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Edited Transcript of JELD.N earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q3 2019 JELD-WEN Holding Inc Earnings Call

CHARLOTTE Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of JELD-WEN Holding Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm 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

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

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

* Philip H. Ng

Jefferies LLC, Research Division - Senior Research Analyst

* Trevor Allinson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the JELD-WEN Holding, Inc. Third Quarter 2019 Earnings Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions).

I would now like to hand the conference over to your speaker today, Karina Padilla, SVP, Corporate Planning and Analysis. Thank you. Please go ahead.

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

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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 Gary Michel, our CEO; and John Linker, our 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 or statements regarding expected outcome of pending litigation.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of the 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 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.

Please turn to Page 4. This morning, we announced our third quarter results, which are in line with the selected preliminary results we announced on October 10. On our preliminary results conference call, I shared my disappointment in our third quarter performance. We believe the results were due to issues largely specific to the quarter, and we'll see improvement in operational performance moving forward from the mitigating actions already in place. I remain confident in our long-term strategy, the strength of our business model and the engagement of our associates whose commitment to our success has never been stronger.

Let me walk you through some of the key points of the quarter. As discussed on the October 11 call, a significant increase in manufacturing costs in a small number of our windows facilities in North America primarily drove the performance gap to expectations for the quarter. Erratic order patterns and customer-driven product resets in the retail channel tested the nimbleness of our demand planning process and systems capabilities, and we were unable to adjust costs quickly enough in the quarter. We believe these issues were seasonal and isolated in nature and do not expect them to recur in 2020.

I'm pleased with the responsiveness of our associates to immediately implement corrective actions by embracing our JEM tools and processes, and I expect operational improvement moving forward.

We continue to see volume headwinds in North America and Australasia, where our businesses are more heavily indexed to single-family residential new construction markets. The Australia market weakened considerably, both sequentially and year-over-year. Positive developments in the U.S. housing market in recent months have us cautiously optimistic, though we have yet to see a substantive shift in our demand curve. I'll elaborate more on our market outlook in just a few minutes.

Our Europe segment delivered core revenue growth and margin expansion in the third quarter as expected. The turnaround executed in Europe is a result of corrective actions taken over the past several months, driving price and productivity. For the fourth consecutive quarter, we delivered favorable price cost as price continues to hold up in most of our markets despite the soft demand environment.

On a consolidated basis, we realized savings from our productivity initiatives, with the strongest contributions in the quarter from our North America Door business, Northern Europe, the U.K. and Australasia.

I'm also very excited about the progress we're making with our footprint rationalization and modernization projects and look forward to sharing some examples of these projects that we have underway in a few minutes.

Lastly, our year-to-date free cash flow performance demonstrates improvement in our quality of earnings. I believe the fundamentals of our business model are robust. And we're seeing results across the enterprise as a result of our strategy and business operating system deployment.

Please turn to Page 5, as I provide a recap of the quarter. John Linker will provide more detail coming up. Revenue declined 3.9% year-over-year driven largely by North America and Australasia residential new construction demand as well as unfavorable foreign exchange. North America was also impacted by erratic order patterns in the retail channel that supports the repair and remodel market.

Diluted earnings per share for the quarter was $0.17, and adjusted earnings per share was $0.26. Adjusted EBITDA decreased 17.9% to $108.9 million, and adjusted EBITDA margin at 10% declined 170 basis points. Adjusted EBITDA margin was negatively impacted by deleverage on lower volume in North America and Australasia. Margins were also impacted by the operational inefficiencies in some of our North America windows plants. As mentioned, we expect operational improvement going forward as a result of corrective actions already in place.

Net leverage at quarter end was approximately 3.2x, which is slightly above target levels due to acquisitions and seasonality of working capital. We're committed to reducing our net leverage ratio closer to our target of 2.5. We also announced today an extension of our share repurchase program, which demonstrates the Board and management's confidence in JELD-WEN's operating model and potential for cash flow generation.

Our near-term cash deployment priorities remain, net debt reduction, organic investment and opportunistic M&A. The extension of our share repurchase program provides us with another lever in our balanced approach to create value for our shareholders. On Page 6, I'll provide an update on markets for the third quarter and our latest view of the near-term demand outlook.

In the third quarter, we experienced weakness in both the U.S. and Canada distribution channels that serve new construction markets, while repair and remodel markets were flat. Year-to-date, single-family permits and housing starts are down low single digits in the U.S. And in Canada, single-family housing starts are down high teens.

