JELD-WEN Holding, Inc. (JELD) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to JELD-WEN Holdings First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Linker.

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’ll be referencing during this call. I’m joined today by Kirk Hachigian, our Chairman and acting CEO; and Brooks Mallard, our CFO. Before we begin, I would like to remind everyone that during this call, we may 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 the 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 this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Kirk.

Thank you, John. Good morning, everybody. I’d like to begin with a background slide to share with you my overall perspective since I became acting CEO of JELD-WEN in late February. I’d also like to contrast my views from when I was the CEO in 2014 and 2015. If you please turn to Page 4. With regards to what’s working well, I still firmly believe we have the right strategy to drive exceptional shareholder value, with a rich global footprint and the right product offering, with a broad mix and global size and scale, we have significant margin improvement opportunity in the existing business today. Our capital deployment policy has been world-class. In the last three years, we’ve acquired 12 great businesses, filling important products in geographical gaps at very attractive valuations. We believe our M&A strategy will deliver exceptional returns, and so far, these deals have – that we’ve done are far outranking our planned returns. Our global sourcing program is executing very well. We realized deflation in 2016 and 2017, and while we’ve seen some modest inflation in the first quarter, freight and other commodity pressures will continue as an issue into 2018, as we progress in the year. But our teams are in place and are executing very well. Our global marketing teams have done a great job on a comprehensive set of initiatives in branding, channel management and e-commerce. We’ve also commissioned a new showroom and training center in Charlotte that will provide outstanding tool for our employees, customers, and investors for years to come. And finally, our Australian operation has executed three straight years without a miss, while acquiring five businesses and building a new glass processing factory. Over the last four years, they have tripled their EBITDA from Australia. Now on the areas of opportunity and where my senior management team and I are spending 90% of our time. The North American business needs work to regain and realize its full potential. We’ve moved backwards in some critical areas of the business like talent, service and core growth. Over the last few months, we’ve restructured the team and we filled 10 critical positions. With these changes in a renewed sense of urgency, we expect to make substantial improvement in 2018, as the year progresses in both core growth and margin improvement. Our European business is better, but not yet great. We make substantial progress in France and in the UK, and our Central European operation remains excellent. We have work to do in the North around service, margin and productivity. Global productivity is still not working consistently. We have parts of our business successfully delivering productivity savings, offset by areas of poor performance. The net impact is limited financial benefit from productivity savings. This has to be better. We’re working hard to improve our execution. While our Q1 results demonstrate that we can get back to forecasting and delivering predictable results, we’re certainly mindful of our performance issues in 2017. We are now providing quarterly guidance, so we can better align with our investor community. Finally, we’re making good progress on the CEO search. Candidates are attracted to our portfolio, our $4 billion global company with great assets, a strong investor base and excellent future potential. We will keep you posted over the months ahead. If you please turn to page 5 for a quick review of the first quarter results. They were mixed compared to a good strong start in 2017, but we did deliver our guidance for the quarter. Revenue growth was solid, but mostly driven by acquisitions. Core growth globally was flat with North America being the main issue. The first quarter volumes in North America were lower due to continued impact of the 2017 retail rationalization and service issues, lead times that led to slower sales. These issues have been resolved, and as we head into the second quarter, we expect to see consistent improvement. As we enter the second quarter, we are feathering in recently announced price increases to offset material and freight inflation. As we do, we intend to strike a balance between price and share. In the first quarter, net income was up, but mostly driven by non-cash gains on minority equity investments and reduced interest expense. Our EBITDA was up 8.5% and margins were 9.3%, which is slightly down 20 basis points from last year’s strong performance. As I mentioned earlier, it was a solid quarter in M&A. We closed three strategic deals with over $500 million of expected annualized revenue. Our leverage is up slightly due to the cash outlay for the recent acquisitions and some timing on working capital that Brooks will comment on in a moment. And lastly, our Board has authorized the $250 million share repurchase plan through 2019, giving us an additional avenue for capital deployment, which we believe is very compelling with our stock at current market values. Now let me turn the call over to Brooks to review the details of the financial results for the first quarter.

