JELD-WEN Holding, Inc. (JELD) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the JELD-WEN Holding, Inc. Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Karina Padilla. Thank you. Please go ahead.

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website which we will be referencing during this call. I’m joined today by Gary Michel, our CEO; and John Linker, our CFO. Before we begin, I would like to remind everyone that during this call we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements including the guidance we are providing with respect to certain expectations for future results or statements regarding 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 Gary.

Thanks, Karina. Good morning, everyone, and thank you for joining us. I want to begin by acknowledging our roughly 3,000 associates in Australia who for the past eight months have courageously dealt with the devastating effects of bushfires and more recently adverse weather and flooding. I’m thankful all of our associates are safe and their operations are largely unaffected. We are committed to supporting our employees and our affected communities. Turning to our business performance. 2019 was a pivotal year for JELD-WEN that set the foundation for continued momentum in 2020. We made significant progress on key strategic initiatives through the adoption and expansion of our business operating system to JELD-WEN Excellence Model or JEM across the enterprise. We delivered favorable productivity, realized price and deployed our rationalization and modernization program to simplify our business and contribute revenue and margin expansion over the coming periods. We introduced several new and innovative products to the market that will accelerate volume growth over the coming years. I’ll highlight a few of these products showcased at the recent International Builders’ Show, in just a few minutes. We improved service and quality levels and remained disciplined with pricing to offset inflation. We announced significant price changes in the North America Door business across all channels, which take effect this month. Globally, our associates delivered net productivity savings during the year through the rigorous deployment of JEM. As part of our facility rationalization and modernization program, we started production in our Atlanta facility, which will deliver efficiency and cost improvements with significant reductions in labor and material scrap compared with legacy operations. Overall, we made excellent progress on the rationalization and modernization program initiating projects that address approximately one-third of our footprint reduction target. We made significant progress advancing key priorities in 2019. We also faced headwinds that impacted our growth and profitability. From market headwinds due to reduced residential new construction demand in Australia and North America and plant inefficiencies in a few of our North America Windows facilities. I’m optimistic about the market outlook for 2020 that will help drive core revenue growth and margin expansion. This includes improving residential new home construction demand in North America and expected stabilization of residential new home construction demand in the Australia housing market. Additionally, the benefits from our rationalization and modernization program and our growing pipeline of productivity projects will contribute to margin expansion. Please turn to page four for a brief summary of our fourth quarter results. We delivered revenue and cash flow in line with expectations and were disappointed by our EBITDA results. We delivered year-over-year core revenue growth of approximately 1% in North America, including core revenue growth across all major product lines. We used this as an inflection point in the return to core growth. We delivered the fifth consecutive quarter of positive price cost as a result of disciplined pricing, and along with net productivity gains, Europe delivered core margin expansion for the second consecutive quarter. North America Windows delivered sequential improvement during the fourth quarter, although slower than we hoped for as the inefficiencies that impacted the third quarter remained a headwind compared to prior year. Operational progress continues for North America Windows, eliminating the inefficiencies from last year and we expect continued sequential improvement. In Australia, markets continued to soften sequentially at a greater rate than expected, resulting in less volume. I’ll provide more detail on our 2020 outlook for Australia in a few minutes, but we continue to take a conservative approach to activity levels and continue to adjust our cost structure in line with current market conditions. The use of our JEM business operating system and tools is expanding across all areas of the enterprise. One particular area of focus in 2019 was operating cash flow. Improved discipline in working capital and reduced cash taxes helped drive a 65% improvement in free cash flow, despite a $17.5 million increase in capital expenditures. As you know, in lean deployments, working capital efficiency is typically a lead indicator to improved operations and quality of earnings. On page five, I’ll provide a summary of our market outlook and catalysts for 2020 earnings growth by segment. For North America, favorable fundamentals including generally robust economic growth and employment, increasing wages, strong consumer confidence and attractive borrowing costs continued to support U.S housing growth. Late in 2019, housing activity including starts and homebuilder orders improved, and we expect this to continue in 2020. We believe these same factors further aided by modest home price appreciation are beneficial for R&R activity as well. While residential new construction market trends improved in both the U.S. and Canada, I’m most excited about JELD-WEN-specific performance drivers in 2020. We’ve announced and deployed significant product pricing actions within our doors and windows businesses in both retail and traditional distribution channels. We introduced several innovative products in 2019 and we are delivering additional innovation to the market in 2020 including our FiniShield vinyl laminated windows, enhanced fiberglass door offering and Auraline composite windows, which delivered unique solutions for our customers and will contribute to core revenue and margin expansion. Finally, and perhaps most exciting are the benefits we will deliver from our JEM and footprint modernization projects completed in 2019 and the deep pipeline of projects being executed in 2020 to further improve our operations and service capabilities and positively impact our margins. Please turn to page six. Construction activity in Europe was mixed during the fourth quarter across channels and geographies with strength in central Europe, France and the UK, largely offsetting relative weakness in Northern Europe. We anticipate European residential new construction R&R and nonresidential construction activity to remain approximately flat in 2020. We are well-positioned for modest core revenue growth and margin expansion in 2020 despite generally stagnant markets in Europe. Pricing actions implemented across regions in 2019 remained a tailwind to core revenue growth and margins, and we will take additional pricing actions in 2020. JEM deployment in Europe is strong and will continue to deliver service level improvements and margin expansion on the back of one of the strongest productivity pipeline conversions in the enterprise. Please turn to page seven. In Australasia, we continue to face considerable headwinds in the residential new construction market related to prior government credit tightening. Residential new home construction during the fourth quarter declined sequentially and was below the already conservative assumptions in our previous outlook. However, our strong brand, leading market positions and our dedicated associates allowed us to outperform the market. R&R activity remained stable, providing an offset, albeit modest, given our lower index of R&R relative to residential new construction. We expect Australia new home construction activity to remain challenged through the first half of 2020. While general sentiment is starting to improve, access to funding remains a hurdle for home buyers. And conversations with our largest customers indicate that stabilization is not expected until at least the second half of 2020. Regardless of market conditions, we continue to drive productivity improvements, remain disciplined with price and compete on product quality, assortment and customer service. We expect to generate productivity savings in 2020 from the restructuring and footprint initiatives executed in 2019 and from efficiencies related to the startup of our new manufacturing facility in Indonesia. This and our pipeline of JEM projects will help to offset the impact of volume deleverage on margins. Please turn to page eight. Innovation in design, material composition and manufacturing processes is a major cornerstone of our strategy to drive future revenue growth and margin expansion. I’d like to highlight several new product introductions that we’re excited about. These include new aesthetic enhancements to existing JELD-WEN products and product extensions that provide customers with improved performance and selection and allows us to capture share and expand margin. The top picture shows our MODA rustic interior door, which combines a beautiful wood veneer with modern flat panel styles and translucent glass offered in 21 innovative configurations, providing customers with complete design flexibility and control. Next, the JELD-WEN exterior fiberglass door system leverages industry-leading technology and components to deliver superior performance and aesthetics. Introduction of the complete system utilizes JELD-WEN’s industry leading door slabs with best in class components that offer builders and contractors proven, tested performance and an improved warranty, great for builders, great for customers and expands the addressable market for JELD-WEN. At the bottom of the page, JELD-WEN’s Foundry Finishes series, a first-to-market proprietary finishing process that offers the look and feel of real iron with the performance and customization of our Aurora fiberglass exterior doors. These new products join our 2019 class of innovation. Products like FiniShield laminated vinyl windows, and Auraline composite windows in North America continue to expand in market acceptance and growth contribution. Stay tuned as we launch more JELD-WEN innovation across our segments, expanding our customer solutions and fueling our growth. With that, I’ll pass it over to John Linker to provide a detailed review of our financial results for the fourth quarter of 2019.