Looking ahead, we are cautiously optimistic about a recovery in the U.S. residential new construction housing market. With growth in permits and new home orders in the last 2 months, housing starts are expected to follow. Housing starts in Canada are also showing signs of growth after weak data year-to-date.

Despite residential new construction markets being sluggish in North America this year, we feel good about the long-term demand drivers in these markets. GDP growth remains positive, indicating expansion in the economy. Unemployment rates and mortgage rates continue to hold at historically low levels.

In Europe, varying levels of economic growth across the region led to mixed demand for building products. Our markets were generally flat but varied by product line, channel and geography. Brexit uncertainty continues to weigh on housing demand in the region, and we expect mixed markets to continue in Europe. Australasia demand conditions weakened as the quarter progressed, with the third quarter core revenue down 12% versus prior year. While interest rates are at historical lows, credit tightening by major banks continues to make it difficult for homebuyers to obtain funding.

We forecasted a deterioration in the Australian residential new construction markets at the beginning of the year but did not expect the acceleration of the decline throughout the year. Australasia residential housing permits are now at their lowest level in 10 years, and the latest forecast provided by the Australia Housing Industry Association predict single-family housing starts to decrease to approximately 20% down for the full year. We continue to focus on executing our planned strategy in the region, and our team has done well in adjusting cost in anticipation of these headwinds.

Please turn to Page 7. I would like to share some details of our footprint rationalization and modernization projects. I'll start by sharing a little of the background of this program for those that may not be familiar with it. We are committed to achieving our long-term EBITDA margin target of 15%. We expect to achieve the 15% margin target by delivering $200 million in cost reductions over the next several years.

To keep it simple, we assumed flat volume and price actions that would offset inflation over the period. The $200 million in cost reductions is based on a targeted $100 million in productivity to be delivered through the deployment of our JEM business operating system and a further $100 million from the footprint rationalization and modernization program.

We're making good progress in both areas. Our net productivity year-to-date is on track to the multi-year target run rate of $100 million. While volume/mix has been a headwind to realize results, the underlying cost improvements and productivity discipline will provide ongoing year-on-year savings. The $100 million long-term facility rationalization and modernization program is focused on reducing our manufacturing footprint by at least 15%. As a reminder, we operate over 130 facilities worldwide. This program is geared toward reducing our footprint while modernizing the operations to increase capacity by improving throughput and efficiency. This year, we focused our investments in this program on a proprietary modernization, automation processes in selected facility as we prepare for consolidation.

Now that the early phases of the investment are complete, we've entered the stage in North America and Australasia where less efficient legacy and redundant capacity is being taken online and will realize benefits in the P&L. The progress towards our $100 million savings target of this program won't be linear as we have elected to go slow to go fast and ensure that customer service is a priority.

So let me share a few examples. In North America, we operate approximately 45 manufacturing plants. We recently acquired our Atlanta door facility, which is a well located modern facility, that was underutilized at the time of acquisition. This plant became the foundation for our rationalization and modernization program in the Southeast, allowing us to consolidate several inefficient legacy door assembly operations into one. Not only are we consolidating locations, we're also improving the efficiency, capacity, throughput, safety and quality of the operations through modernization projects.

We successfully closed our Ozark, Alabama facility, and last week, announced the closure of our Lexington, North Carolina plant. We've transferred labor-intensive, ergonomically challenging and time-consuming batch processing operations in Ozark and Lexington into our streamlined Atlanta operations. We've reduced labor requirements by over 50%, while increasing output by more than 50% by deploying our new proprietary and automated single-piece flow operations. These processes significantly improved ergonomics and associate safety and utilized 80% less floor space for the same operations. Additionally, we've seen a significant improvement in quality output and scrap.

We made similar progress in Australasia. For example, we moved our Regency showerscreens and William Russell Doors business into an existing manufacturing campus at our Stegbar Rowville campus in Melbourne, delivering manufacturing efficiencies through modernization and process improvement, while increasing capacity. As with Atlanta, investments in automated processes improved quality and safety through ergonomics and reduced manual processes. The benefits of these programs are a big factor in our ability to maintain margin in a challenging Australasian market.

