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Edited Transcript of JELD.N earnings conference call or presentation 22-Feb-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 JELD-WEN Holding Inc Earnings Call

Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of JELD-WEN Holding Inc earnings conference call or presentation Wednesday, February 22, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Linker

JELD-WEN Holding, Inc. - SVP, Corporate Development & IR

* Mark Beck

JELD-WEN Holding, Inc. - President & CEO

* Brooks Mallard

JELD-WEN Holding, Inc. - EVP & CFO

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Conference Call Participants

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* Bob Wetenhall

RBC Capital Markets - Analyst

* Mike Dahl

Barclays - Analyst

* Nishu Sood

Deutsche Bank - Analyst

* Jason Marcus

JPMorgan - Analyst

* Stephen East

Wells Fargo - Analyst

* Will Randow

Citi - Analyst

* Josh Chan

Robert W. Baird - Analyst

* Alex Rygiel

FBR - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to JELD-WEN's Fourth Quarter and Full Year 2016 Earnings Conference Call. Today's call is being recorded and we have allocated an hour for prepared remarks and question and answer.

At this time, I would like to turn the conference over to John Linker, Corporate Development and Investor Relations at JELD-WEN. Thank you. Mr. Linker, please go ahead.

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John Linker, JELD-WEN Holding, Inc. - SVP, Corporate Development & IR [2]

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Thank you. Good morning, everyone. We issued our earnings press release this morning and posted the slide presentation to the Investor Relations portion of our website at investors.jeldwen.com. We will be referencing the slide during this call. I'm joined today by Mark Beck, our Chief Executive Officer and Brooks Mallard, our Chief Financial Officer.

Before we begin, I would like to remind everyone that during this call, JELD-WEN management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These include remarks about future expectations, anticipation, belief, estimates, forecast, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our earnings release posted on the website and provided in our final prospectus as filed with the Securities and Exchange Commission.

JELD-WEN does not undertake any duty to update such forward-looking statements, including the guidance we're providing with respect to certain expectations for 2017 results. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be used in evaluating our performance. The presentation of this additional information should not be considered in isolation or substitute results prepared in accordance with GAAP. Reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release, which is posted on our website and page 20 of this presentation.

I would now like to turn the call over to Mark.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [3]

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Thanks, John, and good morning, everyone, and thank you for joining us as we report our operating results for the first time as a public company. Last month, we successfully completed our IPO and began trading on the New York Stock Exchange.

I want to thank all of the JELD-WEN associates who made this possible through their hard work and dedication. I also want to extend a welcome to all of the investors who have chosen to invest in JELD-WEN. We sincerely appreciate the confidence that you have placed in us.

I'll begin today's call with an overview of our Company and talk about our strategies to drive operational and financial improvement. This will be followed by highlights from our full-year results. Then I will turn the call over to our CFO, Brooks Mallard, who will take us through the financials in more detail. Finally, I will wrap up the call with some summary thoughts and our expectations for 2017 before we open the line for questions. So I'll start on slide four of the presentation.

JELD-WEN is a global leader in windows and doors with a broad product offering and a scaled platform. We're operating 115 manufacturing facilities in 19 countries. We hold the number one position by net revenues in the majority of the countries and markets we serve. We have earned our leading market position by offering well-designed, high-quality products through strong and valued brands, and by reaching consumers through multiple channels.

We've bought or built some of the best brands in the industry over the past 50 years, including six strategic acquisitions over the past 18 months. These acquisitions are accretive to EBITDA margins, and they are adding more than $250 million in annual revenues. Approximately 65% of our net revenues come from doors, 24% from windows, and the remaining 9% from other building products.

From a geographic standpoint, we operate in three reportable segments. North America is our largest segment at 59%, Europe is at 27%, and Australasia at 14%. The majority of our business is tied to the residential construction markets, with about equal exposure to the residential repair and remodel market, and the residential new construction market.

Approximately 10% of our business serves the non-residential construction market, and this is primarily in Europe. We believe that the diversity of our mix across products, geographies, and applications mitigates business cycle risk. We also differentiate from our competitors through the breadth of our product offering. We are the only manufacturer with a large window and a large door business. This provides both commercial and operational advantages.

Turning to slide 5, I'd like to highlight several reasons that I feel so fortunate to be leading JELD-WEN, and why I believe so strongly in our future. First, we are in the early stages of an exciting business transformation, which began back in 2014 with a new leadership team. We've made significant progress improving our operations and profitability, including more than 600 basis points of margin expansion since 2013. We believe that there is a long runway ahead for further improvements. Second, although historically undermanaged, the assets of this Company are fantastic, and they provide a great foundation for our future growth. Third, we've built a talented leadership team with deep experience, driving results at world-class industrial companies.

I'll now get into some of the detail on how we are driving this business transformation, and this will be found on slide six. Our operating model starts with the foundation of talent management, our business system, which we call JEM or the JELD-WEN Excellence Model, and enabling technology. Built upon that critical foundation we have our three pillars of; first, operational excellence; second, profitable organic growth, and then third, strategic M&A. Within each pillar, we have defined initiatives with clear ownership, action plans, and targets. As we execute on these initiatives, our goal is to deliver best-in-class financial and operational performance. I'd like to highlight one aspect of our operating model, the JEM business system.