Thanks, Gary, and good morning, everyone. I’ll start on page 10. For the fourth quarter, net revenues decreased 2.1% to $1.1 billion. The decrease was driven primarily by a 2% reduction in core revenues and a 2% headwind from foreign currency, partially offset by a 2% contribution from the VPI acquisition. The decrease in core revenues was driven primarily by sequentially weaker demand conditions in Australasia, partially offset by slightly positive core revenue growth in North America. Notably, this was the first quarter of core revenue growth in North America since mid-2018. I’ll speak more about the segment drivers in a moment. Adjusted EBITDA decreased 15.9% to $89.2 million. Adjusted EBITDA margins declined by 130 basis points in the quarter, 8.4%. Compared to prior year, adjusted EBITDA margins were impacted by inefficiencies in our North America segment, primarily in our windows business, and the deleverage impact of significantly lower volumes in Australasia. These factors were partially offset by improved performance in our Europe segment, which delivered a second consecutive quarter of core margin improvement from positive productivity and pricing. Fourth quarter net income was impacted by the lower operating results as well as a significantly higher tax rate. Our book tax rate in the quarter was 60.7%, due to the compounding effect of the GILTI provisions of U.S. tax reform, as well as the impact of our annual review of valuation allowances, driving discrete higher tax expense in the quarter. Excluding these items, our normalized fourth quarter tax rate was 27.4%. Page 11 provides detail of our revenue drivers for the fourth quarter and full year. Our consolidated core revenue declined 2% in the fourth quarter, comprised of a 4% headwind from volume mix, partially offset by a price benefit of 2%. Favorable pricing in North America and Europe enabled us to deliver our fifth consecutive quarter of positive price cost realization. The 4% volume mix headwind was primarily driven by our Australasia segment, due to the sharply lower new construction demand in Australia. The impact of foreign exchange remained a headwind for revenue in the quarter, although slightly less so than the third quarter. As we look at the full year core revenue decline of 2%, pricing performed largely as expected while volume mix headwinds were a surprise throughout 2019, given the weaker-than-expected demand conditions for new construction in North America and Australasia. As we move into 2020, we see the potential for improved demand conditions in both of these markets. Accelerating demand combined with a tailwind from pricing in North America should set us up well to return to core revenue growth in 2020. Please move to page 12 where I’ll take you through the segment detail beginning with North America. Net revenues in North America for the fourth quarter increased 3.1%. The increase in net revenues was primarily due to a 2% contribution from the acquisition of VPI and a slight increase in core revenues. North America pricing was sequentially stable from the third quarter. We implemented price increase in selected products and channels in December 2019. Given the timing, we didn’t see any material benefit of that price increase in the quarter. A second round of North America price increases goes into effect this month, including both retail and traditional distribution channels, meaning that we have now deployed our 2020 price increases across all products and channels in North America. Given these actions, we should see meaningful improvement in price realization starting from the second quarter and through the rest of 2020. North America volume mix declined by 1%, comprised of lower volumes in our traditional distribution channel, partially offset by increased demand in our retail channel as well as higher volumes in Canada. North America volume mix sequentially improved in the third quarter and we expect to see this trend continue into 2020. We’re starting to see our North America order backlog build, reflecting improving residential and new construction market conditions. Adjusted EBITDA in North America decreased by 12.0% to $60.4 million. Adjusted EBITDA margin decreased 160 basis points to 9.4%. The year-over-year reduction in margins was primarily due to operating inefficiencies in our North America Window business as well as the channel mix shift towards more retail volume and less traditional distribution. Let me spend a moment on the windows performance. As a reminder, unusual ordering patterns earlier in 2019 unfavorably impacted our demand planning process and resulted in insufficient inventory levels and labor staffing to support customer demand, leading to third quarter operational inefficiencies. In our last call, we said that we’d expect to see sequential improvement in our North America Windows business during the fourth quarter. We did realize both financial and operational improvements in the fourth quarter but not to the magnitude we originally expected. Fourth quarter EBITDA margins in our North America Windows business improved sequentially from the third quarter, but were still down significantly year-over-year, driving the majority of the margin compression in the North America segment. As the fourth quarter progressed, our on-time delivery performance and backlog improved. However, we faced cost inefficiencies in the quarter in material usage, labor and freight to stabilize our operations and expedite order backlog to meet customer expectations. We do expect to see continued sequential operational and financial improvements in windows as 2020 progresses. Moving on to page 13. Net revenues in Europe for the fourth quarter decreased 3.8%. The decrease in net revenues was primarily due to the unfavorable impact from foreign currency of 3% and volume mix of 2% that were slightly offset by positive price. Volumes are mixed by region as weakness in Northern Europe was offset by relative strength in Central Europe, France and the UK. We’re very pleased with operating performance in Europe as adjusted EBITDA increased 15.4% to $29.4 million. Adjusted EBITDA margins expanded by 170 basis points, 10.1%, primarily a result of improved productivity and pricing. We continue to build the productivity pipeline with new projects and have good visibility to sustain margin improvement in 2020. On page 14, net revenues in Australasia for the fourth quarter decreased 18.7%. The decrease in net revenues was primarily due to a 15% contraction in core revenue from ongoing market challenges and a 4% adverse impact from foreign currency. Volumes worsened as the year progressed from low single digit decline at the beginning of the year, which was anticipated, to double digit decline in demand at the end of the second quarter and growing into the teens by the end of the third quarter. Fourth quarter volumes sequentially weakened further to a 14% decline. We are very pleased with the preemptive cost reduction actions by our Australasia team over the last year as they tried to stay ahead of weakening end-market demand with the number of facility closures and significant cuts to SG&A, which combined to deliver cost savings in 2019. However, the impact of market volume decline in the fourth quarter was too great to overcome with cost actions alone as adjusted EBITDA decreased 31.0% to $16.5 million. Adjusted EBITDA margins contracted by 210 basis points to 12.2% due to the deleverage impact of lower volumes. We remain focused on productivity and cost controls and expect this segment to return to margin improvement as soon as the demand environment stabilizes. Moving to page 15, I’m pleased to report strong free cash flow performance, finishing the year at $166.5 million, up $65.5 million or 65% versus prior year, primarily due to improvements in operating cash flow from a disciplined focus on working capital management and lower cash taxes. With these improvements, our free cash flow conversion was significantly over our target of 100% of adjusted net income. On page 16, on the balance sheet, we ended 2019 with total net debt of $1.29 billion, a decrease is $69.5 million compared with year-end 2018. At year-end, our net leverage ratio was 3.1 times, at the upper end of our target range, up from 3.0 times at year-end 2018. Our balance sheet and liquidity remains strong to fund our strategic initiatives. Now, I’ll turn it back over to Gary to go through our 2020 outlook and provide closing comments.