Thanks, Kirk. Starting on Slide 7. For the first quarter, net revenues increased 11.6% to $946.2 million. The increase was driven by the contribution of recent acquisitions and the favorable impact of foreign exchange. Core growth was flat in the quarter, as growth in our Europe and Australasia segments was offset by lower volumes in North America. We reported net income of $40.3 million for the first quarter of 2018, compared to net income of $6.4 million in the prior year, an increase of $33.8 million. The increase in net income was primarily due to a $20.8 million non-cash gain and the related tax benefits on a revaluation of the minority equity investment, as well as reduced interest expense, partially offset by higher legal expenses compared to the same quarter last year. For the quarter, diluted earnings per share was $0.37 per share and adjusted diluted earnings per share was $0.30. We don’t include a prior period earnings per share comparison, as the second quarter of 2017 was the first full quarter, reflecting the share capitalization impact of our IPO. Adjusted EBITDA increased 8.5% to $87.8 million. Adjusted EBITDA margins decreased 20 basis points in the quarter to 9.3%, as they were unfavorably impacted by recent acquisitions and foreign exchange. Our core business adjusted EBITDA margins improved approximately 30 basis points. Additionally, I’ll note that, SG&A expense increased $25.1 million to $164.7 million due to higher legal costs, acquisition costs, as well as an increase in SG&A expense from the acquired companies. Net interest expense decreased $11.2 million to $15.7 million. The decrease was primarily due to lower debt levels compared to the prior period, as well as improved terms from our fourth quarter refinancing. I’ll note that we reported a tax benefit in the quarter of $4.0 million. Excluding the tax benefits associated with the gain on revaluation of the minority equity investment, our effective book tax rate was approximately 33%. As a result of our continuing analysis of the new tax reform legislation, we are revising our outlook for our 2018 book effective tax rate to 31% to 35%, excluding the impact of any potential distinct items. Previously, we had communicated an expectation for a book effective tax rate in the range of 23% to 27%. The increase is due to the expected impact of GILTI inclusion on our foreign taxable income. Slide 8 provides a buildup of our revenue drivers. The 11.6% increase in our consolidated revenues was driven by a 7% contribution from recent acquisitions and favorable foreign exchange impact of 5%. Core revenues were flat and comprised of a 1% benefit from pricing and a 1% decrease from volume mix. Next, I’ll move to the segment detail beginning with North America on Slide 9. Net revenues in North America for the first quarter increased 2.8% to $497.9 million. The increase in net revenues was primarily due to a 4% contribution from the acquisition of MMI Door and a 1% impact from foreign exchange, partially offset by a core revenue decrease of 2%. The lower core growth was primarily due to the volume impact of the previously announced Florida business rationalization and reduced volumes in our windows and Canadian businesses. While our service and delivery metrics in windows have significantly improved, volumes continue to recover from our 2017 operational inefficiencies. Excluding the impact of the Florida business line rationalization, our U.S. door business generated mid single-digit core revenue growth. Adjusted EBITDA in North America decreased 6.3% to $47 million. Adjusted EBITDA margins decrease by 100 basis points to 9.4%. The decrease in adjusted EBITDA margins was primarily due to reduced leverage on lower core volumes, price-cost lag on materials and freight and the dilutive impact of the MMI acquisition. On Slide 10. Net revenues in Europe for the first quarter increased 24.5% to $301.7 million. The increase in net revenues was primarily due to the favorable impact of foreign exchange of 13%, contribution from the Mattiovi and Domoferm acquisitions of 9%, and core revenue growth of 2%. Europe’s volume mix increased 1% in the quarter and pricing contributed 1%. Adjusted EBITDA in Europe increased 24.3% to $33.8 million. Adjusted EBITDA margins were unchanged at 11.2%. Solid margin improvement in the core business was offset by the dilutive impact of foreign exchange and recent acquisitions. On Slide 11, net revenues in Australasia for the first quarter increased 20.7% to $146.6 million. The increase in net revenues was primarily due to a 13% increase from recent acquisitions, 4% from favorable foreign exchange and 4% core revenue growth. Volume mix increased 4% as a result of share gains across all product lines. Adjusted EBITDA in Australasia increased 26.4% to $16.7 million. Adjusted EBITDA margins expanded by 50 basis points to a 11.4% as a result of profitable core growth. On Slide 12, I’ll provide a brief update on our cash flow and balance sheet. Cash flow used by operations increased to a use of $65.3 million in 2018, and free cash flow decreased $73.7 million. The decrease in cash flow was primarily due to inter-year timing differences and working capital comparisons, such as increased inventory build in our North America Windows business and a mismatch in cutoff days for quarter-end receivable settlements in our international businesses. We expect these year-over-year working capital comparisons to normalize as the year progresses. Additionally, capital expenditures were higher by $17.6 million as we resumed normal levels of spending after a slower start in 2017. On the balance sheet, net debt increased by approximately $315 million since December 31, 2017, due to the cash flow usage from operations, as well as the impact of the three acquisitions that we closed in the first quarter. As of March 31, 2018, our net leverage ratio was 3.1 times, compared to 2.4 times as of December 31, 2017. Our balance sheet remains strong and continues to provide us with the flexibility to fund our strategic initiatives. Before we move on to our updated 2018 outlook, John will speak to our recent M&A activities.

Thanks, Brooks. Slide 13 highlights our capital deployment through M&A. With three closed deals in the first quarter of 2018, we’ve now completed a total of 12 acquisitions since 2015, representing expected run rate revenues of approximately $900 million with an aggregate purchase price of approximately $500 million, all at very attractive valuations. As you can see in this chart, the M&A activity was balanced by geographic segments as well as product lines. We’re fortunate to have an established platform for bolt-on acquisitions in all three geographic reporting segments, each with separate integration teams, enabling us to simultaneously pursue M&A targets in multiple markets. Most importantly, each one of these 12 acquisitions played a very critical role in filling strategic gaps in product and service offerings. In aggregate, the financial performance of these deals are ahead of plan as compared to our original business cases, and we’re pleased with return on capital thus far. In the first quarter, we were quite active closing the acquisitions, ABS in North America, Domoferm in Europe and A&L Windows in Australasia. These three deals add approximately $500 million in run rate annualized revenue. Currently, we are intensely focused on integration of these businesses and we’re off to a good start. Our M&A pipeline remains healthy, and M&A remains a high priority for cash flow deployment. That said, with our near-term focus on integration of recently closed deals and today’s announcement of our share repurchase plan, in the future, we expect to move towards a more balanced approach to capital deployment, combining both M&A and share repurchases. Now I’ll turn it back over to Brooks to go through our updated 2018 outlook.