Atlanta and Rowville are just 2 examples of the rationalization and modernization programs that are in various stages across the enterprise. As you can imagine, these projects are not easy or quick given the planning and execution required to ensure seamless execution with minimal commercial disruption. They are, however, critical to our success as we improve our cost position and create more efficient and effective capacity for growth. These exciting opportunities underscore why I'm confident that we have the right strategy for JELD-WEN and the ability to deliver value for our customers, associates and shareholders.

With that, I'll pass it over to John Linker to provide a detailed review of our financial results for the third quarter of 2019.

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

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Thanks, Gary, and good morning, everyone. I'll start on Page 9. For the third quarter, net revenues decreased 3.9% to $1.1 billion. The decrease was driven primarily by a 3% reduction in core revenues, a 2% headwind from foreign currency, partially offset by a 1% contribution from the VPI acquisition.

Diluted earnings per share was $0.17, a decrease of $0.10 compared to prior year. Adjusted diluted earnings per share was $0.26, a decrease of $0.14. Both adjusted and unadjusted earnings per share were heavily impacted in the quarter by an increase in our effective tax rate to 56.9%, significantly higher-than-expected in prior year due to a combination of a greater proportion of earnings from non-U. S. higher tax rate jurisdictions, the impact of the GILTI provision of U.S. tax reform and discrete items in the quarter.

The impact of GILTI drove approximately 13 percentage points of the rate due to a higher percentage of our projected earnings being realized in foreign jurisdictions subject to GILTI. Additionally, the onetime impact of discrete items related to other comprehensive income drove another 11 percentage points of the rate. Our cash tax rate in the quarter was in the high teens as we continue to realize the benefit of our NOL. We are now tracking towards a full year effective tax rate of approximately 40% to 44% compared to our prior expectations of 33% to 36%. Excluding the impact of GILTI and the other discrete items, the adjusted effective tax rate for the full year would be approximately 28.5%. We expect the impact of GILTI to taper off in 2020, which will favorably impact our effective tax rate in the future.

Third quarter adjusted EBITDA was $108.9 million, generating margins of 10.0%, down 170 basis points compared to prior year. Core adjusted EBITDA margins, excluding the impact of FX and M&A, also decreased 170 basis points compared to prior year. Adjusted EBITDA declined compared to prior year due to the deleverage impact of lower volumes in Australasia and North America, the impact of inefficiencies in our North America windows business and the absence of legal settlement income of $7.3 million recognized last year. Both price cost and productivity were favorable drivers of adjusted EBITDA in the quarter, but were not sufficient to offset the headwinds I just described.

I'd like to put a little more context around the year-over-year decrease in core adjusted EBITDA margin of 170 basis points. We estimate that the 5% volume/mix revenue headwind caused a 280 basis point negative impact to core EBITDA margins. The North America windows operational inefficiencies drove a 70 basis point headwind. And finally, the nonrecurrence of the 2018 legal settlement income was a 60 basis point headwind.

These factors total approximately 400 basis points of core margin headwind in the quarter. Given that we reported only 170 basis point net decrease in core EBITDA margins, that tells us that other factors such as price cost, productivity outside of North America windows and strong SG&A controls combine to deliver significant core margin improvement versus prior year. This underlying improvement underscores the progress we are making across the platform with the JEM deployment. As volume/mix stabilizes and we realize operational improvement from our North American window business, we expect to return to overall core margin expansion in the near future.

Page 10 provides detail of our revenue drivers for the quarter. Our pricing realization was, once again, strong at 2%. However, this pricing strength was more than offset by a 5% decline in volume mix. Australasia experienced significantly lower volumes and was sequentially worse, as shown by the 12% headwind in volume mix in the quarter compared to an 8% headwind through the first half of the year.

Please move to Page 11, where I'll take you through the segment detail beginning with North America. Net revenues in North America for the third quarter declined by 1.4%, driven by a core revenue decrease of 3%. We continue to achieve healthy price realization of 2%, but this pricing benefit was more than offset by a volume/mix headwind of approximately 5%. Adjusted EBITDA in North America decreased by 20.9% compared to prior year, driven primarily by the impact of volume/mix and efficiencies in the window business and the nonrecurrence of legal settlement income in the same period last year. These factors were partially offset by favorable price cost and positive productivity in doors in Canada.

Moving on to Page 12. We were very pleased with Europe's operational performance in the quarter. We've delivered both core revenue and core EBITDA margin expansion for the first time since early 2018. Net revenues in Europe for the third quarter decreased 1.8% compared to prior year. The decrease in net revenues was driven primarily by a 5% headwind in foreign currency. Excluding the impact of foreign currency, Europe core revenue grew 3%. Adjusted EBITDA in Europe increased 8.9%, driven by strong core adjusted EBITDA margin expansion, 120 basis points. The margin improvement was driven primarily by favorable price cost and improved productivity.