Thank you, John. Please turn to page 18 for our 2020 segment revenue expectations. In North America, we expect favorable pricing and improving new construction demand to drive full-year revenue growth of 3% to 6%. In Europe, we expect mixed demand across our end markets, netting to flat volume and delivering revenue growth of 0% to 2%. In Australasia, we expect residential new construction weakness to continue through the first half of the year with stabilization in the second half, resulting in total revenue contraction of down 4% to down 6%. Total revenue for 2020 on a consolidated basis is expected to grow between 1% and 4%. Our pricing actions, improving volumes and productivity project pipeline are expected to deliver growth in adjusted EBITDA from $415 million in 2019 to a range of $450 million to $495 million in 2020. At the midpoint, this represents a 14% increase in adjusted EBITDA, compared to last year. Please turn to page 19 as I describe our expected cadence for earnings improvement through the year. We expect a number of headwinds in the first quarter, resulting in adjusted EBITDA margin contraction, although as you can see, we have visibility to sequential margin expansion as the year progresses, due to specific drivers. In the first quarter, we anticipate continued market headwind in Australasia, resulting in revenue being down in the range of mid to high teens percent, compared to last year, which will have a corresponding deleverage impact on earnings. In North America, the windows business continues to recover from operational inefficiencies and while sequentially improving, we expect first quarter margins will still be below prior year. We also faced a foreign exchange headwind in the first quarter. In the second quarter, we expect to realize the full benefit of the North America price increases along with improving productivity, and into the second half, we expect tailwind to kick in from improving market demand, pricing, productivity and saving from our footprint, modernization and rationalization projects. Together, these factors should lead to significant margin expansion in the second half of the year. Before opening the line for Q&A, I’d like to note that we cannot comment substantively on our ongoing dispute with Steves & Sons. Some of you may have seen that Steves filed a new lawsuit against us last week. What I can tell you is that the newest lawsuit they filed is related to a contract dispute and is different than the existing litigation that we have appealed. It misconstrues the fact in an attempt to damage our reputation and obtain an unfair competitive advantage in the marketplace against both us and other competitors. I assure you that our contract addresses the issues at hand and that we are abiding by all the terms. We also continue to believe that we will prevail in our appeal and look forward to stating our case and upcoming oral arguments. With that, let’s open the line for Q&A.