Thank you, John. Moving to our financial outlook on Page 15, we are introducing an outlook for the second quarter of 2018, as well as updating our outlook for the full-year. For the quarter, we expect adjusted EBITDA of $135 million to $145 million, compared to $125.3 million in the second quarter of 2017. Second quarter adjusted EBITDA will benefit from the contribution of recent M&A, while core business margin improvement will be muted due to price cost timing lag on materials and freight and increased operational investments in core growth. Based on recent pricing actions that take effect during the second quarter, we expect the price-cost relationship to become more favorable in the back-half of the year. For the full-year, adjusting the previous outlook for the recent acquisition of ABS and for FX rates, we now estimate net revenue growth of 17% to 19%, which includes a core growth assumption of approximately 3%. The majority of the net revenue growth comes from acquisitions, as well as a small contribution from FX. Our outlook for adjusted EBITDA for full-year 2018 is unchanged at $505 million to $535 million, compared to $437.6 million for 2017. While we continue to expect an improvement in core profitability, overall adjusted EBITDA margin improvement for the full-year will be limited by the dilutive impact from recent M&A, as well as foreign exchange. The midpoint of our guidance assumes that core adjusted EBITDA margins will improve approximately 80 basis points, which is approximately 30 basis points lower than our previous guidance assumptions due to the price-cost lag on inflation in materials and freight, as well as temporary operational investments in core growth. We expect capital expenditures of $100 million to $120 million for 2018, compared to $63 million in 2017. The increase is primarily the result of the phasing of certain projects that moved out of 2017 and into 2018. Finally, we expect to deliver free cash flow in excess of adjusted net income. Kirk will wrap things up on Page 16.

Thank you, Brooks. I will close with a few summary comments. As you analyze, our first quarter results and our forecast for the rest of 2018, it should be quite clear that we’re focused on getting North American business back on track. We are rebuilding the team in critical roles that were restructured in November of last year. We continue to improve our service and lead times and are focused on maintaining those improvements. There is a big focus on cost out in all areas of our business. We can be much more efficient in our base cost and variable cost structure. We are executing on detailed cost out plans with specific objectives. We are focused on managing the substantial inflation in materials and freight that have materialized. We’ve announced price increases in all of our global markets, but we’ll be mindful of the balance with respect to core growth and share. And lastly, with the recent three acquisitions as we have with the prior nine acquisitions, we are focused on delivering the acquisition model and integration plans. Now prior to me opening up the lines for questions, I want to let you know that due to the ongoing nature of the Steves litigation, we will be unable to take any questions during the Q&A session on this matter. We previously disclosed the unfavorable jury verdict of February 15, 2018. However, no final judgment has yet been entered. The judge is still considering issues related to the trial and potential remedies. We currently anticipate that it will be midsummer before a judgment is entered. And once that is – once that judgment is entered and occurs, we will begin the appeals process. JELD-WEN’s trade secrets against the Steves started on April 30, and is currently ongoing. We intend to disclose the results of that trial when it’s complete. We expect this litigation to play out over the next year or two and we remain committed to availing ourselves of all potential remedies. Now I’ll ask the operator to open up the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Susan Maklari with Credit Suisse. Please proceed.

Good morning. I guess, to start out with, you noted in your comments, Kirk, that global productivity is clearly not consistent across the business. Can you give us a sense of how your approach or if it has changed relative to the sort of JELD-WEN excellence model that had been in place there, maybe some of the specifics that you’re focused on, especially in North America, and how we should think about that evolving over time?

So, yes. We took a gentleman, who was running customer service, customer care and he was promoted last year to lead the global initiative. Jim was specifically focused on windows in North America, and I would say, Susan, if you look at the progress of the benefits that we have made on the wood and vinyl windows side, they’re taking hold. I think, the key to what is more granularity, more process-based metrics, and then we’re also looking at some structural reform or restructuring on the physical rooftop side with all the acquisitions and complexity of our material flow in such. And I think that’s another avenue to unlock productivity as we go into 2018. We – as I said on the transcript part, we’ve seen and demonstrated that we can get it just not consistently and across all facilities in all parts of the world.

Okay. And then, I guess, your 2018 guidance implies the EBIT margin rise is about 80 basis points year-over-year. Can you give us some sense of how we should be thinking about the longer-term trajectory of that? How does it relate to maybe the 15% to 20% we sort of had been thinking about there and the rate of improvement as some of these initiatives come together?