On Page 13, net revenues in Australasia for the third quarter decreased 17.1%, driven primarily due to a 12% contraction in core revenue and a 5% adverse impact from foreign currency. Our Australasia segment derives approximately 75% of its revenue from the Australia residential new construction housing market, which has weakened considerably as the year has progressed.

According to the most recent housing industry association report, housing starts are forecasted to decline by 20% in 2019. The latest forecast signals further declines in new construction housing into the first half of 2020 before recovery begins in the second half of the year.

Adjusted EBITDA in Australasia decreased 22.3%, and core EBITDA margins contracted by 80 basis points due to the deleverage impact of lower volumes. We remain focused on cost controls to ensure that we align our facility footprint and overhead structure with the declining market. Since the downturn started, we have completed a number of facility rationalization projects and have several other restructuring projects in progress. When completed, the combined impact of these initiatives will be a 20% reduction in our number of facilities in the Australasia region.

On Page 14, we continue to achieve meaningful improvement in our cash performance. Compared to last year, year-to-date cash flow from operations increased $76.9 million, and free cash flow improved $52.5 million, both driven by our focus on more efficient working capital utilization. Our capital expenditures increased $24.5 million year-to-date compared to the prior year as we are actively funding attractive returning investments and our footprint rationalization and modernization program as well as other productivity projects.

On the balance sheet, we ended the third quarter with total net debt of $1.39 billion, an increase of $26 million since December 31, 2018. The increase of our net debt was primarily driven by the cash used to fund the VPI acquisition, which we closed in the first quarter, and seasonal working capital usage. Our net leverage ratio of 3.2x remains at the upper end of our target range. However, we expect the ratio to improve by up to 0.25 turn in the fourth quarter with our normal seasonal reversal of working capital. Our balance sheet remains strong, and our capital structure, liquidity and free cash flow generation will provide us with the flexibility to reduce our net leverage ratio over time and fund our strategic initiatives.

With that, I'll turn it back over to Gary to take you through our latest 2019 outlook and provide you with closing comments.

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

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Thanks, John. Please turn to Page 16. Consistent with the comments provided on the October 11 call, we now expect full year revenue for 2019 to be approximately 2% below full year 2018. And we expect full year adjusted EBITDA to be in the range of $419 million to $429 million. Our earlier forecast for 2019 anticipated that we would pivot to growth in the second half of the year. Unfortunately, market conditions in Australasia and Canada worsened, while North America weakness continued and Europe performed as expected. Residential new construction markets provided mixed signals throughout the year and are showing signs of strengthening in the U.S. We have seen pockets of repair and remodel market growth, although not at the expected rates, and we will continue to position ourselves to take advantage of any further improvements.

Please turn to Page 17. Despite the impact from volume headwinds, our associates have utilized JEM to deliver positive productivity in our core operations and have developed an extensive backlog of projects to drive future cost savings. And the facility rationalization and modernization plan is on track, and we are now actively reducing inefficient and latent capacity. I'm confident in our strategy and believe that our ongoing deployment of JEM will improve our operations and deliver long-term value for our shareholders.

Finally, we have no significant update on the Steves litigation appeal process. And given the ongoing nature of the proceedings, we will be unable to take any questions on this topic during the Q&A session.

With that, operator, please open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from the line of Matthew Bouley from Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [2]

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I wanted to touch on the implied Q4 guide. I think previously, you guys had talked to seeing some potential operational improvement in the fourth quarter sequentially. But I think the guide suggests perhaps margin stepped down a bit in the quarter. So I'm just wondering kind of what's changed in your view over the past months. I know you gave a lot of detail there, but just kind of any specifics around that margin profile into Q4 and then kind of timing around when you might see that inflection into 2020?

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

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Thanks, Matt. This is John speaking. Yes. So just generally speaking, Q4 is going to be a weaker margin than Q3 just from a seasonality standpoint. We saw that last year. Margins went from 8.9% in Q3 of last year, down to 6.5% in Q4. So traditionally, we do see a bit of a step down. What we're calling for here is sort of implied in the midpoint of our guidance is around 9.5%, which is just slightly under what we reported for Q4 of last year. So more or less flat core margins year-over-year. We did have negative core margins in Q3 of 170 basis points. So while we're not that yet back to core margin improvement in Q4, that is a sequential improvement.

