product launches that might help drive mix or top-line growth?
Yeah. Good morning, Andrew. You know, we're not really prepared to comment yet, and I think to share externally on, you know, really detailed on our outlook for next year. We're working through our more detailed budgeting process right now and so I think it'd be premature to comment, especially specifically about raw materials as we move into next year.
Okay. Great. Yeah. That goes in line with what a lot of companies are saying right now in our space. Would you be able to give us an update on any of the labor challenges or the absenteeism you guys saw last quarter and in trends within the plants?
Yeah. I'll take that one. I T's kind of unique by region, but overall, I think some of that has leveled out. It's still a challenge, as far as just labor shortages across the board. I think, from what we saw last year, we've mitigated some of that and it's stabilized to a certain degree. Those challenges will continue but we're looking obviously at not just the labor, but also how we modernize some of our facilities and, you know, invest in a little more automation as well.
Okay. Great. That's all for me. Good luck in the coming quarters.
Thank you.
Thank you.
Your next question comes from the line of Matthew Bouley from Barclays. Your line is open.
Morning, everyone. Thank you for taking the questions. Back on that topic of inventory destocking, you know, I'm curious. I think, Kevin, you mentioned something around, you know, specific categories. I just wanted to pull on that thread a little bit more, j ust, you know, which categories, you know, within the distribution channel do you think either have excess inventory or maybe over ordered in recent quarters? A nd sort of as you look forward, you know, what do you think that destocking impact might look like? Thank you.
I'll give you a couple of examples. You know, it's kind of a mix, but you know, I think in the area of exterior doors and also interior doors, we're seeing some of that pulling back. I would say as far as you know, where we see some of that you know, with retail and traditional, those are probably some of the major areas we're seeing. Obviously we're trying to adjust working with customers and our suppliers of balancing that. I would say those are the two that we're probably seeing some of that destocking and inventory focus.
Got it. That's helpful. Second one just on the topic of pricing, y ou know, given the level of pricing that has been implemented and clearly a strong number there in North America, I mean, it's kind of a follow-up to the prior question, but, you know, can you speak to sort of which categories and channels are, you know, better positioned to kind of hold price where it is o r, you know, in those categories where, you know, there might be some excess inventory, you know, should we expect to see sort of more promotional activity going on? Thank you.
Yeah. I think we're still seeing, as Julie mentioned, some challenges with inflation, et cetera, but, you know, it's overall, you know, it's pretty dynamic. I would say that what we are trying to do is make sure that the, you know, kind of, you know, we're focused on the value that we provide to customers and hope the price reflects that. But, of course, it does mean that we're going to be working with suppliers and customers, you know, as always, you know, balancing out to make sure that it's mutually beneficial of how we manage that. I think price, it's been a dynamic. We've been a little bit, you know, kind of behind, but it's also something we're trying to do to, you know, work on inventory as well.
All right. Thanks for the color.
No problem.
Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.
Thank you. Good morning, everyone.
Good morning.
Morning.
I wonder, for my first question, can you talk a little bit to the mix shift that you're seeing? Has there been any noticeable change there as you think about custom versus stock products or anything that you're expecting as we go into year end?
Yeah. I think you know mix, you know, is very dynamic. I do think that you know for us working with a lot of our customers you know on the pro custom segment is obviously desirable. I think we're seeing with some of the pullback, it's happening in a kind of across the board. I don't have specifics as far as if we're seeing some of our you know more of the custom or traditional versus retail. It's kind of been a mix across the board but it's something that we're trying to balance.
Okay. Perhaps taking a step back and thinking about the bigger picture. There's obviously been an intense focus on the operations side of the business in the last couple of years and really driving some efficiencies and some improvements there. As you think about going forward and positioning a new team in place, how are you thinking of some of those efforts there, where they sort of fall within your priorities? Anything that we should be looking out for or thinking about from that perspective?
Yeah. I think it's a really strong focus as always, y ou know, you hear us talk about the JELD-WEN Excellence Model or our GEM, which, you know, we've been implementing over the years, and a lot of that has provided us, you know, some additional capacity and some optimizations. I would say going forward, one of the things we focused on is really pushing that accountability within the region down to the plant and function level. I think what you're going to see in future quarters is a little more definitive plans of how we're managing some of that productivity as well as rationalizing and optimizing our footprint. We have a lot of work going on in that area.