Hi, this is Brooks. So, the way I would think about it is our 15% target over the medium-term is still intact. We still think we have all the levers to pull to get to that 15% EBITDA. I think, what we’ve seen this year is when you get into an accelerating inflationary environment, you can see some puts and takes in terms of that margin improvement. And so it’s not a linear improvement when you think about that 100 bps to 150 bps that’s out there. It’s not going to be a linear type improvement. But over the long-term, we will get to that 15%. We think the productivity thesis is intact and we’ll continue to drive cost out. We think we can continue to pull price, although we’ll also make sure that we defend our position in the market as we pull price to offset inflation and we think that we can take the acquisitions and we can make them better than what they were and we can continue to drive energy there.

Okay. Thank you. Good luck.

Our next question is from Tim Wojs of Robert W. Baird. Please proceed.

Hey, good morning, everybody. I guess, maybe on the EBITDA guidance. So I think the midpoint of the range implies margins to be lower year-over-year in the second quarter, but then you’ve got expansion at the midpoint for the year. So it does imply margin expansion in the second-half. So I guess, my question is just really on the visibility to that improvement. I mean, how much is – of that is just lapping the wood windows issues and the inefficiencies that you had last year and just improving general execution? And then how much is reliant on price capture to offset that inflation, and then just your confidence in being able to be more positive on price-cost in the back-half?

Yes. So – this is Brooks, I’ll take that one, too. So, look, and I think you got most of it there, right? So we think price-cost will improve in the second-half. We’ve got all the price increases in. Some of them have a little bit of a lag effect. We think we’ve got good visibility to material inflation and freight inflation. So we feel confident that we’ll make up some of the ground from the first-half and the second-half. We also think that as we fix some of our – as we continue to fix our operational issues and we come up against those easier comps, we’ll drive nice margin expansion through productivity in the second-half. I think, the third piece of it that gives us confidence in the second-half numbers is, we’ll start to get some volume wins in our sales, particularly in North America. We’ll have the Lowe’s business coming online. We’ve really executed well with our vinyl inventory – vinyl window inventory build in the first-half of the year. So we feel confident in that business. And then that coupled with the operational improvements should give us some nice volume tailwinds as we head into the second-half.

Okay, great. And then, Kirk, maybe just on the CEO search, I’m not sure how much you can really comment on it. But what are you looking for, I guess, in an ideal candidate to kind of take over JELD-WEN? And any sort of timeline that you might kind of have in your head would be helpful?

Sure. So we kicked off executive recruiter in February once we made the announcement. We canvassed probably 100 different resumes in the first screening of candidates. It was public, and so it was easy to screen. I would say, we’re down to 10 candidates and we’re using five members of the Board to be involved with the interview process. I think, in the next week or two, we will have it down to a very short list or a top candidate and trying to build a little bit of a consensus across the senior leaders of the board and doing reference checks and things like that. And so I don’t think this is going to be a drawn-out process, and I would guess that we will have resolution over the next month or two. It’s the intent of the company to get this done quickly and have the person in the chair relatively quickly. I would say, if you think about sort of the skill set if you go back to Page 4 that I talked to at the beginning of my opening comments, I think, it’s a real heavy background in operational experience, somebody who is very comfortable with digging into the granularity and getting that process-based capability. If you look at the great industrial companies that throw transformation in lean and productivity, I think, that experience set is really what we’re focused on.

Great. I’ll hop back in queue. Good luck on the rest of the year.

Thank you.

Our next question is from Phil Ng with Jefferies. Please proceed.

Hey, guys. Any color on how your competitors have responded to this rising inflation environment and how you’re balancing that between price and share, because you made some – you alluded some comments about defending your market share?

So here’s what I’d say, we’re pretty good at this, right? We brought our VP of Sales back in February, that was retired. We made a change on the commercial leadership role in our North American business. I would say, in all product categories domestically and abroad, we were probably the first in the marketplace across the Board. We have really good diagnostics at seeing where inflation is coming from, what’s going on with freight. And so our teams reacted pretty quickly in the marketplace. The thing that doesn’t happen in this industry so quickly is the rest of the market kind of realizing that moving on that. And so I would say, by and large, around the world, most of them don’t expect to get the price increases in place until the end of the second quarter. And so by definition, we drag our feet a little bit in realization. So I think, as Brooks commented that we would expect to see the full brunt of the price increases going into the third quarter would have hoped it would have happened sooner, but the market environment just didn’t cooperate. So, look, I give our team great credit in seeing it,. Brooks was on top of it, went out to the marketplace, but you have to be cognizant of where your competitors and market dynamics are and that’s across the Board around the world. So that’s the way I would answer the questions.

Got it. That’s really helpful color, Kirk. And then just from an organic growth standpoint, Australia was, obviously, quite strong. Talking – it sounds like a lot of that is share gain. But can you just give us a little more color on what’s working, how sustainable is that, and how you think about the market for the full-year? Thank.