Yes. I think the things that are impacting us in Q4, Australia, certainly from a volumes perspective, continues to sequentially get worse. We're looking at sort of mid-teens type of a volume environment in Australia in Q4. Europe, probably flat growth. And North America still slightly down on a core basis. So that would imply core volumes are still down pretty meaningfully, offset by some price.

So certainly, operations are improving in Q4, still facing some of the volume headwinds. We expect Europe to continue its trajectory of driving year-over-year core margin improvement. So I think as we get into 2020, certainly, we expect that the lag here, some of the activity on the new construction side in North America to start to contribute to some volume tailwind in 2020.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [4]

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Okay. Perfect. And then secondly, you guys did highlight still seeing some favorable price cost trends in North America. Obviously, we've seen some public announcements from your competitor in North America. Just how are you guys thinking about the pricing environment in North America into 2020?

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

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Thanks for the question. Obviously, we don't comment on competitive actions but certainly aware of them and found out about them probably at the same time you did. But I would like to highlight that we're in our fourth consecutive quarter of positive price cost. So we're going to remain disciplined about pricing. We continue to look at the marketplace, both from a competitive standpoint, looking at our cost plus the value that we expect in different channels. We don't preannounce our actions, but we do have dynamic pricing, and we're continually monitoring the ability to increase our prices as appropriate. And we look at it channel by channel and as well as product line by product line.

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Operator [6]

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Our next question comes from the line of Mike Dahl from RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [7]

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I wanted to follow-up on the pricing question, understanding that there's a limit to what you can or will say, but asked a slightly different way. Given the volume environment has been somewhat soft, and I think that's extended to doors as well as windows. How are you thinking about the trade-off between volume and price? And can you give us an update -- and I'm thinking specifically in doors? And can you give us an update of where your utilization rates are today?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [8]

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Yes. So I would say, we've actually had a pretty good run this year on doors, maybe a little softer than we would have expected. But I think we've gained a little bit of share, and we've enjoyed a positive view, certainly, in retail point-of-sale and as well as in our traditional channels. So yes, we're -- I don't know if there's a volume story there on doors. But when we look -- the way we think about pricing is we do look channel by channel, product by product. We've said in the past that we believe we have a differentiated product line, a differentiated service level, and we expect to extract value for that. And we continue to look at the opportunity to do that everywhere that we sell products.

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

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Just on the utilization side, Mike, I mean, it varies a lot by product line and country and so it's tough to generalize. I mean, in windows, right now, we've got our vinyl window plants are sold out, and we're full on trying to produce the product. On the door side, clearly, we've got a couple of moving pieces right now as we're ramping up new capacity in Atlanta and starting to consolidate latent capacity. So it's tough to put an exact number on the utilization. But certainly, we've got capacity to grow with customers that want to grow with us in 2020.

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [10]

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Yes. I mean, that is the underlying charge that we've got with JEM is really to increase our cycle time, increase our capacity and do it in a more efficient way in fewer facilities. So we're starting to see that, that comes through, as I talked about a couple of projects, particularly in Atlanta, I talked about what we're doing in Australia as well. So I think that demonstrates that we're focused on increasing our capacity and utilizing what we have as well.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [11]

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Okay. That's helpful. And my second question, and sorry if you covered this in the response to the prior question but just around the overall environment, less about kind of the seasonality here and more kind of high level, if we think about when the pre-announcement call happened and today, are there any differences in your views, either positive or negative based on how order patterns or conversations with customers have progressed over the past month as we look out maybe not just the 4Q but into the beginning of '20?

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

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Yes. I think long term, we still like the markets that we're in. We still think residential new construction has growth in it. We think R&R has firmed up and will be favorable. We like the underlying foundation of the markets that we're in. We had expected R&C to be a little stronger in the second half, show some growth. Obviously, we're seeing some good indicators, but the lag and when they start happening for us probably is into next. So we're looking forward to that. So not really a -- in the last month, not a market change in what we're seeing in our demand patterns, but we do expect to see that going forward.

On the R&R side, we've done fairly well. It's been fairly stable, but we do expect to see some firming up there as well. We're seeing that a little bit in the point-of-sale data. And we would expect that to be a good trajectory, and hopefully, a tailwind into 2020.