JEM drives our operational excellence cadence, defines how we work, and is the backbone of our Company as we strive to become a process-driven organization. We are still in the early days of embedding JEM throughout the organization, yet we are already seeing great traction.

Turning to slide 7, you can see that our business transformation has driven substantial improvement in earnings and free cash flow. During 2016, the improvement continued as we grew our revenue by 8.5% to $3.7 billion. We expanded our adjusted EBITDA margin by 150 basis points to 10.7% or $394 million. And we improved our free cash flow by 28% to $122 million.

Brooks will now walk you through the financials in a little bit more detail.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [4]

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Thanks, Mark. I will start on slide 9 with fourth quarter and full year highlights. For the fourth quarter, net revenues increased $82.2 million or 9.2% to $973.2 million compared to $890.9 million for the same period last year. Gross margin increased $47.8 million or 28% to $218.5 million compared to $170.8 million in 2015.

Gross margin as a percentage of net revenue expanded 330 basis points, from 19.2% in 2015 to 22.5% in 2016. The increases in gross margin and gross margin percentage were due to favorable pricing, improved cost productivity, and the favorable impact of recent acquisitions. SG&A expense increased $38.9 million or 27.4% to $181 million compared to the same quarter a year ago. SG&A expense as a percentage of net revenues was 18.6% compared to 15.9% for the same period in 2015.

The increases in SG&A expense and SG&A expense percentage were primarily due to one-time share-based compensation expense and other payments related to the November 2016 dividend recapitalization transaction totaling $22.8 million as well as professional fees related to the IPO process of $3.7 million. Excluding these one-time items, SG&A as a percentage of net revenues would have been unchanged versus 2015.

Additionally, the acquisitions of Trend and Breezway resulted in higher SG&A expense on a year-over-year basis. Net income increased $212.7 million to $233 million from $20.3 million in the same quarter a year ago. The increase in net income is driven largely by a significant benefit related to the recognition of tax attributes by releasing certain valuation allowances.

Adjusted EBITDA increased $24.9 million or 31.9% to $103 million from $78.1 million in the same quarter a year ago. Adjusted EBITDA margins expanded 180 basis points in the quarter to 10.6% compared to 8.8% a year ago. The increase in adjusted EBITDA and EBITDA margins was primarily due to favorable pricing, improved productivity, and the favorable impact of recent acquisitions.

Now I would like to turn to our full-year results. Net revenues for 2016 increased $285.7 million or 8.5% to $3.7 billion compared to $3.4 billion in 2105. Gross margin increased $134.1 million or 20.1% to $800 million compared to $665.9 million in 2015. As a percentage of net revenue gross margin increased 210 basis points from 19.7% in 2015 to 21.8% in 2016. Adjusted EBITDA increased $83.1 million or 26.7% to $394.1 million. Adjusted EBITDA margins expanded 150 basis points to 10.7% compared to 9.2% in 2015.

Slide 10 provides a buildup of our revenue growth. For the fourth quarter the 9.2% improvement in our revenues was driven by a 5% core growth comprised of a 2% benefit from our pricing optimization strategy in all three segments and 3% from volume and mix improvement driven primarily by the 6% increase in North America. Recent acquisitions in our Australasia segment contributed another 5% to growth, while the negative impact of foreign exchange in Europe reduced our total growth in US dollar terms by almost minus 1%.

For the full year, the 8.5% improvement in our net revenues was driven by 3% core growth, comprised of 2% benefit from our pricing optimization strategy across all three segments, and 1% from volume and mix improvement, also primarily in North America. We completed acquisitions that contributed approximately 7% to growth, while the negative impact of foreign exchange reduced our total growth in US dollar terms by a little over 1% for the full year.

Next, I'll move to the geographic segment detail beginning with North America on slide 11, and I'll focus on the quarterly data. Net revenues in North America for the fourth quarter increased $42.1 million or 8% to $569.3 million from $527.1 million in the same period a year ago. The increase in net revenues was primarily due to an increase in core net revenues of 8%, comprised of an increase in volume and mix of approximately 6%, and an increase of pricing of approximately 2%. We believe that the strong volume mix in the fourth quarter was a result of both the catch-up in demand after an industry-wide soft period in the third quarter as well as favorable comps from 2015.

Adjusted EBITDA in North America increased $23.2 million or 54.2% to $66.1 million from $42.9 million in the same period a year ago. EBITDA margins expanded 350 basis points to 11.6%. The increase in adjusted EBITDA was primarily due to favorable pricing and operating leverage on improved volume mix.

On slide 12, net revenues in Europe for the fourth quarter fell $11.7 million or 4.3% to $256.5 million from $268.2 million in the same period a year ago. The decrease in net revenues was primarily due to an unfavorable foreign exchange impact of minus 4%. Positive benefits from pricing were offset by decreased volume mix as we rationalized certain parts of our European business with a continued focus on profitable growth. Adjusted EBITDA in Europe increased $4.2 million or 15.2% to $32.2 million from 27.9% in the same period a year ago. EBITDA margins expanded 210 basis points to 12.5%. The increase in adjusted EBITDA was primarily due to favorable pricing and the benefit of our cost productivity programs offset by unfavorable volume mix as we work to rationalize our portfolio empowered by unwinding certain unfavorable pricing and rebate agreements.

