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Edited Transcript of JELD.N earnings conference call or presentation 11-Oct-19 12:00pm GMT

Preliminary Q3 2019 JELD-WEN Holding Inc Earnings Call

CHARLOTTE Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of JELD-WEN Holding Inc earnings conference call or presentation Friday, October 11, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary S. Michel

JELD-WEN Holding, Inc. - President, CEO & Director

* John Linker

JELD-WEN Holding, Inc. - Executive VP & CFO

* Karina Padilla

JELD-WEN Holding, Inc. - SVP of Corporate Planning & Analysis

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Conference Call Participants

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* Elad Elie Hillman

JP Morgan Chase & Co, Research Division - Analyst

* John Lovallo

BofA Merrill Lynch, Research Division - VP

* Margaret Eileen Grady

Jefferies LLC, Research Division - Equity Associate

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

RBC Capital Markets, LLC, Research Division - MD of U.S. Homebuilders & Building Products

* Reuben Garner

Seaport Global Securities LLC, Research Division - Associate Analyst

* Timothy Ronald Wojs

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jack, and I will be your conference operator today. At this time, I would like to welcome everyone to the JELD-WEN third quarter preliminary results conference call. (Operator Instructions) This call will last 30 minutes. (Operator Instructions) Thank you.

Karina Padilla, SVP Corporate Planning and Analysis and Investor Relations, you may begin your conference.

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Karina Padilla, JELD-WEN Holding, Inc. - SVP of Corporate Planning & Analysis [2]

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Thank you. Good morning, and thank you for joining us. We issued a press release yesterday with selected preliminary financial results for the third quarter. I'm joined today by Gary Michel, our CEO; and John Linker, our CFO.

During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects. These statements are subject to a variety of risks and uncertainties, including those set forth in our preliminary earnings release and provided in our Form 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 or statements regarding the expected outcome of pending litigation. During the call, we will be discussing preliminary non-GAAP financial measures. Reconciliations of GAAP to final non-GAAP measures will be posted on our website when we present final results for the quarter.

I'll now turn the call over to Gary.

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [3]

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Thanks, Karina. Good morning, everyone, and thank you for joining us this morning. Yesterday, we announced selected preliminary financial results for the third quarter. While we're disappointed by these results, we believe the issues that led to our Q3 performance are largely specific to the quarter. And as a result of mitigating actions we have put in place, we will see improved operational performance moving forward. I remain confident in our long-term strategy, the strength of our business model and engagement of our associates.

I'll begin by providing you with some background on how end markets and revenue performed year-to-date. You may recall the first quarter played out much as we anticipated with soft demand in all of our end markets driving an overall core revenue decrease of 1%.

During the second quarter, end markets performed below our expectations. Most notable was the significant deterioration in the Australian new construction housing market where conditions worsened sequentially from our already conservative expectations at the start of the year.

In North America, single-family permits and housing starts were down mid-single digits in the United States, and single-family housing starts were down nearly 20% in Canada. And we experienced erratic order patterns in our North America retail channel, which impacted our volumes. These factors led to weaker demand for our products in the second quarter and drove an overall core revenue decline of 3%.

As we exited the second quarter, we expected to see continued demand weakness in Australasia and North America in the second half of the year, but that demand would stabilize somewhat as the year progressed. We also anticipated that the erratic retail ordering pattern, which were largely in our North America window business, would normalize in the third quarter. Demand, however, was once again lower than our expectations in North America and Australasia primarily due to continued softness in residential new construction markets.

In Australasia, demand conditions weakened as the quarter progressed. In the month of September, core volumes in Australasia were down approximately 13% versus prior year. Australia residential housing permits are now at their lowest level in 10 years.

In North America, we experienced weakness in both Canada and the United States in distribution channels that serve new construction markets. North America demand in the third quarter was also impacted by the continuation of irregular order patterns in our windows retail channel that serves the repair and remodel market.

As a result of these factors and the unfavorable impact of foreign exchange, our third quarter revenue decreased 3.9% to approximately $1.09 billion compared to prior year. We also reported preliminary third quarter adjusted EBITDA of approximately $106 million to $110 million compared to the $132.6 million in the same period a year ago. Adjusted EBITDA was negatively impacted by lower volumes in North America and Australasia as well as manufacturing inefficiencies in North America windows caused primarily by our inability to adjust our cost structure to support the erratic order patterns in the retail channel. Europe's performance was largely in line with our expectations, and we were pleased to deliver core margin expansion for the first quarter since early 2018.