Yes. So this is Brooks, I’ll take that one. So, we’ve been able to – even as there has been some headwinds on single family houses, we’ve been able to maintain and even grow our share a little bit on that side of the business. So we’re not being impacted by that. And I think, the bigger piece of it is, we’re really going after the repair and renovation market. We’ve got a great network of showrooms there. We’ve got a great network of dealers that can reach out to the public. And we really feel like we can more than offset the headwinds that we might be seeing on the builder side with gains we can make on the repair and renovation side. With the acquisitions we’ve done, we have a great suite of products we can deliver. We can deliver doors, we can deliver windows, we can deliver shower screens, we can deliver wardrobes, and that package together just works really nicely in the add-on market.

Okay. Great, thanks a lot.

Our next question is from John Lovallo with Bank of America Merrill Lynch. Please proceed.

Hey, guys, thanks for taking my question. The first one, Brooks, you mentioned that 100 to 150 basis points target is still kind of intact and you’re still looking for margin expansion and you’re still looking for that 15% over time. But is it fair to assume that that target has been pushed out? And if so, by how much?

John, let me take the first swing at this, and I’m going to give it to Brooks. So, when I came in 2014, this business was at about 4% EBITDA margin, right? And if I told you then, we could get a rough math 12%, not many would have believed us. I think, the path from four to 12 has been primarily getting rid of bad margin business, taking pricing actions to get us back to price points that were prerecession. There was a huge fixation with volume and post-crisis, we were not able to get pricing back to where it had become – where it had come from. So many product areas. We’re still not back 10 years later to market pricing pre-crisis, right? If you look at the levers that the company still has in front of it, it’s massive on the productivity side. We still haven’t hit the vein on that or the sweet spot on that. The way we came up with the 15% wasn’t just a random throw of the darts, right? We looked at 25 companies in the building products and we looked at their position and where they had been pre-crisis and post-crisis on pricing, and that’s the way we came up with it. I think the chunkiness of where that’s going to come from and how we get there is the piece that’s on the table this year, right? With a little extra inflation and freight and some choppiness of some issues, it’s not a 100 or 110 bps, it’s 810 bps in the plan as we have it. And I’d say, look, the other piece of it is honestly, taking prior a little bit more conservative view, given the transition of leadership in the company as well, right? So that’s the way I would frame it up. And we’re still focused on EBITDA growth. We’re still focused on cash growth. And again, I think, the big lever still is working the cost side of this business.

Okay, that’s helpful. Thank you. And then in terms of the leadership changes, Kirk, I think, you mentioned that there were 10 positions that were turned over in North America, that seems like a pretty deep restructuring. So I’m just curious, were these all senior-level folks, mid-level folks, and what was kind of the impetus behind that big of a change?

So I think, as you know, the business went through a restructuring in November and took out some of the North American leadership team. I think then what happened is, they couldn’t quite figure out what structure or what positions needed to be filled and how they wanted to run the business. And so, given that I had run the business historically, and I had known most of the management team and we’re comfortable in the industry and customers and such. The team has responded very well. We’ve restructured that we are not going to fill the North American President role. So the North American door, North American window, common sales organization, there was an open finance position in North America we filled. There were two big operations jobs that we have filled that we have filled. There were the VP of sales, as I mentioned, and then two regional Vice President positions. And so I would say, they are critical positions, right? You can’t run a $2.5 billion business with that many open critical jobs. And so the team responded very, very well. We have mostly hired people in that we have worked with in our previous lives. And so I would say, it all feels pretty good, as we go into the second quarter. And if you look at the fundamentals of April, it would suggest that things are back on an even keel and executing very well.

Okay. Thank you, Kirk.

Thank you, John.

Our next question is from Samuel Eisner with Goldman Sachs. Please proceed.

Yes, good morning, everyone.

Good morning.

Just on the revised kind of prior guidance, if you will. It looks like, obviously, you’re adding in the ABS transaction. So if I kind of exclude that, I think, your prior guidance has actually been lowered by about $10 million or $15 million on the EBITDA line, kind of rough math there. Can you maybe talk to the various buckets or components of why that prior guidance is being revised down? How much is price-cost-related? How much is additional investments, if any kind of additional color there would be great?

Yes. Hi, Sam. Thanks. And I think you hit it right on the head. I mean. we were – you’re right. In the middle of what that adjustment is and it’s almost entirely price-cost timing, right? As we’ve talked about a couple of times on here, I think, we were on top of what was going on from an inflationary perspective and what we needed to do from a pricing perspective, but the pricing has been pushed back there. Now I would say, that the inflationary impacts of freight and materials continue to escalate a little bit, as we kind of got through the first and the second quarter. So it’s almost price-cost, almost all price-cost. We do have some of those additional operational investments that we’re trying to put in place to make sure that we don’t – that we keep the customer happy in terms of service and delivery, particularly around the Lowe’s ramp and things like that, but it’s mostly price-cost.

And maybe just following-up on that price-cost comment. How much is it negative in the first quarter? How much is negative in 1H? And perhaps you can give us some greater details on your percentage of COGS as it relates to resin, steel, freight, just so we can have a better idea of how this impact might play forward if, in fact, there’s further inflation?