On slide 13, net revenues in Australia for the fourth quarter increased $51.7 million or 54.1% to $147.4 million from $95.6 million in the same period a year ago. The large increase in net revenues was primarily due to a 47% increase from the recent acquisitions of Trend and Breezway, as well as 2% core growth and a slight positive foreign exchange impact. Adjusted EBITDA in Australia increased $8.8 million or 83.5% to $19.3 million from $10.5 million in the same period a year ago. EBITDA margins expanded 210 basis points to 13.1%. The increase in adjusted EBITDA was primarily due to the contribution of recent acquisitions and favorable pricing.

Now, I would like to provide a brief update on our balance sheet and cash flow on slide 14. Cash and cash equivalents as of December 31, 2016 were $102.7 million compared to $113.6 million a year ago. Total debt as of December 31, 2016 was $1.6 billion compared to $1.3 billion a year ago. However, it is important to note that earlier this month we received net proceeds from our IPO of $472.8 million and used a portion of these proceeds to repay $375 million of debt.

After giving effect to the IPO proceeds and subsequent debt reduction the net debt to adjusted EBITDA ratio was approximately 2.65 times compared to 3.85 times at December 31, 2016 and 3.69 times a year ago. Our leverage ratio is now in line with our longer-term target. Cash flow from operations increased $29.3 million or 17% to $201.6 million as of December 31, 2016, compared to $172.3 million as of December 31, 2015. Free cash flow increased $27.5 million or 29% to $122.1 million as of December 31, 2016, compared to $94.6 million as of December 31, 2015.

I will now turn the call back over to Mark for closing remarks.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [5]

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Thanks, Brooks. We posted strong results for 2016, and ended the year on a positive note. It's important to remember that we are still in the early stages of a multi-year turnaround. Our experienced leadership team and our operating model have us well-positioned to continue to generate operational and financial improvement in 2017 and beyond. Slide 16 and 17 highlight our multiple drivers for revenue growth and margin expansion.

Looking at revenue on page 16, our long-term core growth target of 4% to 5% will be driven by attractive end-market growth, pricing opportunities, continued innovation, and channel investments. To complement our organic growth strategy, we have robust M&A opportunities. Our global platform, strong free cash flow generation and ready access to capital markets will allow us to be an active M&A player to further drive our financial performance.

As we turn to EBITDA margin expansion on page 17, we are focused on operational excellence opportunities through our JEM business system, things like productivity and strategic sourcing. We expect to see profitable revenue growth from new products, share gains, pricing, and operating leverage. And finally, our disciplined approach to acquisitions focuses on accretive transactions with attractive synergies. These factors drive our long-term target adjusted EBITDA margin of 15% or more.

I'll wrap up on slide 18 with our annual outlook for 2017. For the full year 2017, we expect total net revenue growth to be in the range of 1.5% to 3.5%. We expect 2017 adjusted EBITDA to be in the range of $435 million to $455 million, representing a 10% to 15% growth rate. Lastly, we expect capital expenditures to be in the range of $90 million to $100 million. Our underlying assumptions anticipate improvements in demand drivers in our diverse global end markets, as well as constructive macroeconomic factors. From a net revenue perspective, our 2017 expectation of 1.5% to 3.5% is driven by core growth.

In addition to the core growth, we expect 1% increase in net revenue contribution from the 2016 acquisitions. Now, please remember that after 12 months acquisitions become a part of the core. So this 1% is from deals that have not yet hit the one-year mark. We expect that the 1% increase from acquisitions will largely be offset by unfavorable foreign exchange across the global business. Our assumptions also include continued margin expansion by executing on the initiatives of our operating model. In conclusion, I want to thank all of JELD-WEN's associates again for their hard work. We would not be able to achieve any of these results if it wasn't for their efforts.

With that, I'll now ask the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions). Bob Wetenhall, RBC Capital Markets.

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Bob Wetenhall, RBC Capital Markets - Analyst [2]

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Good morning and congratulations on a successful IPO.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [3]

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Thank you, Bob.

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Bob Wetenhall, RBC Capital Markets - Analyst [4]

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I wanted to ask about your thoughts on the core North American market, if you could give just a little bit more granularity on your expectations for the pricing environment given that the three large competitors that are in this space are public. How do you think about that in 2017 given your relatively favorable outlook for underlying demand trends?

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [5]

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Sure, thanks for the question, Bob. We do see the underlying market in North America to be remaining quite constructive. Just, I think, yesterday we saw some good numbers around housing starts up here early in the year showing improvement again on a year-over-year basis. And as you think about where we sit versus the long-term trend, we're still well below that trend line. So we think it remains constructive, and we think in that environment we will be able to continue to bring some price to the market across all of our product lines. And as we look at what our peers are doing and what we're doing, we see sort of broad-based movement in terms of pricing.

As the market continues to strengthen throughout the year we'll reevaluate how much price we can take at the end of the year as we roll out the following year's price increase, but this is the pattern that we intend to establish where each year we bring the market an increase. It may be larger, it may be smaller depending on the strength of the market and things like inflation, but we do want to establish that cadence.