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Operator [13]

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Our next question comes from the line of Phil Ng from Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst [14]

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You're clearly a lot more upbeat about housing broadly, and that should hopefully funnel through early next year. But a lot of the growth is coming from these entry price point, more affordable homes. So what kind of impact do you expect that to have, whether it's from a mix standpoint or volumes, when you look out to 2020?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [15]

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We -- Phil, good question. We actually tend to be a little more indexed, maybe higher up the food chain in R&C, maybe more the step-up in higher-end homes. There is -- opening price point seems to be fairly strong, but we're seeing some activity higher up in the more value homes as well. And that's where we play. We're starting to see data that suggests that we should see improvements in our demand patterns where we're indexed. Like I said, we don't really play at the opening price point so much. So we don't really see that other than in data. But we are seeing firming up certainly in the move up section. And then, of course, there's always just a -- seems to be a level of stability at the higher end that we often see.

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

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I would just add on. Generally speaking, from a channel standpoint in North America, our traditional distribution channel is going to be a higher margin profile than our retail channel, not largely because of the mix of the products that sold through their stock versus specials, things like that. So certainly, a growth in new construction would be a favorable mix impact for us relative to what we've experienced this year, where traditional channel has been lower and retail has been a little higher. So that's an opportunity. I'd also say we've got some particular JELD-WEN specific investments that we're making around fiberglass doors, where that product category is growing very nicely for us and we believe taking some share. And as that product continues to grow into 2020, the new construction side, that's a richer mix margin product for us and should be a tailwind, I guess, to the mix side of things as we get into 2020.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst [17]

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Got it. That's really helpful. And just 1 more for me. What's your outlook for inflation in 2020? And assuming all the announced tariffs do stick, how should we think about the level of pricing you need to kind of push through to offset these headwinds? And could it be a drag on margins when we think about 2020?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [18]

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So as we look at -- if you think about sort of the whole basket of inflation across the board for labor, freight, materials, certainly, we are still in an inflationary environment. There's things that stabilized meaningfully from where we were in late 2018 in terms of the pace of what we we're seeing. But certainly, there's, across the board in all 3 of our geographic segments, we still see inflation. And so as we think about building a plan and then what we operationalize in our business, certainly, our goal is to make sure that we announce and realize enough price to more than offset that basket of inflation. And so going into 2020, I think this year, year-to-date, we've been in the ballpark range as a percent of sales kind of pricing cost tailwind of about 100 basis points. And I'm just speaking specifically there to materials and freight and excluding labor for the moment. So certainly, our goal would be to continue to deliver that sort of a trajectory into 2020 as well.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst [19]

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But if you have to size 2020 versus 2019 in terms of the magnitude, would 2020 be more manageable on a relative basis versus '19?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [20]

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Yes. I would say -- I wouldn't say it's markedly different at this point, and we'll give guidance for 2020 on our next call.

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Operator [21]

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Our next question comes from the line of Truman Patterson from Wells Fargo.

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Trevor Allinson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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This is actually Trevor Allinson on for Truman. I wanted to touch on a -- on your international segments. Australia was starts down. I think you said 20% or so. I know you said that new red is about 75% of that market. But has that demand deterioration -- is that exclusively in the new res channel -- or in the res channel is that expanded to R&R as well? And then kind of piggy backing off that in Europe. We're kind of surprised that conditions haven't slowed as much with the economy stalling there. Can you give us an update on what you're seeing? Is pricing at risk of slotting back at all there?

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

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Yes. So Australia, it is really focused -- the downturn there is really focused on residential new construction. It's very much attributed to the credit tightening activities of the government there. The R&R segment remains fairly stable. And the opportunity there that we've been working on for a number of years, we've talked about is gaining share in R& R, and that's really where we're working towards seeing growth.

But yes, it's very focused on residential and construction in Australia.

The -- as far as Europe, the markets are mixed. It's a broad basket of different conditions. I guess, for us, what we've seen is the markets that have been stronger for us, markets like the U.K. and France, we've seen growth. It comes at a little bit of an expense to us, but to our basket, as it's -- it's a little lower margin than what we realized maybe in the Central and the North. But as you take Europe as a whole for the way we look at Europe, it's about flat from a market standpoint. The ups and the downs offset each other, and the difference really just becomes a channel mix. So hopefully, that answers your question about Europe.