Yes. Well, I mean, that’s a pretty granular level of detail. What I can tell you – let me kind of frame it up for you this way. It’s pretty evenly split in terms of the dilution in the first-half between Q1 and Q2. As we start seeing some additional, I think, inflationary pressures that have somewhat been offset by prices, we did get some price increases in. And I’ll also tell you, it’s pretty evenly split between freight and materials again, in terms of the – the changes to the forecast, right? So freight has really been – we’ve seen freight rates up, 15% to 20%, in some places in addition to the difficulty in getting your hands around trucks at all. So that’s kind of the way that we’re looking at it. And for – and if you think about it just from a material perspective, in North America, it’s aluminum, it’s vinyl and, as I said, it’s freight. In Europe, it’s mostly wood, both from a supply perspective and a cost perspective, and in Australia the big cost driver has been aluminum. So those are the main buckets.

Helpful. Thanks so much.

Our next question is from Stephen East with Wells Fargo. Please proceed.

Yes, thank you and good morning. Maybe we can switch gears a little bit. The $250 million share of authorization, that’s a – Kirk, you mentioned the balance in trade-off between share repo and M&A. Could you just give us a little bit more what your thought process was there? And it sounds like what John said, there’s still a tremendous amount of M&A. So just want to understand better the thought process of implementing the share repurchase?

So the first piece of it is, I think, it’s been a stated policy that we’ll buy back the creep. We haven’t done that yet. And so we’ll lay into that right away. It’s about 2 million shares when you look at the last two years or $60 million. So we’ll start off with that and get that out of the market. I think, the second piece is the sediment in the market changes on building products companies because of interest rates and things. But the Board and the management team still have the same long-term trajectory of the business, right? We still think we get the 15%. We still think the cash flow of the business. We still think we have tremendous M&A options even if the economy does slowdown. And so, if these valuations and if the market isn’t overly robust, then we think it’s a great opportunity for us to reward the long-term shareholders. There’s a lot of fast money and people complain about that. But I think, buying back the stock is a very attractive financial return for use of cash, especially at these valuations, if you believe the economics of our forecast and what we think we can do with this business. So I put it that way. I’ll ask John to comment on the M&A. He’s deeply engaged and done a terrific job there.

Okay.

Yes, I mean, I think, with the three deals that we did in the first quarter, that’s one sizable deal in each of three operating segments and we’re going to be intensely focused on integration. So I think, while we are keeping the pipeline very full and active, continuing to cultivate deals, at least, for the next couple of quarters, I think, you’ll see us a bit more integration focused and make sure we get those right, keep our track record clean. And so that gives us the flexibility to pursue the share repurchases here over the next couple of quarters for use of cash. But over the longer period of time, M&A is absolutely still a very high priority and feel very good about deploying capital that way.

Okay. And if I can slip in one more question on the M&A. You’re going down channel into the distribution, I would like some thoughts there? And then, Brooks, on the price and inflation, could you give us an idea of what type of pricing level you all are putting through or you need to run flat, if you will, versus the inflation you’re seeing?

All right. I’ll hit the M&A one first. So yes, so the ABS and MMI deals you mentioned down channel. I would say that calling those businesses, distribution businesses is not really an accurate role of the – what they play in the marketplace. They’re certainly not traditional distribution. So these are two step, what’s called, two steppers. But they did provide late-point configuration of doors or value-added fabrication to the marketplace. They’re selling full door systems and – including the value-add components. And they really excel on quick ship, special order whole house packages and selling the same customer base as JELD-WEN to home centers and dealers. And these capabilities they were getting through ABS and MMI will actually allow us to offer existing customers and improved service offering and improved lead times. On the JELD-WEN side, owning these businesses will get us closer to the customer, allow us to sell a better and richer mix, so our full product line of both interior and exterior should drive some pretty attractive sales synergies. But I would say that ABS and MMI, these are pretty regional businesses in nature. And in other geographic markets around the U.S., we’ve got existing two-step partners, who are very loyal to JELD-WEN and carry a whole line of products. And we’re going to be very respectable of those relationships as we move forward. So it’s going to be a selective strategy for us. But in the markets where ABS and MMI are very strategic moves for us

All right. Thanks.

Hey, and then on price. Yes, and on the price side, what we typically do and we’ve gone up a little bit more, I think, obviously, this year. But you roll out kind of a mid single-digit price increase and then your realization tends to be kind of lower mid single digits, and that’s what we’re expecting this year.

Okay. Thanks a lot.

Our next question is from Michael Rehaut with JPMorgan. Please proceed.

Thanks. Good morning, everyone. First question, I just wanted to make sure I fully understood. In terms of the price-cost lag, just the mechanics of that. Am I to understand right that it’s going to be even a little bit more of a drag in 2Q versus 1Q, but then by 3Q, would you expect the price to fully offset the cost inflation headwind, or – and then it would – it potentially be a tailwind in 2019, or – and what’s the sort of percent offset that you expect to realize? Would it be 100%, 75%? Just kind of rough order of magnitude?