I am disappointed with the operational inefficiencies at our North America windows business in the third quarter. I am pleased, however, with the overall improvements in productivity and advanced problem-solving that we're seeing throughout JELD-WEN as a result of the JELD-WEN Excellence Model, or JEM. These processes and tools have been deployed globally, and we are seeing results in quality, on-time delivery and cost productivity. These are the same processes and tools we have deployed to drive improvements within Windows, like our established problem-solving tools to address line downs seen in our manufacturing facilities and assist in redefining our demand planning processes. Because of these actions and our continued commitment to the JEM methodology, I believe that we will see sequential operational improvements in the fourth quarter.

In a few moments, John Linker will take you through some of the detail on our preliminary third quarter results. But first, I want to highlight some of the reasons why we continue to feel confident in our strategy and business model, and why we see potential for long-term value creation.

We are pleased with the results and progress we see from our productivity initiatives and footprint rationalization and modernization program. And we believe we are taking the right actions to position us for long-term value creation. Overall, productivity is positive year-to-date despite the unexpected inefficiencies in the third quarter. We also have good visibility to a pipeline of productivity initiatives that will deliver cost savings into 2020.

We continue to track on plan with our footprint rationalization and modernization program. In 2019, we've been investing in modernizing production processes and outfitting manufacturing sites to prepare for consolidation. Now that those first phases of investment are complete, we're entering the stage in North America and Australia where we will start exiting less-efficient legacy and redundant locations and realizing savings in the P&L.

We also delivered favorable price cost for the fourth consecutive quarter. Price continues to hold up nicely in North America despite soft demand, and pricing in Europe continue to improve in the third quarter.

We continue to invest in innovation to deliver core revenue growth as demonstrated by our upcoming composite window launch in North America. Our customers are very enthusiastic about the potential of this new product. Additionally, we are very excited to announce that we are close to the commissioning of our second low-cost manufacturing facility in Indonesia, which will supply joinery-style doors to customers in Europe, the United States and Australasia.

While the third quarter presented us with unexpected challenges, we continue to feel good about the long-term fundamental demand drivers in North America residential new construction and believe the repair and remodel market remains relatively stable. In fact, we're starting to see signs of potential improvements in single-family housing starts and homebuilder orders and expect this activity to improve demand for our products in future quarters.

I'll now turn the call over to John to take you through some additional detail of our preliminary third quarter results.

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [4]

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Thank you, Gary. While we are still completing our closing procedures for the quarter, I will now provide some additional context around drivers of our preliminary third quarter results. We will provide a more detailed review of our financial results on our call on November 6.

Overall revenue and EBITDA results for the quarter were materially below our expectations and prior year. The deleverage impact on a lower revenue was the primary driver of the lower earnings and margins compared to prior year. The 3.9% revenue decline versus prior year was comprised of core revenue reduction of approximately 3%, an unfavorable impact of FX of 2%, partially offset by acquisition contribution of 1%. Overall core volumes decreased mid-single digits while pricing improved low single digits.

The year-over-year decrease in EBITDA was primarily due to the following factors: First, we estimate a $25 million negative impact to EBITDA from the deleveraging associated with volume mix compared to prior year. Additionally, EBITDA was impacted by the nonrecurrence of $7 million in legal settlement income in the same period last year and inefficiencies arising from the erratic order patterns in our North America retail channel. These factors are partially offset by the EBITDA contribution from favorable price/cost.

I'll now provide some additional detail around segment performance. North America revenues decreased approximately 1.5%, comprised of a core revenue decrease of approximately 3% to 4%, offset by the contribution of the VPI acquisition. Core volumes were down mid-single digits, most notably in North America windows and Canada. Pricing continued to be favorable versus prior year. I'll note that while we did observe some potentially positive developments in the U.S. housing market in recent months, such as the lower mortgage rates, improving starts and improving homebuilder orders, that activity has not yet contributed to improved demand for our products due to the lag in the construction cycle.

North America adjusted EBITDA margins were negatively impacted by the deleverage impact on lower volumes as well as the labor and freight inefficiencies in our North America window business due to our inability to react to the erratic order patterns from our retail channel. We do expect these manufacturing efficiencies to abate as the retail order patterns stabilize.