I do think the, you know, what's different to me is driving that accountability within the region, the businesses, down to the plant level, but also the function levels as well. We've got some plans in place. It's too early to comment, but going forward, we expect to provide, you know, stronger updates and progress on how we're doing in future updates.
Okay. Thank you and good luck.
Thank you.
Thank you.
Your next question comes from a line of Philip Ng from Jefferies. Your line is open.
Hey, guys. S orry to harp on this. Julie, you mentioned that pricing is holding up pretty good. I am still a little surprised the big step down in margins. Anything you want to call out? Just because it is a little sharper of a drop than we expected. How should we think about incremental margins across the regions would be helpful as well.
Yeah, absolutely, y eah , as I mentioned earlier, we had entered the second half expecting our second half margins to be around 9%. Again, we've had a really significant drop off in our outlook, really specifically to the fourth quarter. That really is most dramatic in Europe when you think about just absolute margin deterioration. That is really driven by, again, in that region, the dramatic drop off in demand, but as well as this inflation I've talked about as well.
That, you know, when you look at margins, in Europe, I'd expect them to be in the fourth quarter better than what we saw in Q3, but still, you know, pretty significantly down versus the prior year and generally, you know, more in this range that we've delivered throughout 2022, obviously, this year. Then, you know, just talking about North America, really, you know, I think they'll be able to deliver pretty consistent margin levels, kind of Q3 into Q4. While that is lower than we had expected earlier, well, a few months ago, you know, we're not expecting as dramatic of a drop-off versus our expectations as we are in Europe. A little bit of weakness when it comes to Australasia but not as much.
Again, you know, their numbers, since they're only about, you know, 10%-15% of our business, really just overall have less of an impact. Hopefully that helps but r eally Europe is kind of the leader when it comes to how margins have deteriorated from what we were expecting and especially in the fourth quarter, and a little bit less dramatic absolutely in North America.
How should we think about decremental margins by segment?
Decremental? Sorry.
Yeah, volumes decline.
Oh, yeah.
The lack of operating leverage.
Yeah. I mean, yeah, it's, I mean, you know, I don't know that I have the specifics there. I mean, volumes are, I mean, again, we're expecting volumes to be down, like I've already mentioned, in Q4, and again, most dramatically in Europe. I can't really comment right now on how specific that is. Again, really a combination, especially in Europe, of the lower volumes and the more significant inflation.
For 2020 and throughout, I don't know if you guys are prepared to talk about this. You've been very successful in taking price even in a softer demand environment. How should we think about your ability to kind of maintain price and push price to offset inflation? Any updates, any potential major line reviews on the horizon, particularly in North America in the retail channel? Thanks a lot, guys.
Yeah. I think, you know, that's always an area of focus, you know, working closely with our customers, especially in the retail side. Overall, you know, as far as price, as I mentioned before, it's something that we're going to have to balance. You know, we're still seeing some of those inflationary pressures and also, you know, some of the recovery. We've been behind on that recovery. Like I mentioned too, it does, you know, really involve our close relationships with suppliers and customers to kind of talk through that. We think price is one component, you know, that we need to measure, but also it gets into the overall value for our customers, and that's a conversation that happens really customer to customer about what warrants the price.
We're going to do our best to manage that, but it's going to be an ongoing dynamic.
Your next question comes from the line of Timothy Wojs from Baird. Your line is open.
Yeah. Hey, everybody. Good morning.
Good morning.
Maybe just on the backlog, just exiting the quarter, where does your backlog sit maybe just in North America versus what would be kind of typical at this point in the year?
I would say that, you know, we're not a real heavy backlog business. I would say that we are seeing some of those reductions, you know, year-over-year, y ou know, it's not so much, but definitely quarter-to-quarter we're seeing some of that draw down. I think, you know, from an overall perspective on backlog, you know, in some places we're pretty healthy, in our Australasia business. North America specifically to your question, that's one we're seeing a little softness, but that's the one we're trying to balance with inventory levels and working with our entire supply chain going forward.
We are seeing some pressure on the backlog just because of the demand softening because of, you know, the overall reductions in the residential new construction.
Okay. Okay. You've got the strategic review in Australasia that's ongoing. I mean, how are you thinking about maybe the rest of the portfolio and if there could maybe be kind of a larger strategic review that could be on the table? Just, you know, Europe and windows and the distribution business here in North America and doors and components and things, it's just not clear that all those businesses need to kind of strategically be together. I'm just kind of curious what your opinion on that is.