Thank you. [Operator Instructions] And our first question comes from the line of Phil Ng of Jefferies. Your line is open.

Hey, guys. Quick question on your 1Q guidance. Considering some of these ongoing operational issues in windows is expected to moderate and the trend in Australia you called out in 1Q is not too different, coupled with the fact you’re going to see some pricing, I’m a little surprised as your margin performance is actually going to decelerate from Q4. Can you give us a little more color?

Sure. So if you think about the components you just listed, I mean, starting with Australia, I mean the comp were up against in Australia is pretty unfavorable. I mean, we did see margin -- saw revenue and volume contraction in Q1 of last year, but the downturn really didn’t accelerate until Q2, Q3 and Q4. So, we’re looking at another mid-teens type of percentage decline in volumes in Australia, the highest contribution margin in the business. So, that’s certainly a significant revenue headwind. Windows will certainly be a headwind versus prior year, although sequentially improving. We do see a little bit of a weakness in the Northern European markets. While we didn’t call that out in the prepared remarks, there’s some demand headwinds there. And then, you got about $3 million or so FX headwind that we’re contemplating. So, on the pricing side in North America, I guess in terms of what we’re comping in Q1 of last year, just the timing of when increases went in, the carryover we had in Q1 of last year, yes, we’re positive price cost in Q1 of this year, but it’s not significant relative to a year-over-year improvement. The big step change in price goes into effect here in February. And given ordering patterns and things like that, we really don’t see the full benefit of that until March -- I’m sorry, April and into the second quarter.