Europe revenues decreased approximately 2% primarily due to the unfavorable impact of foreign exchange, offset by core revenue growth of approximately 3%. Both pricing and volumes were positive in the quarter. Core adjusted EBITDA margins in Europe expanded due to improved productivity and favorable price/cost. Australasia revenues decreased approximately 17% primarily due to core revenue decline of 12% as well as the unfavorable impact of FX. Core volumes were down approximately 11%, and pricing was pressured slightly by the weak demand market. Adjusted EBITDA margins were impacted by the deleverage impact on lower volumes.

While we will not be providing specifics on free cash flow until we discuss full quarter results, I'll note that our year-to-date third quarter free cash flow continue to improve meaningfully versus prior year, primarily due to improved working capital utilization.

I'd now like to turn the call back over to Gary for closing comments before we begin our Q&A.

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [5]

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Thanks, John. To summarize, we are disappointed by these preliminary results but remain confident in our long-term strategy and the strength of our business model. Given the variance of these preliminary results from expectations, we wanted to share this information with you as soon as it was available, and I appreciate you joining us this morning. While it's too early in the close process for us to provide a full update to the 2019 outlook, I'll provide a few comments on our expectations for the rest of the year.

Based on these preliminary third quarter results and the current trend we're seeing, we now expect that our 2019 full year revenue will be lower than our previous outlook of flat to 2018. We currently anticipate an approximate 2% decrease in full year 2019 revenue compared to full year 2018.

From a profitability standpoint, we believe that the impact of the third quarter performance and corresponding inefficiencies will impact full year adjusted EBITDA margin by approximately 60 basis points. Once we complete our closing procedures for the quarter, we will provide a detailed update on our 2019 outlook on our November 6 call.

We would now like to open the call to questions and answers. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Tim Wojs with Baird.

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Timothy Ronald Wojs, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Maybe just going back to the ordering patterns. How much do -- I didn't know if it was specifically called out. I know you said the $7 million legal settlement. But how much was the -- just the cost in the labor inflation and the freight inflation that you saw related to the order pattern?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [3]

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I mean I guess relative to our last expectations, as opposed to talking prior year for a second, we would attribute about $10 million of EBITDA to the inefficiencies in windows in the quarter.

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Operator [4]

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Matthew Bouley with Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [5]

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Just on the resi new construction side, Gary, you talked about seeing some signs of improvement, at the same time, I think the guide assumes that Q4 revenues actually softened a bit relative to what we saw in Q3. So I guess, is your view that any kind of potential improvements in new construction demand is really more of a 2020 event for your business? I guess how and when would you expect those trends to manifest?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [6]

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Yes. So that's correct. We do see the signs of improvement in the North America residential new construction market, and we do expect to see a delay in those. We just haven't seen that cycle into our business yet. So it's probably something that we'll see as markets pick up in -- at the beginning of the year. Probably see some of it towards the end of the year, but it'll be really late in the quarter. The real issue there with revenue is the continued deceleration in residential new construction in Australia. We saw that sequentially soften in the third quarter, and we expect that to remain soft through the fourth quarter as well.

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Operator [7]

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Reuben Garner with Seaport Global.

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Reuben Garner, Seaport Global Securities LLC, Research Division - Associate Analyst [8]

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So I just want to clarify something on the 60 basis point drag for the full year. If I'm doing the math right, that's about $26 million, but I think John just said that there was a $10 million drag from inefficiencies. So are you saying that there's a $26 million drag from operational inefficiencies but it's $10 million worse than you previously guided to?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [9]

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Yes. Thanks, Reuben. Let me try and clarify that. So my answer to Tim's question was specific to the third quarter, so within the third quarter sort of relative to our last expectations, how much will we attribute the windows inefficiencies to. That was the $10 million. As we talked about, when Gary made some statements around the expectations for the rest of the full year, we -- while we're not yet prepared to provide sort of a full range with a top and the bottom for EBITDA, we do sort of attribute what we're seeing for the rest of the year as about a 60 basis point headwind to sort of our last expectations for EBITDA margins, which your math is generally correct from a direction standpoint on a dollar impact.

So what that does imply is, yes, you've got rolling through the windows inefficiencies. We also had some volume lighter than our expectation in Q3, which is part of that. And then as you think about Q4, Gary talked about that the full year estimate for revenue now being down 2% versus our prior expectations of flat. So if you do the math on that, that would imply that Q4 total revenues are down sort of in the low to mid-single-digits range on a year-over-year basis. So we're implying, yes, not necessarily that we're going to have windows issues continue into Q4, but we're going to have some more volume headwinds in Q4.