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Bob Wetenhall, RBC Capital Markets - Analyst [6]

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Thank you very much. That's helpful. And it sounds like it's a positive trajectory. I also wanted to follow up. If I'm looking at the midpoint of your guidance that Brooks provided, it looks like your implied EBITDA margin for 2017 would be somewhere between 11.7% and 12%, so approximately 90 to 120 basis points of improvement. Can you give us your confidence level in achieving that range? And what is the delta, where do you see the key drivers of that EBITDA margin expansion? Is it gross margin improvement or is it SG&A leverage and what specific operational initiatives support that?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [7]

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This is Brooks. So if you think about our long-term objectives, we're thinking we want to improve 100 and 150 basis points per year over the medium term, right, so over the next two to three years to get to our longer term objective of 15% EBITDA. And between those bands, it's really a couple of things, it's how much leverage do we get on the additional sales and how much price are we going to pull versus volume. How much do we want to continue to invest into business from an SG&A perspective, which kind of determines the leverage, and then how successful are we on our JEM programs on productivity and sourcing, right. So, all three of those play together. And if we're able to hit on all those programs, we will definitely be in the 150 range and if not all the programs hit simultaneously or one lags behind another we still think we can deliver that, at least 100 basis points kind of improvement.

And I would say if you look forward where is it going to come from, over the past two or three years, I think, we've been probably more on the growth and price side which has delivered more of the year-over-year improvement from a basis points' perspective. If you look at 2016, we probably got about -- if we're up 150 bps probably 10 of those bps came from acquisition accretion and then the other 140 are split pretty evenly between price and organic growth, and then sourcing and productivity in JEM improvements.

I think if you look forward that's going to flip a little bit, probably do a little bit less on price, a little bit more on productivity. So, it'll probably be 60% productivity sourcing, and then 40% organic growth as you look forward over the next two or three years.

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Bob Wetenhall, RBC Capital Markets - Analyst [8]

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That's very helpful, gentlemen. Good luck.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [9]

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Thank you, Bob.

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Operator [10]

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Mike Dahl, Barclays.

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Mike Dahl, Barclays - Analyst [11]

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Thanks for taking my questions and congrats on the successful IPO.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [12]

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Thank you.

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Mike Dahl, Barclays - Analyst [13]

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I wanted to pick up with some of those comments, Brooks, and focus specifically on the sourcing component. I think we certainly got some questions around just with some inflation in certain commodity buckets, how to think about the opportunity for that sourcing or the sourcing initiatives. And if you could help us kind of frame that up, and maybe highlight some early wins that you've had and any quantification on that front would be helpful? Thanks.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [14]

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So, we want to be careful about splitting, because splitting between sourcing and productivity, because they really go hand-in-hand. There's certainly a BABE or a material cost out that goes along with the sourcing fees. I can tell you from a high level, as we got to the Company and we started looking at the overall sourcing program, there was really never a cohesive global sourcing strategy. And so, we've done a lot of work over the past 18 months where we've looked at all of our spend and everything we're doing from a sourcing perspective. And so, we've got a three-year plan that's going to deliver these sourcing savings. And so, if you think about -- the comment that I just made, 60% of our savings -- 60% of the bps of improvement coming from productivity and sourcing, you'll probably want to think like 30% to 40% of that 60% coming from the sourcing side. And again, that's going to change a little bit with inflation, it's going to change a little bit with the decisions we make on our manufacturing profile and where we make things, and do we go after material cost out from a BABE perspective versus a sourcing perspective. But it's a significant piece of what our savings is going to be. And we have pretty good line of sight and pretty good confidence to what we're going to deliver in 2017. The good thing about sourcing is you're able to lay those plans in pretty far ahead of when the savings comes in, because you have to test, and you have to specify, and you have to run through your old inventory, and so you get a pretty good confidence level. So we're pretty confident, and pretty confident in that 30% to 40% of productivity coming from sourcing. Does that help?

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Mike Dahl, Barclays - Analyst [15]

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Great. Yes, that's very helpful. And then shifting gears to the top line side, I think, Mark, one of the things you've talked about is innovation, and we've seen the vitality index kind of tick-up over the past couple of years. So I was hoping you could give us a little more color on how you're thinking about the contributions from mix and innovation as we get through this year and next.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [16]

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Sure, thank you. Appreciate the question, Mike. If we step back a few years, three or four years ago, we found the Company in a position where coming out of the downturn R&D and innovation was one area that had been cut back to try to get through those difficult times. And we began reinvesting in R&D, not only by bringing more people to the R&D organization, but by putting in processes, processes that have been proven to work at other places that are known for innovation, places like Cooper, and Corning, and Danaher. And we brought these processes like a five-stage tollgate process, say, a portfolio process, so you pick the best projects. We installed product line managers who could go out and get the voice of the consumer and the voice of the customer and translate that into product line roadmaps, so that we knew where we were going.

But much of that has frankly been catching up, and closing gaps that had been created during that downturn when we were sort of out of the game. I think we've largely closed the vast majority of those gaps. And we're now starting to be in a position where we can look at being the one creating gaps that will cause our competitors some concern. We're very pleased with the talent that we've added to R&D, but I would also just note that, related to your pervious question, we did take about a third of that group and turned them for about a year on qualifying new materials to support the sourcing program that is getting some early wins. And so, we've used our R&D resources in that way as well.