Got it. That’s helpful. Appreciating there’s a timing component when the pricing does come through, can you give us a sense how it’s been received in the channel, implicit in your guidance? Obviously, the big piece is tied to your doors business. How much of the price increase have you kind of baked into your guidance?

So, as far as receptivity, pretty good at this point. We’ve, issued our price increases and have conversations with our channel partners and our customer really across all our channels, so, retail and our traditional channels as well as builders. This is for North American doors. So, we’ve seen some significant price increases there. We’re starting to -- as John pointed out, we’re starting to see some business come in, but it’s for delivery later in the quarter, early into next quarter is when some of the new pricing will really hit. We went out in two stages. So, the first stage will start to hit sooner; the second stage hitting a little bit later. But, no real pushback for that. And then traditionally in our other channels, windows, Europe, Australia, even in terms of R&R -- the R&R market, we go out with our traditional price increases, which are a little more moderate.

And so, I’ll hit the guidance portion. I’m sure we’ll get into this in the rest of the Q&A. But, if you think about the 1% to 4% total revenue guide for the full year, I mean that’s mostly price, and we got FX and M&A sort of offset each other. And then, you’ve got from a volume standpoint, but the first half headwinds from volume in Australia sort of really sort of mitigate any volume pickup that we’re getting in North America. So, most of the revenue guide is price related. I will say the opportunity set for pricing is certainly more than we have baked into our guidance. But, we’re, we’re moving into sort of a step change pricing environment and at this point in the year want to take a moderate view of how much of that flows into our results in 2020.

Our next question comes from a line of Tim Wojs from Baird. Your line is open.

Maybe just on the productivity and the rationalization efforts. Could you just talk to us how much you guys are baking in to the year-over-year improvement in EBITDA from those two items? And then, maybe what was that in 2019 in terms of a net realization number?

Sure. So, in terms of ‘19, the actual realization from the footprint program ended up being around in the $5 million. We’ve talked in the past about making sure that we do this program in a way where we don’t disrupt customer deliveries and our delivery performance. And so, we did hold on to some of the legacy capacity that is required for us to achieve the full savings on a little bit longer than we originally anticipated. So, for example, we didn’t shut down a few plants that were originally anticipated to be shut down earlier in the year, just to make sure we could meet customer order demand patterns. As you think about 2020, certainly the improvement steps up from that by $5 million in 2020. I guess, the best way to think about it is, there will continue to be some of the offsets of ramping up and ramping down some of the legacy facilities. But, as we exit 2020, Gary mentioned earlier, we’ve acted on about a third of the square footage for our overall target. And so, sort of our exit run rate exiting 2020 would be about a third of that $100 million target is kind of how to think about it. So, we’re not going to see all that in 2020 in terms of the calendar year realization. But certainly, we’ll be well on our way by third and fourth quarter after showing a run rate of that amount.

Okay. That’s helpful. And then, I guess, as you think about kind of full years 2020 free cash flow, is there any way to kind of segment how we should think about that for the year?

Yes. I mean, certainly, we saw a nice step up of improvement in 2019 that we were pleased about. I think, as we start to pivot towards 2020 cash flow, I would kind of think about it being similar to 2019 from a magnitude standpoint. CapEx is going to be a bit higher than 2019 as we continue to fund the footprint rationalization programs. We saw a pretty nice pickup in working capital in ‘19, some of that was more one time in nature as we sort of worked with our vendor base to optimize terms, and that won’t be necessarily a recurring tailwind every year. But, it’s now included in the base. So, I guess a rough order of magnitude I would think about free cash flow as being -- in 2020 as being similar to 2019.

Next question comes from the line of Truman Patterson from Wells Fargo. Your line is open.

Hi. Good morning, guys. I just wanted to touch on your 2020 guidance. It looks like it implies up $55 million $60 million year-over-year. Can you just walk us through the drivers of the improvement, either quantify or possibly just rank order from volumes pricing versus input costs, the JEM savings, the footprint rationalization, and then also in that are you all baking in any sort of inefficiencies in there as well?