So -- and just to be explicit, yes, we do expect Q4 to get back to some modest core margin expansion. So we do expect some sequential improvement in the business, but the revenue headwind will still be there in Q4 in North America and Australasia primarily. I hope -- did I answer your question, Reuben, before we move on? Sounds like the line's muted.

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Operator [10]

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Truman Patterson with Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [11]

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Just first want to touch on the North America retail channel. If you just guys just give us a little bit more detail. Was this a single big box ordering erratically? Or was this really the entire channel? If it was the entire channel, can you just kind of walk us through what's really driving this? And then when you gave guidance, you pretty much had July in the bag, so to speak. Could you just maybe discuss the trends that you saw throughout the quarter?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [12]

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Yes. So we -- without giving specifics on customers, the -- we saw a slow -- if you go back to the first quarter, slower-than-expected retail business, retail demand. That was followed in the second quarter with some pretty stout ordering, kind of in one fell swoop, if you will, that kind of bogged down our operations. We do not have a lot of visibility to that. We had to throw some overtime at that, additional freight to try to meet the influx of those orders.

In addition, we saw variation next to those orders, that again we didn't have visibility to, which was a little bit of a mismatch to our prebuild that we normally do to serve that channel. So that being said, a little bit of erratic order pattern responsible for some of the issue and our inability to effectively in the quarter address filling those orders without additional overtime and freight expense. So all that being said, we also did see a decline in the overall volume demand for that channel in the third quarter. So even with the influx of those orders and that erratic pattern, the overall revenues -- net revenue demand was down as well.

When you look at kind of going forward, we're obviously working with our channel partners to understand the mix and the order patterns to just move those out, but we've also deployed our processes, our general process that we talked about, to ensure that we're getting the cycle time, the labor components as well as our ability to ship properly in line. And we expect sequential operational improvement going into the fourth quarter.

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [13]

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Truman, I'd just like to add on just from order of magnitude. September, for us, is one of the largest months of the year, both from a revenue and earnings standpoint just given seasonality. July, August are fairly small, particularly given holiday periods in Europe. So as we thought about where we stood in July and as you noted, the expected visibility where July was coming out, the order of magnitude of the issues in North America really became more apparent with the September results given how large that month is for us.

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Operator [14]

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Phil Ng with Jefferies.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [15]

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This is Maggie on for Phil. So the implied 4Q guidance suggests some lingering top line and margin headwinds into 4Q. Can you talk about what issues you identified in the 3Q results that will still be an impact in 4Q and kind of how that's changed since you gave the updated guidance at the end of 2Q?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [16]

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Certainly. I think for the fourth quarter, the big story is top line. I mean Australia has continued to get worse for us as the years progressed. As Gary noted, the month of September was down 13% volumes, while the quarter was down sort of 11%. So we see Australia sort of continuing to get worse and really didn't have visibility to that when we gave last guidance. We're also continuing to see softness in the new construction channels and North America in the fourth quarter. That's both U.S. and Canada. And so i think that's kind of a piece that's changed as well. But for the most part, I think about sort of the change in the guidance rolling through the missed expectations in the third quarter with some revenue softness in the fourth quarter being the primary driver. Do you have anything to add, Gary, before we move on?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [17]

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No. I think you covered it quite well.

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Operator [18]

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Michael Rehaut with JPMorgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [19]

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This is Elad on for Mike. I was just wondering if in North America, turning kind of to the door segment for a minute, I -- what your sense was for how volumes tracked relative to the rest of the industry? How much of the -- how much was made -- within that volume, how much of it was market-related versus gain or losing share?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [20]

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So it's a little early for us to comment on everybody -- on other people's performance. For us, clearly, the slowness in residential new construction in North America has been -- has continued for us up until very, very recently, where we're seeing signs of additional permitting and starts. So that clearly is the market condition that we've been challenged with in North America.

I think on the repair and remodel section, the retail piece is relatively stable market. It started slow, followed on with higher demand for us. And we think that's probably stabilizing. So I wouldn't say there is anything untoward going on in the repair and remodel. I think that's a relatively stable piece of the market for us. Like I said, the third quarter being a little bit around the order -- erratic order patterns and a little bit around our own making of our ability to service that. So we're expecting this residential new construction piece to be favorable to us in the quarters ahead.