Even so, as we look back over that three years, last year we launched nearly twice as many new products as we did three years before. And you mentioned our vitality index over that same timeframe, it has doubled.

Now it takes some time for these products to penetrate the market. We usually look at about a three to four-year penetration curve. And so we're early on that curve, but we're very excited about the new products we have, and the market response has been very positive.

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Operator [17]

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Nishu Sood, Deutsche Bank.

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Nishu Sood, Deutsche Bank - Analyst [18]

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Thank you and let me add my congrats on the IPO and the first call here. I wanted to start talking about the Americas division. Nice strong sales growth in the fourth quarter. Brooks, you mentioned that the soft patch in 3Q, there was some recovery from that, also the favorable comp. So, on the soft patch, now that that's in the rearview mirror, first the soft patch and then the recovery, so I was wondering if you could give your thoughts on what might have driven that and then the subsequent rebound. Also the favorable comp in 4Q 2015, it kind of runs counter to what we've seen with a lot of the other building products here, construction companies where the 4Q 2015 comp was pretty difficult because of weather. So I was wondering if you could just kind of give us some additional color on both of those, please?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [19]

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So first of all, let me preface this by we debate long and hard about how we want to go out with guidance and things like that. One of the big things for us is because of weather patterns and because of the regional nature of the business in the North America there can be some chunkiness from quarter to quarter. If you look over the course of the year things tend to even out, but there can be some chunkiness of wins and losses and things like that. And so that's why you kind of see some of these flips. I could tell you from a Q3 2016 perspective, we went out and surveyed our customers and they all saw the same thing that we saw, was that soft patch in Q3 of 2016, and it was fairly industry-wide. I mean, you saw a lot of our peer group talking about it as well. So there was a lot of speculation on what it might be, different things like the first half of the year was so strong and so people kind of slowed down in Q3, different things like that.

I really don't know the underlying reasons, I just know that it was a soft Q3. And that gave us concern on, well, is this a longer term trend or is this just a soft patch, and then in Q4, obviously we bounced back and had a really, really strong Q4, we believe. So I think what that really is, as you looked over the course of the year is just that chunkiness in different quarters and when you look at the whole year and you go, well that's a pretty good indication of how you did, even though you may have had a flip from one quarter to the other. If you look back at 2015, again I think there was a couple of things -- there were some odd ordering patterns in 2015 with some of our big retail customers that got corrected about half way through the quarter, but from a flow through perspective just never got completely out. And so that was a little bit of what was going on in 2015 into Q4.

But I think if you kind of look ahead, I think for the most part 2015 was a more normal quarter in terms of how we think things usually phase to where Q4 tends to kind of trail off a little bit, as opposed to 2016. So I don't think anything more than that -- more than just kind of that industry variation in terms of weather and regional building, and things of that nature. So, I know it's not probably a great answer, but hopefully that gives you some sense of how we're thinking about it.

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Nishu Sood, Deutsche Bank - Analyst [20]

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Got it. No, appreciate the details there. With the stronger revenue trend in the Americas, and then thinking about the strong EBITDA leverage that's implied in your guidance, and obviously the ambitious EBITDA margin target, should we expect that given that the Americas is stronger that that's where the EBITDA margin growth might be a little bit stronger or is it rather the case that a lot of these initiatives are internal and in terms of the sourcing and the productivity, and the lean manufacturing, so therefore it should be more evenly spread out across the regions?

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [21]

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Thank you for the question. This is Mark, again. And I think it's more of the latter, we really are a self-help story, so much of the opportunity here exists within the four walls of the Company. It doesn't mean that a strong macro environment and some tailwinds aren't appreciated and they don't help, they do. And definitely of the three geographic markets, we would agree that the North American market is going to be the strongest. But we have very compelling opportunities to improve EBITDA in all three regions, their performance today are very comparable and every year the three EVPs who run each of those regions claim at the beginning year that they are going to come out on top and it's always a little bit close. So I think you'll continue to see these three compete to see which one can and does deliver the most EBITDA improvement.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [22]

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Yes. And I would just add to if you look back historically I think North America probably fell the farthest behind during the downturn, they got the biggest -- the way the economy and the housing market turned down in North America caused them the most problem. And so, they had the most ground to make up. And now they really kind of gotten back on par with the rest of the businesses, you're going to see the same level of trajectory improvement -- same trajectory of improvement kind of across the world.

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Nishu Sood, Deutsche Bank - Analyst [23]

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Great. Thanks for the thoughts.

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Operator [24]

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Jason Marcus, JPMorgan

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Jason Marcus, JPMorgan - Analyst [25]

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Good morning, and congrats again on the IPO.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [26]

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Hi. Good morning, Jason. Thank you.

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Jason Marcus, JPMorgan - Analyst [27]

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So, just want to touch on the trend in North America again from a top line perspective. Obviously very strong trends there. Wanted to get a sense from the product category standpoint if there were certain categories that were growing faster than others and how you would characterize volume growth relative to mix in the quarter. And then I guess lastly from a regional perspective, if there were any areas that were noteworthy?