Sure. So, as you think about the walk that you just mentioned, I’d start off just from an EBITDA standpoint. The small contribution from the VPI acquisition which is a carryover in Q1, that’s largely offset by FX in Q1. So, really, the full year guidance, midpoint increase that you described is really all in the core business. So, from a order of magnitude standpoint, certainly price costs realization would be the largest driver. We expect to see sequential improvement in price cost realization from 2019 into 2020, most of that coming from price. I think inflation we expect to be largely of similar to ‘19, on a material and freight standpoint. And then, the next largest contributor would be sort of the productivity bucket. And in that I would include both, our organic JEM productivity initiatives as well as the contribution from the footprint rationalization and modernization program. And then, there are some offsets from an SG&A and investment standpoint. There is some SG&A inflation, some growth investments we’re making in the business that do offset some of those tailwinds to EBITDA. And then, I would just think about, as I mentioned earlier, sort of the volume mix contribution as being largely neutral to EBITDA in the year. There’s certainly some opportunity there, depending on how the markets pan out, but we have not baked in a significant amount of EBITDA from a volume mix standpoint.

Okay, John. And then, just for clarity on that SG&A investment that was up. Could you just walk us through, I believe your corporate expense was up quite a bit in the quarter that actually led to a portion of the EBITDA miss. Could you just walk us through what that was?

Sure. So on -- let’s talk about actuals first. I mean, in the fourth quarter, SG&A was actually down year-over-year, down by $5 million. So, what you’re seeing in our segment reporting is more geographic in nature in terms of where some of the costs are realized. We had some true-ups on workers’ comp and health benefits at the corporate line, and there were some offsets in North America segment. Also, embedded in that line though is real year-over-year compression of our FX hedging program. Q4 of ‘18, we had some pretty nice FX hedge gains that we didn’t see recur in 2019. So, I would think about the year-over-year increase that you see in the corporate line is not real increase in dollar spend. I do want to reiterate that SG&A was actually down over prior year, and that’s inclusive of the fact that we had VPI in SG&A, which we didn’t have in Q4 of ‘18. But, I guess, moving to the 2020 portion of your question, I mean, I’d kind of categorize the increases in four areas. There will be some incentive accruals that we’re planning to accrue at a higher level in 2020 that were not there given 2019’s EBITDA performance. There’s some true SG&A inflation, both on wage as well as insurance and things like that. And then, I mentioned some growth investments that we’re making in the business around really trying to drive core growth in future years. So, innovation, R&Ds and digital programs that we’re working on and sort of reinvesting, I guess after a year where we had 5% volume headwind and we really had to cut pretty hard on SG&A to mitigate the impact of that. We’re looking to be prudent and pay as we go, but make some selective growth investments in the business to ensure we can drive a core organic growth in the future.

Our next question comes from the line of Reuben Garner from The Benchmark Company. Your line is now open.

Thanks. Good morning, everybody. Let’s see. Maybe can we dive into the North American Windows operation issues a little bit more? Can you quantify what the headwind was in Q3 from a dollar -- or remind us what it was from a dollar perspective? And then, what it ended up being in Q4 and what you’re kind of baking into the early part of 2020? And then, just going a step further, maybe could you just tell us what’s kind of changed that’s extended the pressures into early 2020? Why do you expect it to carry on? I don’t -- I didn’t think that was what you had talked about a quarter ago. Thanks, guys.

Sure. Let me hit the financial piece. And I’ll hand it to Gary to talk about the improvements that we’re seeing. Q3, I believe the first part of question, I mean, at that point windows was about a $10 million or so headwind to prior year from an operational and efficiency standpoint. Q4 was slightly less than that. We did see over 100 basis points of margin improvement sequentially from Q3 to Q4 in North America Windows. But, we were still down close to 500 basis points year-over-year in windows in Q4. And so, relative to what we had guided to, we certainly anticipated a headwind in Q4, but we did not anticipate the full amount that we ended up realizing. So, I guess relative to sort of the midpoint of the guidance we gave back in October and what we ended up delivering, I would attribute about $3 million to $4 million -- sorry, $4 million of kind of the miss to the midpoint of our guidance being attributed to not getting back in windows where we wanted to be. But, I’ll let Gary comment more on the operational side.

Yes. So, as John mentioned, we sequentially improved in the windows business from third quarter to fourth quarter, largely in part to the deployment, redeployment of our JEM tools. As we look at exiting Q3 into Q4, we had a significant backlog to work down. We worked on the efficiency of our plants and productivity of our plants getting our on-time delivery out of those plants reset to a level that was acceptable in the channels into our customers. We’ve also had significant conversations and working on planning with our North American windows customers. So, we understand what the demand curve looks like or what their requirements will be. And we’ve been able to match our supply to that demand equation. So, a little slower, maybe flying out of it but we are seeing sequential improvement. We’re seeing good performance out of our -- the effective plants. And with no reset set for 2020 and the very, very close tie-out with our customers on demand, we feel pretty good about continuing the sequential improvement of the business, and that we should see a pretty steady on-time performance out of our North America windows.