Yes. So I think, you’re thinking about the right way, and particularly, in relation to the last time we came out is, the price inflation – excuse me, the cost inflation has been a little bit stronger and the implementation of the price increases have been a little bit slower. So a little bit more upside down in the second quarter. As you get to the back-half of the year, all things being equal, that should be much better. We’ll have all the price increases going through and you start to run up against easier comps as you get to the back-half of the year. As you think back out farther than that, that’s pretty speculative. I don’t know what’s going to go on in the broader materials market or the inflation market or the freight, what’s going to go on with freight rates. So I hesitate to try to predict what’s going to happen that far out. And we’ll continue to move our price and sure that we cover off on that inflation depending on what happens in the broader market.

But Brooks hit it, Michael, on the head, right? You got the price increases going through at the end of Q2 in wholesale and then you have efficiencies through the factories and such that we chunked up in 2017. Son on a comp basis, it gets a lot easier in the back-half of the year, as we look at the year.

Great. I guess, just to clarify before I get to my second question. In terms of just price versus costs then as you get the full impact in 3Q, would that be a full offset to cost or would the other parts of the – in other words, productivity, manufacturing efficiencies make up for the balance?

No, it would be a full offset.

Right, okay.

And then the efficiencies go into the margin improvement in the third and fourth quarter.

Okay, perfect. And then just circling back to the share repurchase and, obviously, it’s a nice element to have that balanced capital allocation approach and gives a lot of flexibility as well. But just so I understand relative to Steve’s prior question, is the $250 million, is that a program that you expect to work through in more of a systematic, consistent basis over the next couple of quarters, where you would think that you would kind of exhaust that authorization by the end of the year, or is this going to be a little bit more opportunistic and – I don’t want to say, infrequent, but there won’t be necessarily like a specific cadence that you’re trying to implement?

So I think, two things. One is, we’ll move to get creep out probably fairly quickly, right? With the stock price where it is, there’s no reason not to fool around and try to time the market or anything like that. So we’ll move on the creep in a fairly consistent fashion with a program that gets those shares out of the market. The second thing will be mindful of is our leverage ratio. 3.0 is sort of where we’re targeted. So as we look at the year, the cash generation in the business ought to really pick off in the back-half of the year. We built inventory on vinyl. We had some timing issues in Australia. We stepped up the CapEx a little bit that affected the cash in the first quarter, but still think we’ll have a terrific free cash flow year. And so it depends where the stock price is. Of course, it will lay into the $250 million on a more aggressive basis in the back-half of the year, and it depends what we see on the M&A front, right? So it’s a hard question to answer. I have done it before and used it as a lever before to creating shareholder value and it worked effectively in a prior life and see no reason not to – so, as you sort of say have that avenue, and the Board is fully supportive of that.

Okay, great. Thank you.

Our next question is from Alex Rygiel with B. Riley FBR. Please proceed.

Thank you. Kirk, you’ve been through a few global economic cycles. How are you thinking about the North American economy today, and how you’re thinking about where the global economy is relative to North America?

It’s funny, Alex. When you look at our issues from 2017, right, they’re all self-inflicted right? There’s – I think, the U.S. economy and our business outlook is terrific. If you talk to our customers, if you talk to retail channel, if you talk to the people around the country, I think, everybody is really optimistic. I don’t see any dent in demand because of this recent interest rate move. I think, people are able to offset this commodity inflation. I don’t see that, that is going to stunt, repair, remodel and new construction. So, I think, we reported numbers that had core growth if you take out the Florida situation. Now we’re going to pick up the low situation. And if you look at April numbers, Alex, the input is terrific. Europe is growing, again, as well. I know, you asked North America. Europe is growing and even our team in Australia, wherein yesterday despite the slower housing starts down, they’re coming back to sort of a normal – more normal. We still think we’ll get positive volume growth because of the repair and remodel business down there, and our relationship directly with the homebuilders. So pretty – our issues for this year will not be the economy, right? We’re not going to lay into that as an excuse for not delivering the numbers.

That’s fantastic. Good luck.

Thank you.

Our next question is from Matthew Bouley with Barclays. Please proceed.

Hi, thank you for taking my questions. First question, could you elaborate a little on volume in North America now that you’ll be lapping the Florida rationalization? I guess, just what is your visibility into recovery in the Windows business at this point, as well as the challenges you called out in Canada? Thank you.

Yes. So on the – I’ll take the Canada one first and do it real quickly. So. there are some signs of a little bit of headwinds in Canada. The Toronto market has been doing very well, concerns about it softening. We really improved our Canadian business over the past couple of years, both from a pricing perspective and a cost perspective. And so we think we’re well-positioned to weather any slight market headwinds and continue to grow that business and do well there. I think on the North America side, as Kirk said, we’re well-positioned we think with the Lowe’s pick up. We think we’re well-positioned with the vinyl inventory windows build that we’ve done. So we think we should be in good shape from a capacity perspective as we head in to the seasonal uptick. And and we think the Windows business has recovered on its past dues and its service and delivery issues. So we ought to be in good shape there. So, as long as Kirk’s predictive analytics around the economy are good. We should be in good shape as we head into the second-half of the year.