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [28]

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Sure, we can do that. Brooks, go ahead.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [29]

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So, I would say from a product perspective, what we've seen -- I think both from a mix and from a volume perspective is the exterior door business probably a little bit stronger particularly on the fiber glass side. If you think about our overall North America business that's probably where we're the least penetrated and we have the most opportunity to gain share.

And then even on the steel doors, on the exterior side, we've seen some nice growth and we've done some nice things on innovation with new steel offerings that are coming out that people are attracted to. And then the other product line, again, I would say is higher end vinyl win business has been pretty strong and that's been kind of in the upper single digits in terms of gross. So, I would say from a product line perspective, those are the areas where we've seen the most growth and probably see the most opportunity.

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Jason Marcus, JPMorgan - Analyst [30]

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And from a regional standpoint?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [31]

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Well, I think from a regional standpoint, obviously, there're big economic factors in there as well. I'd say Australia is facing a tougher housing market, but they are actually doing pretty well, they are actually still seeing growth and they see great opportunity particularly on the RNR side to be able to -- maybe not certainly grow, but certainly be able to do better than what the market is predicting. And I'd say on the European side, for the most part, the market indicators are pretty good, kind of in this mid-single-digit range from a growth perspective with UK being the outliner. The Brexit issue is a pretty big unknown and so that's really kind of -- we're thinking about that more in terms of flattish from a market headwind or tailwind perspective. And then North America, we kind of been through that.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [32]

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The only thing I would add is that the UK is about 5% of the total Company revenue, so our exposure there is not enormous.

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Jason Marcus, JPMorgan - Analyst [33]

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Okay. And then just going back to Europe, obviously volumes were a bit choppy during the year, but I think you continue to get about 2% or so price throughout the year. So just wanted to get a sense as to how you'd characterize the pricing environment in Europe and your outlook there for 2017.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [34]

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Happy to. This is Mark. In the United States and Canada, we started probably 18 to 24 months ago doing some price resetting and really focusing on repairing EBITDA margins. Europe is a little bit behind in that process and so what you see in our results last year, we were able to get some price, in some cases we saw business that we also needed to exit.

We believe the vast majority of that is now complete from the decisions that need to be made. Do keep in mind that until you lap some of those decisions and you'll feel some of that impact in terms of how it looks in terms of growth, but we think most of that is behind us.

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Operator [35]

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Stephen East, Wells Fargo.

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Stephen East, Wells Fargo - Analyst [36]

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You know Mark just to follow-on a little bit if you look at your guidance for 2017 on the revenue side, you've got a little price in there. Your FX is offsetting your acquisition. But as you look at your volume between price and volume which do you think is the bigger driver this year? And do you have any particular areas, it sounds like Europe you're starting to accelerate that but that pricing still behind the US. So, just trying to understand the volume versus pricing as we go through the year.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [37]

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I think the way I like to think about this, we got our long-term target for the Company to grow 4% to 5%. Obviously, our guidance is a little bit below that in 2017 and I think of this in terms of there are some things that are helping and there are some things that are kind of tracking from our top line growth. So, first of all, certainly the North American market is helpful, it's constructive and as you mentioned we see opportunity to continue to get price, not just in North America but also in Europe.

And then from channel investments or innovation investments or brand investments, we're starting to see those starting to contribute as well. But on the negative side there were some decisions we made last year and although these decisions are behind us, the implications of them are felt in 2017.

So, for example, there was a fairly sizable chunk of business in Florida with a large retail customer that as we worked our way through some negotiations there we determined it was not attractive business for us, it's a fairly significant amount of top line revenue, not a very significant amount of EBITDA. And then as I said we're largely behind the same kind of decisions in Europe. We don't have any single big chunk in Europe and we've made a number of smaller decisions that when you add them up, it's meaningful. Now those implications are going to be felt this year. So, for example, on the Florida business, we start exiting that here next month. It will take a little while to exit it and then we'll feel that for the next 12 months when we do comparables, and the same thing in Europe we made decisions last year that were feeling today. So we think there is about a point to a point and a half from a percentage point standpoint that's a result of those decisions that we still have to work our way through this year. And I think the other thing that's bit of a headwind for us is the Australia market. That market got quite frothy over the past couple of years and now they are in a cyclical downturn, we think that overall housing starts are going to be down double-digit.

Single-family where we're most exposed will also be down probably mid to high single digits and that certainly will have an impact on us. We think we will be low single digit negative from a revenue standpoint in Australia. So when you add all of that together that's why we end up with this 1.5% to 3.5% guidance. And in terms of this specific question around price and volume, we really don't want to guide. We want to maintain the flexibility when it makes sense and is best for the business and for the Company to use a little bit of price -- or a little bit of volume or vice versa, we want to be able to trade those off in the smartest way possible and we feel like giving guidance around that, actually may tie our hands a little bit.

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Stephen East, Wells Fargo - Analyst [38]

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Okay. Fair enough. That was a great explanation I appreciate that. And then as you look at the M&A side of the world I guess a couple of questions embedded there, what's the market look like? We think you have capacity of maybe $400 million plus that you could put the work but where is your comfort level regarding size and geography on that? And then just one quick housekeeping question for Brooks, accounts receivable is up a lot year over year so just wondered what was driving that?