Great. That’s very helpful. And quick follow-up. So, you talked about some of the SG&A puts and takes or mostly takes going into 2020. Is it fair to say that the vast majority of your targeted margin extensions going to come on the gross line this year?

Yes. Yes, I think that’s fair.

Our next question comes from the line of Matthew Bouley from Barclays. Your line is open.

Good morning. Thank you for taking my questions. So, John, you mentioned that you’re taking a more conservative approach to layering in the pricing improvement in North America within your guide. And please clarify that statement if I’m wrong there. But, can you provide a little color on what’s actually embedded in the 3% to 6% growth in North America on the pricing side? And I guess, kind of what the assumption is around the realization of pricing? Thank you.

Sure. So, you’re right. I mean, given the timing of when this call is and when the pricing is going in effect, I mean we have implemented and deployed the pricing at this point in North America across all of our channels. It is effective in February, this month. But, in terms of what we will actually start realizing and ensuring that we’re seeing that flow through to the bottom line, a lot of that’s not going to come until the second quarter. So, we’ve taken -- at this point in the year taken what we believe is a bit of a conservative approach embedding in our outlook what may actually transpire from a pricing standpoint. I mentioned before that the opportunity set for what we could realize in pricing is certainly greater than what we’ve embedded in the guide. But, given uncertainty around how the market dynamics are going to pan out over the next 10 months, we wanted to be conservative. But, to answer your specific question on the 3% to 6% guide for North America, that’s primarily a rough order of magnitude. That would be about a point of volume mix, and then the rest of that would be sort of pricing related.

Okay. That’s perfect. Thank you for that detail. And then, I guess sticking with North America, and you kind of highlighted some of the drivers of North America margins in 2020. I noticed you didn’t really discuss the channel mix. I guess, just what is this improvement on the new residential side mean for channel mix between distribution in retail and how should we think about that mix impact on margins, assuming that distribution might see a stronger uptick in 2020. Thank you.

So, yes, we like -- we obviously like the movement in residential new construction. We think that that will -- what we saw late in last year and certainly coming into this year will play well for our forward orders. We’re starting to see some activity there. And that’ll play out over really the next several quarters of the year. And we believe that that will certainly favor our traditional channel. Likewise, R&R remains pretty stable. So, the retail channels continue to plug along there. As we said earlier, we are getting priced in all those channels for North American Doors. We’re well positioned with our recoveries in our factories for North America Windows. So, we feel that we can take on the new business in both of those areas when it comes. And we have the opportunity as well with the work that we talked about last year on our customer segmentation work to make sure that we’re focusing particularly in the traditional channels with customers and channel partners that take our entire product line. And that we feel that we can grow with -- that will grow along with the residential new construction piece of the business, but also we’ll position all of our products, so we look at whole home packages and incomplete solutions. So, we’re pretty excited with the market dynamics in North America that we expect to play out over the next several quarters.

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

Good morning. Thanks for taking my questions. I just wanted to follow up on the comments around North America and specifically the volume environment. If we look at housing starts, we started to see a real inflection almost six months ago now. And obviously, to your point, the last couple of months have been even stronger. But, the demand recovery has been in place for give or take, half a year. And on the margin, these are homes that are getting built more like a four or five months build cycle, probably just given its greater proportion entry level. So, I guess, the question is, why isn’t this hitting your results sooner? Is it some of the windows headwinds that are perhaps detracting from it, or how else would you characterize it’s such a lag between that and your comments suggesting it’s a second half of ‘20 recovery?

Yes. So, we typically think about on our products from the new construction side a more of a six to nine-month lag between a start. And our sales -- and our lead times are pretty short, so sort of to two weeks on the doors side, three to four weeks on windows, depending on the product type. So, we don’t have a ton of visibility in terms of long-term visibility in North America. But, I’d just say that -- early in the year, it has started a little soft from order activity in a few of our markets in the January time frame, but our backlogs now moving into February are building quickly. We’re starting to see -- we’re starting to see some nice backlog improvement across all of our product lines in North America. So, we do -- we are starting to see that signs of recovery. I’d just say coming off of a year of a 5% volume headwind to revenue in North America, you’re just hearing us be a little bit conservative in terms of what we’re actually embedding in our outlook for volume. But, we certainly agree with you that the demand environment is improving and believe that there’s some nice opportunity there for us.

Okay. That’s helpful. The second question is related, I guess, maybe if you think about that -- the soft patches in January. Would you attribute that to kind of geographic market related issues, or is there -- was there kind of pre-buy ahead of your first round of price increases? And how would you characterize kind of pre-buy environment and inventory in the channel and in door, specifically in the U.S.?