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Trevor Allinson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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Yes. Yes. And then with MI set to acquire Milgard, just wondering how has that changed in industry dynamics and how do you view that going forward?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [25]

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There's -- I mean, there's been a lot of consolidation in the window market, certainly, over the last 2 years, and particularly, on the vinyl side. The Milgard business is a nice business, largely focused on the West Coast. Our vinyl window business is more nationwide in scope. So I think just generally speaking, we think consolidation in the market, the window market is a good thing. It's bound to happen. It will probably continue to happen. But in terms of that specific transaction, we don't see really any sort of competitive or operational impact to us.

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Operator [26]

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Our next question comes from the line of John Lovallo from Bank of America.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [27]

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First one is during the pre-announcement call, you mentioned that JEM had been rolled out in a number of your businesses but not all of them. I think you also indicated that some of your businesses are operating at or above that kind of target 15% EBITDA margin. Can you just help us to mention how many of the businesses have JEM rolled out and are operating at that margin level? And how many are left to go?

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

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Well, I think the -- at this point, those are 2 separate subjects. As far as JEM is going, we've actually rolled out, if you will -- JEM is our operating system across the entire enterprise. We're at different levels of maturity in the different places of deployment of the various tools. So as we go to certain plants on certain businesses, we have model plants where we've deployed more and we continue to push the envelope on how fast we can go as we try the tools. And as they adapt, we adapt the tools of our operating system to JELD-WEN, making sure that we learn and we continue to push the envelope so that we can use those learnings and those processes to deploy more broadly across the enterprise.

So we are continually looking at all of our plants. We kind of rack and stack on the deployment of the tools as well as on performance. I would tell you that we have a lot of plants. So it's hard for us to say that every single one of them is at the same level on any given tool. I would say, problem-solving, visual management, day-to-day, day-to-day, hour to hour-wide operations, we're pretty consistent across. We're starting to see functional utilization of our business operating tools as well. But we'll -- it's early, very early stages. So we continue to move forward. We continue to learn, and we continue as an organization to improve.

As far as talking about which businesses are above or below, it's a particular target. I can tell you that we have exemplars in every area of our company on different metrics, including EBITDA performance, on performance, on-time delivery, on quality, safety, and we continue to benchmark those as we look at developing our business operating system best practices. And deploying what's working in one area becomes kind of the standard, the best-known way, that we deploy everywhere else.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [29]

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Okay. And then, John, in your prepared remarks, I think you bucketed 3 different headwinds for margin. So the volume and mix, the window efficiencies in North America and then the legal on a year-over-year basis, which are about 400 basis points. And then on the positives, you mentioned pricing cost, productivity and SG&A actions. So I was just hoping you could maybe break those out or quantify each of those positive impacts.

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [30]

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Yes. I mean, I think -- so price/cost was in the ballpark of about 100 basis point tailwind to margin. And then productivity probably made up to rest. And I think SG&A is more of an issue of just holding SG&A flat in a sort of declining volume market as opposed to seeing significant reductions. But certainly, it was a contributor to helping the profitability.

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Operator [31]

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And our next question comes from the line of Keith Hughes from SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [32]

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Questions back to Europe. You had first, EBITDA gain year-over-year in Europe, we're seeing, since really the beginning of 2018. So a couple of short and long-term questions on that. Number one, do you think that will continue with the cost saves you highlighted for the next couple of quarters? And then looking longer-term at Europe, it doesn't seem like a place where you're never going to get a lot of volume growth. What's sort of the long-term plan to grow that business after we get this profit bounce?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [33]

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So thanks for the question. Yes, we actually like Europe quite a bit. We think we have an -- we actually -- to take the second half of your question first. We actually like our opportunities for growth there, both in looking across the landscape of products that we sell in 1 market that maybe we don't sell in another. There's a lot of cross opportunity across solutions that, quite frankly, we started to demonstrate with our acquisition of Domoferm, for example, but taking those technologies and those capabilities from Central and North, bringing them into the U.K. and France, for example, and likewise, vice versa. So we think there's a lot of opportunity to gain share in the markets that we currently serve. And we do think that there's some adjacent markets that are underserved by JELD-WEN today that we believe that we can grow into and expand the business.