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John Linker, JELD-WEN Holding, Inc. - SVP, Corporate Development & IR [39]

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Stephen, this is John. I'll take the M&A question and then Brooks can circle back on the AR [subject] things, but on the M&A front the pipeline is good and healthy in all three of our geographic segments both in terms of near-term activity as well as longer-term cultivation opportunities. I think as we think about what's ahead of us, I would expect -- we would like to continue executing on more of what we've been doing, which is filling in gaps in our product or service offering with some of these smaller bolt-on companies that are growing faster than we are in certain segments or have specialty offering that we can fill in and really accelerate our core growth. We also continue to see some opportunities in certain markets and certain submarkets to consolidate when there's some fragmentation in certain markets, but really all these opportunities really tie back to our strategy in some way of how are we going to use this M&A lever to accelerate our core growth in the future years. So, finding ways to grow around our core through M&A is really the strategy there.

In terms of actual capacity and guidance and levels of activity there, obviously it's very tough to predict M&A in terms of what's going to fall when, and so we can't really control that. So we can't give specific guidance around it. But what I can tell you is, as you mentioned we do have some good liquidity particularly post-IPO in terms of cash and undrawn revolver availability, our leverage is at a good spot right now. So, if we can continue to execute on this bolt-on M&A strategy, keep our leverage in our 2.5 to 3.5 net leverage target zone and continue to deliver on bolt-on M&A, we'd be very pleased to deliver what we did last year, which was 7% M&A growth. We don't know if we will hit that this year, but we think that would be a great outcome if we can continue to deliver within those parameters.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [40]

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Yes. On the AR question, at the end of 2015, we had pricing negotiations with a large retail customer that were really all-in in terms of everything, our terms, our pricing, our rebates and because of that we had a terms change and that terms change impact in 2016 was about $50 million to $60 million. That's a one-time event that will not happen again in the future, but that's what's driving the whole AR question.

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Stephen East, Wells Fargo - Analyst [41]

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Okay. Thanks a lot.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [42]

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I would just add that basically on the terms change we were basically turning back to something more normal from something that was a little less normal.

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Operator [43]

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Will Randow, Citi.

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Will Randow, Citi - Analyst [44]

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I guess just two follow-ups from prior questions. So looking at your EBITDA operating leverage or EBITDA dollar dropdown per dollar of revenue in the fourth quarter of 2016, you guys achieved 30%. For 2017 your guidance implies north of 50%. So similar to your previous comments in the call, can you kind of bridge the gap why operating leverage in 2017 should be stronger than the fourth quarter and to be fair I understand that 2016 was also north of 50%?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [45]

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Yes. Well, I think what you have to do is carve out the -- you have to carve out the acquisition piece and look at your organic piece and you look at the acquisition piece and once you carve that out, you probably see a more return to the norm what we're expecting in 2017. And in fact I can tell you in 2016, I talked about the 150 bps improvement, 10 bps of that coming from acquisition, the rest split between organic growth/price and then productivity and sourcing. As we exited the year, we're actually better than that. We were a little bit closer - we are closer to that 60% coming from the organic side. So, I think what you really have to do is put that acquisition piece out and look at the acquisition piece separate from the organic piece, and then starts to make a little bit more sense.

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Will Randow, Citi - Analyst [46]

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That makes sense. I guess in terms of thinking about 2017, understanding that one of your goals is what I would call contacting up when you think about product extensions like offering LaCantina in different regions, can you kind of review your thoughts on how that should drive core incremental profitability and what progress you've made so far or planning to make in 2017?

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [47]

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Sure. You're absolutely correct that mixing up is an important part of our strategy and as you look at what's in our innovation funnel, as well as what's in our M&A funnel, you'll see the vast majority of those projects are aimed at ways to mix up. So, just in the last six months, we launched a new top-of-the-line, very contemporary design, wood window products called EpicVue. We offered a new impact product, again high-end wood window product for the Florida market. This is to serve the hurricane belt with the high end wood product. You look at our fiberglass door offerings and you'll see, again, we're bringing to market from our innovation pipeline very high end products that will make it interesting for our customers and our consumers to mix up.

And then if you look at the things that we have been buying, you mentioned one already LaCantina fantastic, best of breed, high end wall system. This is very fast growing segment of the market, growing double digits. And we went out and bought, what we believe is the best brand and the best product. And when we bought them, they were largely focused on the southwest of the United States.

We've worked hard to put in place the infrastructure for that to become a truly national offering. And we are in the process of rolling it out to the rest of the country and that's going very well. And ultimately that product will also, I think, find its way to places in Australia and other international locations. So, those are some of the initiatives that are driving the mix up and this will help us as we seek to become this 15% or higher EBITDA company.

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Will Randow, Citi - Analyst [48]

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Thanks again guys, and congrats as well on the progress and IPO.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [49]

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Thanks. I think we have time for probably one more question then we'll wrap it up.

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Operator [50]

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Josh Chan, Robert W. Baird.

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Josh Chan, Robert W. Baird - Analyst [51]

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Congrats on the IPO as well and thanks for taking my questions. I wanted to ask about the Australia business. The acquisition contribution is very strong and the margin is very strong as well. Is that a function of seasonality or what would you highlight there driving the strength in those areas?