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Operator [21]

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Michael Dahl with RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - MD of U.S. Homebuilders & Building Products [22]

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Gary, I wanted to go back to some of the comments around the JEM rollout and what you're doing to kind of solve for some of these issues. I guess the question is the erratic behavior in windows, seeing some inefficiencies, while this quarter may be slightly different specifics around, that the nature of the business has been that it's somewhat erratic and you've seen inefficiencies in prior periods as well. So I guess what I'm wondering is what specifically are we talking about when we're looking at this JEM rollout that's going to change your ability to manage that? And also then what specifically are you seeing heading into fourth quarter, giving you the confidence that the markets will improve sequentially?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [23]

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Yes. So that's a great question. So when we talk about JEM, the JELD-WEN Excellence Model is really -- it's a collection of tools, well-known, well-established tools for manufacturing excellence. We -- I've said it a number of times, we're very much in the early innings of deploying the JELD-WEN Excellence Model across the company. And as we do that, we see improvements where we put tools things in, things like problem solving, our JEM SBU, which is around looking at line balancing and our ability to take demand and create playbooks that allow us to operate our manufacturing lines effectively with the right material, the right manpower and the correct cycle time.

As we deploy these tools, we're seeing improvements in quality; in productivity; and quite frankly, in safety as well. And we like what we're seeing. We see positive productivity year-to-date driven through in our productivity program, through what we've already done with JEM, but we had not been able to get to every plant and every part of the business in the last year or 18 months or so. So we're still in the process of doing that.

As we look at the issues within windows, clearly, a part of this is deploying those problem -- same problem-solving techniques, the same JEM SB and line balancing techniques. We're doing that real time to solve this problem. At the same time, you're going to see erratic order patterns. In a short period of time, those are going to matter. You still have to react. You still have to throw resources at it. And you have to do it appropriately and in a cost-effective manner. And that's where we fell down a little bit in North America windows in the quarter.

So why do I feel confident? Because I'm seeing the benefit of JEM across the company. As I go do gemba walks with our team as we're going around the business, we see the evidence of JEM taking hold. We just haven't gotten everywhere that we need to get to yet. And I feel good about these tools working as we're trying to solve the problems that we saw due to these demand behaviors in the business that we're talking about. So I do feel very, very good about the long-term approach and that we will see sequential improvement in this business. And as we continue to deploy, we'll continue see margin expansion across the entirety of JELD-WEN as well.

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Operator [24]

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John Lovallo with Bank of America.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [25]

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Over the past couple of years, there's been a series of operating challenges, but you guys have kind of maintained your view that, that 15% EBITDA margin over the next few years is attainable. What gives you the confidence that that's really achievable?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [26]

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John, thanks for the question. Yes. We've always said our -- about the 15% that when we look at setting up that model, it was revenue, it was -- we based it on a flat revenue starting last year. And we said we're working around price other than to offset inflation to get that. So it's really a self-help story. It's one where as we deploy the Excellence Model across the business and we drive productivity, we felt that we could drive margin expansion. We still believe that. I really wasn't hoping to get challenged on the revenue side as early as we have in the process, but we still are seeing margin expansion within the business. We're seeing good productivity. We have a nice pipeline going into 2020 as well. As I talked about earlier, we're -- the restructuring, the modernization programs are well underway. This has been a year of investment in those programs. And we're starting to be at the point where we're taking latent capacity out of the business. And that's where you're going to see the cost savings. As we're doing the modernization programs, you see the labor reduction, the cycle time improvements. And quite, frankly, additionally, we'll see some freight savings.

So I'm feeling confident about that. A little bit setback maybe in the trajectory. It's going to be a little choppy at the beginning as we're making investments and we're deploying resources and tools. But over the long term, I still see that benefit that really internally we've got the capabilities to drive the $200 million that we talked about needing to get to that 15% EBITDA target.

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [27]

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And I'll just add on that we -- within our portfolio today, John, we definitely have businesses that are operating at or above, in many cases, that 15% level. So we see the proof points within our own business. There's -- obviously, we've got some business lines and some channels that are not there yet, and we're -- the work we're doing on the cost side and the productivity side as well as what we're doing on the commercial front end of the business is what's going to, I guess, lift all those up to the 15% or above.

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [28]

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Yes. So feel really good. Thank you all for joining us on short notice. We're very disappointed, obviously, in the performance in the quarter. Felt we wanted to get that out as soon as possible and share with you what we're looking at for the rest of the year. If you have any additional questions, we'll look forward to sharing those in conversations later on. Thank you again for joining us.

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Operator [29]

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This concludes the JELD-WEN third quarter preliminary results conference call. We thank you for your participation. You may now disconnect.