Yeah. I'll start and, you know, Dave can jump in as well. At this point in time, you know, Australasia is the only part that we're doing a formal strategic review. We are focused on reviewing all segments, to your point. At this point in time, it'd be premature to discuss any other options. What we are focused on is how we adjust to the challenges in Europe, you know, and reviewing plans of how we kind of right size that business. North America as well, like I said, doing line of business reviews to make sure we got good visibility and transparency across our product lines so we can kind of build that into our future plans. I don't know, Dave, is there anything else you want to add?
Yeah. No, I think that's right. I think, you know, one of the things to keep in mind as Kevin talked about, one area of focus for us is simplifying the business. But that includes, you know, as Kevin mentioned, that, you know, we probably took on too much, the team took on too much to execute effectively. So, we're focused right now on the Australia business, improving Europe, and there's still a lot of work to do within the North American business even on things that we have talked about and had been executing on, but when you look at the footprint rationalization. Your point on, you know, product lines, that's come up before. I mean, there'll be ongoing evaluation as there always is, but some of that might be more medium term or longer term.
Okay, o kay, appreciate the thoughts. Good luck on the rest of the year here.
Thanks.
Thank you.
Your next question comes from the line of Joe Ahlersmeyer from Deutsche Bank. Your line is open.
Thank you and good morning.
Morning.
Morning.
Yeah. In response to an earlier question, I don't think I heard this covered, but can you talk about the relative pricing in the quarter within North America for doors versus windows?
Yeah, we don't, I mean, you know, we don't really get into that level of detail. I think you can assume nothing terribly unusual there. T hat's not information we typically provide.
Okay. Even just on a directional basis, not maybe a number, but was doors stronger than windows or anything like that?
Yeah, I don't think there was anything unusual there between the different kind of market segments. I think you can assume that it was pretty reasonably balanced across the North American portfolio.
Okay, great, and then Julie, on cash flow, can you maybe just walk us through a couple different scenarios that could play out for sources and uses of cash over the next year? You talked about working capital management. You have the potential asset sales out there. Just how you might prioritize the uses of that cash specifically as you look to bring down leverage below that target?
Yeah, absolutely, and y ou're spot on that we're keeping a close eye on different sources of funds as we move through 2023. O bviously, one of our main focus areas is what we do control, and that is obviously our earnings generation and our management of working capital. Those are really top priorities because we obviously have room for improvement in 2023 over what we've delivered this year. That's kind of like number one when you think about sources of cash. But you're also spot on that we have potential divestitures out there that are, you know, kind of all a part of activity that we're working on. Then when you get to uses, you know, if we can deliver whatever amount of sources.
I mean, as I mentioned in my prepared comments, continuing to invest in ourselves, and I think we have some improvement for how we manage kind of front to back of our CapEx processes. Obviously, we'll continue to invest in the business. Again, in the spirit of, you know, kind of control what we can control. I mean, we can control how we spend our CapEx dollars and generally are we getting the returns on those that we expect. Absolutely deleveraging is a top priority. We do want to get down to that less than 3x net leverage. We could have a path to that absolutely during 2023, and so that's again kind of top of the list with CapEx a nd then, you know, you kind of move into other opportunities, right?
As we move beyond. I mean, we've got various potential for, you know, how do we want, I'll say, invest in ourselves when it comes to footprint rationalization, other types of, call it, you know, kind of transformation, profit improvement activities that are beyond what we would be doing just in the normal course. That's another potential use of funds as we look at, you know, really driving improvements to our profitability next year and beyond. M&A, share repurchase, all those are things that we will just review very opportunistically as we move forward.
Thank you very much.
Sure.
Your next question comes from the line of Reuben Garner from The Benchmark Company. Your line is open.
Thank you. Good morning, everybody.
Morning.
Most of my questions were answered but I do have one on next year. I'm hoping you guys can help us with kind of a bridge. Obviously, there's a lot of moving parts with savings and cost initiatives and pricing actions to keep up with inflation and then now the potential volume headwinds. Can you kind of, I mean, normally we would take volume decline to put a decremental margin on it to kind of figure out what the downside is. But can you talk about what the offsets are to that next year and kind of how to think about you know, a downside earnings scenario?