Okay. That’s really helpful. Thank you. Second question, the working capital investment in the quarter. Hey, you called out some timing issues and as well as you just mentioned intentional vinyl inventory build. So is it something that you expect to kind of work off quickly here, or how do we think about the pace of that investment normalizing? Thank you.

Yes, it will happen throughout the year. I mean, look, last year, it was more of an anomaly last year than it is this year. I mean, this is a seasonal business. You need to build inventory through the seasonal, through the cyclicality of it. So that you have the right levels of capacity as you head into the busy season. And on the timing difference, that was just the timing issue between when cash receipts come in versus when we close the quarter. And so that will work itself off by the end of the year, because we close on a calendar year. So we expect all that to clean up through the course of the year.

Understood. Thank you very much.

Our next question is from Nishu Sood with Deutsche Bank. Please proceed.

Thank you. So, Kirk, thinking about the longer-term 15% to 20% EBITDA margin target, it sounds like what you’re seeing and kind of reviewing the business, is that there’s still substantial cost outs, a lot of inefficiencies in the process that can ultimately get you back to 15% to 20%. And obviously, that puts aside a lot of the price versus commodity variability that we’re seeing here. That – like, we’re in double digits on margins now, obviously, versus when the journey began. I think, investors have some sense that a lot of low-hanging fruit has been plucked already. What are you seeing now in your review of the business that that still gives you confidence that the efficiencies and the cost outs can drive you ultimately back to the high teens on a margin basis?

Yes. So if you look at some of the areas that we have improved, for example, in Europe, the French business was money-losing business for four or five years. We restructured our facility there, changed the leadership team, and that business today is tracking at 10%. We’ve taken some actions in the UK to improve that business on the both pricing and some efficiencies and think that business has turned the corner and made substantial improvement. If you go back to 2014, it’s an interesting question, was it easier to go from 4% to 12%, or is it easier to go from 12% to 15%, 16%, 17%? I would argue you have a better team in place. You have better tools and processes in place. We’re working on the ERP implementation. We’re working on systems. And I think, we have the right guys in place and we’ve finished filling some critical jobs. So, and we’ve made all these acquisitions and we haven’t really focused on improving the flow of materials or fixing the efficiencies within those facilities that we have. And so I think, I still think there’s massive low-hanging fruit on the productivity side of this business. I think what you’ll see on the windows side in North America, is that coming to fruition as we progress through the year? I expect doors to get significantly better as we get through the year. The Australians have been delivering. In the Europe out of North – outside of the North region, would suggest that we know how to fix it and we’ve got that kind of opportunity once we get the North turned around as well. So, I think it’s easier to get there when you have a full team and you’re already profitable. We’ve got some really good plans that we’re looking at to execute and help us execute within the four walls. I keep telling the guys at $4 billion, you ought to probably be 15% today, right? I keep saying that, we ought to look at our SG&A and look at our overhead structure and figure out how to get to 15%, we really probably don’t need a whole bunch of growth and restructure yourselves in such a way you can be 15% at $4 billion. But I think, it’s very doable. And I think it – the new CEO that’s going to be his charter, right? It’s going to be a heavy focus on cost and productivity and making sure that we have somebody who has that DNA in their repertoire. Sood, that maybe your last question.

Got it. And – yes, just also in terms of the prior experience and kind of kicking off this process and then returning. As the economic recovery continues in all your markets globally, I think that consensus view would be that the cost pressures are going to continue to rise. And so is it possible for efficiencies and for cost outs to overcome that, or will you continue to be behind the curve there just given how intense the cost pressure increases have been?

So I – again, I ran another industrial business for the better part of 10 years, and so you’re right. But our model is push pricing in such a way to offset the labor inflation and those inflationary pressures on purchase price. And then the efficiencies on scrap and yield and factory efficiencies ought to go into margin expansion, right? And so if we can get 2% to 3% cost of goods sold productivity year-over-year, that ought to go into margin enhancement. And if you look at our products and I had a large customer tell us that they went back and they looked at 40 different categories and where they were versus pre-housing crisis, majority of our products are still not back to where they were even on a non-inflation on a nominal basis to 2005, 2006, right> So I don’t think that our price points have gotten so high that we’re reducing demand, because people can’t afford the product, right? I think, we’re just getting back to entitlement of kind of where we ought to be on a vinyl window or a wood window, et cetera. And I would say the same thing overseas, right? If I think about the European business and Australian businesses, we’re not out pricing the market. So we’re not destroying the demand. But I think getting paid for the value we bring is certainly part of what we do, right? It’s not a commodity product. It’s got ascetics to it. It’s got style to it. It performs a valuable function. When we look at these other 25 companies and you look at drywall and more commodity products in nature, they certainly command a much better margin and profitability than we currently enjoy. So we think that’s all part of the value equation process that we’re driving the company to achieve.

Got it. Thank you.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Thank you, everybody, for joining, and we’ll talk to you all soon.

Thank you. This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time.