So we actually like the growth prospects for Europe. We also like what we're doing in terms of how we're going after that, which is looking at the business in a more pan-European approach. We've made some leadership changes there that we announced earlier in the year, and they're very, very focused on bringing that organization together, continuing to look at our cost structure. And just as we've talked about, we didn't mention any examples in Europe today for our rationalization modernization program, but the same type of efforts are going on there as well. And we'll continue to drive efficiencies, drive our performance and provide capacity for growth. So we actually like Europe. We think there's a great opportunity for us to grow there.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [34]

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And on the profit side, is -- should we have a couple of quarters of a tailwind ahead from this cost work you had highlighted earlier in the call?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [35]

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Yes. I would say the visibility that we've got around the productivity pipeline right now in Europe is very healthy. I mean, in terms of what we'd expect to get out of the next few quarters, certainly. In order for us to continue on the same trajectory, we got to have the projects identified at this point and know exactly what it is we're going to go execute on. And we're certainly in that position as we look into early 2020. And from a pricing action standpoint, at this point in the year, we've taken all the pricing actions that we're going to be taking, for the most part, in 2019. We'll look for additional opportunities in 2020 in Europe. And so yes, there's really nothing changed on the landscape here that would imply that we should not continue core margin expansion in 2020 in Europe.

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Operator [36]

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(Operator Instructions) Our next question comes from the line of Michael Rehaut from JPMorgan.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [37]

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This is Elad on for Mike. You touched on some of the opportunities for the top line in Europe and in fiberglass doors, perhaps. I was also curious what other opportunities you're seeing to grow the top line, especially from a product mix or new product standpoint and where you see the most opportunity for growth?

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John Linker, JELD-WEN Holding, Inc. - Executive VP & CFO [38]

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Yes. So certainly in -- and your question is just generally, right? You weren't just speaking to Europe, I believe. Certainly, in North America, one of the biggest opportunities we've got that we talked about on the last earnings call was a composite window launch, which we're -- as we get into 2020. That is going to be ramping up to a full-scale nationwide launch. We believe that has the opportunity to be a meaningful contributor to North America growth over the next few years. So that's certainly an example of new products, let's say, in Australasia. There's some new opportunities there as well, both from a product and a capability standpoint, where, I believe Gary mentioned on the last call, getting ready to commission a new joinery door facility in Indonesia that will have the capability to sell doors into Australia as well into other markets as well, and we've got good demand from customer base there. So that -- those are just a couple of other examples of things that we've got visibility to. But certainly, continuing to invest in new products and innovation and service innovation is -- are key priorities for us as we look into the future.

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [39]

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Yes. You couple that with what we're doing in customer segmentation, our service delivery work as well as in the digitation and modernization of our commercial aspects of our business. And we feel like we're really structured to start seeing some significant core growth in this business.

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Elad Elie Hillman, JP Morgan Chase & Co, Research Division - Analyst [40]

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Okay. Great. And then I also just wanted to follow-up on some of the comments in the North America windows. So during Q2, you had mentioned you reduced headcount there by about 620 employees year-on-year. This quarter, you mentioned you guys encountered some overtime costs in the erratic order patterns in the Windows segment, so from the retail channel. I'm just curious if part of the efforts to restore stability of the windows business, at least in the short term as you continue to roll out the JEM practices, how are you thinking about the right level of staff for that business?

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [41]

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Listen, there's no doubt that, that's -- what you point out is part of the problem that -- it's part of the problem, right? And part of the solution. We've doubled down on our efforts with JEM and our tools in order to apply problem-solving to that business. We do believe that the issues were isolated in the quarter and that we'll see sequential improvement there. It comes down to staffing. It comes down to our build cycles, and it comes down to how orders are placed and how we plan for them. So it's the combination of all of that. And when you got -- we've got to take the signals that we get from the market. We need to deploy those through our SIOP process and our planning processes to ensure that we've got the right capacity, the right manpower and the right throughput in order to meet customer demand.

So we'll continue to monitor that. We feel like we've put the right tools into place and the right remediation actions into place, as I said earlier. And we expect to see operational improvement sequentially in the business.

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Operator [42]

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

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Gary S. Michel, JELD-WEN Holding, Inc. - President, CEO & Director [43]

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Well, thanks, again, for joining us this morning. While our third quarter performance was disappointing, we believe the issues are specific to the quarter and isolated, and we do not expect them to recur. I remain excited about our progress with JEM and the rationalization and modernization programs. While we're in the early innings of the deployment of both of those, we are in the stage where we expect to begin to see P&L results.

I'd like to thank you again for joining us today, and we look forward to sharing our progress in the coming quarters.

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Operator [44]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.