I think, you know, there's not a lot of guidance to provide for next year but just to your point about, you know, things we're going to do on the cost side, and the productivity side. You know, it's a balance. You know, some of the things we need to do are longer term initiatives, but we're also trying to balance that with the short-term stuff that we can do. A lot of it has to do with the day-to-day stuff we do in the GEM side as far as driving productivity across our plants and operations. A lso, as Julie mentioned, strong look at our SG&A, you know, as far as.
From a cost structure, we're looking to make sure that we scale, but also with an eye on the ability to scale back up, you know, in the future if demand goes the other way. I think that's one of the challenges we have is making sure we can scale appropriately and, you know, get better indicators as far as making sure we're moving faster, as the market adjusts.
Okay. Just to follow up, maybe a different way to ask it. I mean, I think you guys were doing kind of in 2017 through 2019, you were kind of in the low 400s from an EBITDA perspective with single family starts in the 800,000 to 900,000 range. Is there downside to that right now just because of some of the issues that have gone on or any changes in share or anything else o r, you know, can you just kind of frame it from that perspective?
Yeah, we're really not going to get into that level of detail right now. I think as we've already talked about, as you know, it's pretty clear from the market, especially as we start 2023, there's going to be volume decline. I think, you know, looking at second half, I think it's a big TBD right across the regions, what's going on with interest rates, w here's the conflict in Ukraine? Where has that landed? What's the status? I think demand on a full- year basis next year is going to be really dynamic. I mean, I think we kind of know it's going to at least start the year weaker. I think as far as Kevin has mentioned, you know what?
We're very, very focused on how do we mitigate on the bottom line, the demand weakness that we're going to see. Anyway, I think we've kind of got to leave it at that right now.
Understood. Thank you, guys.
Your last question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.
Good morning. I wanted to think about the growth areas of Auraline and VPI. Can you talk about how that is trending now, both from a demand and operations perspective? I think you shared something about inefficiencies in the ramp-up phase. Maybe share more on that. Lastly, was the lower CapEx related to those two product lines?
Yeah, I'll take that one. On VPI, we're still seeing, you know, strong demand and backlog, and we've been adjusting for that demand and have mitigated a lot of that. So that's, we're good to see as we've kind of expanded to the East Coast, that business continuing to grow, and giving us the right problems to work with, which is how we expand capacity. On the Auraline side, that's one that we still are confident in that product from a long-term viability and sustainability standpoint and energy efficiency. That product has, you know, I would say it's ramped up slower than any of us would have liked. You know, so we're still getting good demand, but from a production side and volume side, you know, we're kind of in line with some of the forecasts.
I would say some of the stuff we were probably hoping to do here in Q4 is probably going to push into Q1.
There's really no connectivity between those new products and our lowered CapEx guidance. Those are, you know, there are other drivers around, taking a fresh look at priorities in CapEx, some supply chain delays here and there so k ind of just a few different factors, nothing really unusual, with the lower CapEx for this year.
Okay, helpful. Last quick one from me. You've talked about, volume mix, range for Q4, maybe to focus on North America or if you want to talk other segments. Does that imply that pricing is still positive in Q4 but down from, levels in the previous quarter, thinking about the impact of solely the pricing line?
Pricing, you know, kind of year-over-year pricing growth in the fourth quarter, probably is a little bit below, kind of what we've delivered. When I look at year-to-date pricing, I think it's, like, kind of in that 13% range, you know, year-to-date through Q3. Yeah, I think Q4 is at more in that kind of 8% to 10% range. Yeah, slightly down year-over-year but still very solid.
Great. Thank you.
Sure.
I will now turn the call over to Kevin Lilly for some final closing remarks.
Thank you. Thanks for spending some time with us today. A s you heard, you know, we've delivered on expectations in a pretty challenging environment, and some of those challenges are reflected in our near-term outlook. It's something that we've looked at going forward, and I think we're confident, and we have a very capable team to deliver. On a personal side, just from somebody from the inside, you know, I can tell you there's kind of a renewed sense of urgency and energy to drive forward.
We know we have a lot of work to do, but as far as the alignment, the accountability and, you know, the focus that we have, you know, as we simplify and move the operations forward, we're looking forward to providing more updates in our progress in future calls. Thank you very much for your time today.
This concludes today's conference call. Thank you for your participation. You may now disconnect.