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John Linker, JELD-WEN Holding, Inc. - SVP, Corporate Development & IR [52]

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This is John here. So the acquisitions that we did in Australia last year were Trend and Breezeway. Trend was our next largest competitor in the window market. It was privately owned and not very well run from a profitability stand point. And so with that acquisition we have a very clear line of sight around cost synergies, particularly around the sourcing side and the overhead side. And so, with that acquisition we were able to add a very substantial amount of revenue and within the first 12 months with the clear synergies we have we doubled their profitability on a EBITDA margin basis in the first 12 months. So the flow through of that acquisition was pretty substantial and contributed to the very nice margin improvement you see there.

And then secondly, the well to a lesser extent the other acquisition we did in Australia Breezway, which happened in the third quarter. It's a smaller business but the margin profile of that, this is Louver Window, it's very high end specialty product, the margins of that business were far and way higher than anything else in the JELD-WEN portfolio and were immediately accretive to our margins there. So, some great contribution from an acquisition activity stand point in Australia, but also we did see positive price in that market in the fourth quarter and the full year, about 2% as Brookes mentioned in his slides. So that contributed to the nice margin improvement as well. So, good mix of improvement in the underlying core business as well as the additions from the acquisitions.

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Josh Chan, Robert W. Baird - Analyst [53]

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Okay, great. That was great to hear. If I can switch over to the free cash flow. I appreciate Brooke's earlier comment on the receivables. In terms of looking at 2017, how should we think about free cash flow in terms of whether a conversion or a percentage of sales, how are you looking at free cash flow this year?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [54]

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What we are looking at is a percentage of net income, just strictly on a GAAP basis. And our goal is always going to be in excess of 100% conversion on net income. If you look at our capital spend plan versus our depreciation amortization, you look at our cash tax rate, which should be in the mid-teens versus the GAAP tax rate, closer to 28% to 32%, we feel pretty confident, we can achieve those goals of over a 100% conversion on net income, but that's the way we think about it.

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Josh Chan, Robert W. Baird - Analyst [55]

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Okay. Great. Thanks for the color and congrats on a good quarter.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [56]

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It looks like we still have about two minutes left. Let's do one more guys.

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Operator [57]

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Alex Rygiel, FBR.

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Alex Rygiel, FBR - Analyst [58]

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Gentlemen, I want to thank you for a very professional conference call with slides, guidance and plenty of details, super helpful.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [59]

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Thank you.

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Alex Rygiel, FBR - Analyst [60]

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First question, as it relates to SG&A as a percentage of sales relative to peers, what kind of trend can we expect from JELD-WEN over the next sort of three years?

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [61]

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Yes. So I think, over the past three years as we've improved the profitability of the Company, and as we've laid the foundation on JEM and our cost out initiatives, we've also had to add some pretty significant SG&A challenge, from an IT perspective, from an R&D perspective and then also, really getting ourselves beefed up to be a public Company, right. And so, we've made a lot of those investments and a lot of those in our rear view mirror, what we really focused on now is getting the value of those investments. And so, we're looking as we go forward, and when you look at it from a GAAP perspective, there's a lot of noise in the numbers, as an example, Q4 we had the dividend recap, and so we paid out approximately $20 million of dividends for options and our shareholders have flowed through the income statement from a GAAP perspective and SG&A, and so you kind of factor those things out. We're really looking to stay flattish from an SG&A perspective and start leveraging that top line up. And so, we're going to continue to invest in the business as we continue to grow. But we really want to stay flat from an SG&A perspective and kind of harvest the investments we made.

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Alex Rygiel, FBR - Analyst [62]

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And lastly, are you expecting any major line reviews aimed at large customers in 2017, and any quick early comments about your recent price increase in North America?

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [63]

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Sure, this is Mark. Now each of the large retail customers conducts a line review about once every three years and they break it up, they don't review everything. For example, they will do a door line review and a window line review and then separate patio doors into another line review. And so, pretty much every year we'll see at least one maybe two line reviews amongst all the retail guys. We do have one line review this year at each of the two biggest retailers and that's pretty typical.

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Brooks Mallard, JELD-WEN Holding, Inc. - EVP & CFO [64]

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And there was a second part of the question. Our price -- basically we rolled out a price increase late last year. We've seen many others of our peers do the same. These price increases are basically shown as a list price increase and then we realize something less than that. The list price increase that we've rolled out was basically mid-single digits. And again, we have to then go customer-by-customer and negotiate how much of that sticks. I'd say early days, it's going pretty well.

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Alex Rygiel, FBR - Analyst [65]

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Great. Thank you again.

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Mark Beck, JELD-WEN Holding, Inc. - President & CEO [66]

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Thank you. We just like to say thanks to all the participants on the call. We appreciate the questions. We really do appreciate your interest in JELD-WEN and our story. And we're feeling pretty good about the progress that we're making, but we recognize there's much more runway ahead and that's what makes this so exciting and so fun, and we really look forward to developing a partnership with all our new shareholders as we continue on this journey and now continue it as a public company. So, thank you for attending today and we wish you all to have a great day.

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Operator [67]

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Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.