Yes. I’d say, the softness that I mentioned was really more on the retail side. I mean, the way our retail partners work is typically will come to us with sort of a significant host order to start the building season. And the timing of those host orders has been a little bit delayed, which would -- I mean that could be inventory in the channel that they’re trying to work down. I’m not totally sure what’s driving that. I mean, I’ll tell you that all of our partners, both retail and our traditional wholesale distribution are - across the country are giving us a view that they’re expecting to see growth in demand and unit demand this year. So, I would just attribute it to timing more than anything. I don’t think, there’s anything else going on there, just in terms of when the ramp actually starts.

And our next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

Thank you. Good morning. My first question is, can you just give us a little more color around inflation? How you’re thinking about through 2020? I know you mentioned that you expect it to be similar to 2019. But, just a little more color on where you are in terms of catching up with that, especially maybe as it relates to tariffs and how we should be thinking about it going forward.

Sure. So, 2019 materials freight inflation ended up being -- and inclusive of tariffs included up being around 1% of sales, was the headwind. As we look to 2020, we see a similar 1% of sales sort of view that’s coming out of primarily glass and vinyl in North America and then in Europe, logs and lumber are inflationary. We -- also embedded in that 1% for 2020 would be about a $10 million headwind from tariffs related to China. So, I would just say right now the inflation environment is predictable. We do have some categories that are deflationary. It’s not all bad guys. There is definitely some areas where we’re making some nice progress. But, I think, the best way to characterize it is it’s stable versus prior year. We can plan for it and we can embed it into our pricing strategy for the full year.

Okay. That’s helpful. And, Gary, in your prepared remarks, you mentioned that you’ve got a growing pipeline of some productivity initiatives around JEM and some of the cost improvements that you’re making. Can you just give us a little more color on that? How is it evolving and how should we think about that coming through this year?

Sure. Typically, when we talk about our productivity when we get on these calls, we talk a lot about kind of the bigger refresh or modernization and rationalization programs. So, as we start working through those, obviously those are contributing. But in other -- we’ve got a lot of other plants where we’re just focused on good old-fashioned lean deployment, working on cycle time reduction and deploying JEM tools in those plants. So, as we work through those plants, we do improvement events in those plants. We’re starting to identify places where we can take waste out and we can improve the processes as we take cost out. So, in each one of our segments, we’ve been driving towards improved pipeline for productivity program like those. And we have been transforming those plants and those operations to do that. So, as we’ve built through last year, the pipeline certainly increased. We started to execute and realize benefits from those productivity projects. Coming into 2020, the pipeline is much stronger; it’s kind right in front of us. We get a little bit of benefit obviously from programs that were deployed in 2019 and then we’ll continue to deploy those throughout the year and get the benefits from them as well. So, cycle-time reduction, obviously material cost improvements, but really deploying JEM more broadly across the organization.

Okay. And so then, just as a quick follow-up to that. With the improvement in working capital that you saw in 2019 -- and I know you mentioned that you are working with your suppliers and got some benefits from that. Should we expect a similar level coming through in 2020 or kind of further improvements as some of these cycle times and material improvements come through?

Yes. I think the -- John mentioned working with suppliers on rationalizing our terms was one of the benefactors last year. As we continue to improve our cycle time and deploy JEM across more operations, we’ll start to see inventory turns, improve as well even more. So, I think that’s the place where you’ll see that happened. And we’ll obviously continue to work on receivables as well, which as cycle time improves, you should see our cash -- working capital utilization improve as well.

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

Hey, guys. Thank you for fitting me in here. John, I think you had initially framed the December price increases in North America as being kind of mid-single digits on a blended basis. How should we kind of think about or dimension the magnitude of the second round of increases?

Yes. And just to clarify, that was selected in the December round of price increases in North America. That was selected product lines just within our traditional distribution channel, no impact on our retail channel. And so -- I mean, as you think about what’s going through in the February timeframe -- view it as a sort of a second round of increases. And so, cumulatively, between the two different rounds that we’ve now got between the December phase and the February phase. In North America, you’ve got interior doors increases anywhere from 15% to 25%. You’ve got exterior door increases more in the mid single digit range. You’ve got windows increases probably more in the low to mid single digit range kind of across the board. And there is a piece of our North America revenue to our ABS and MMI businesses that is more non-residential products in nature, the non-residential doors. And that piece of the business doesn’t have quite the same magnitude of pricing improvement.

That’s helpful. And then, Gary, I think in Australia, you mentioned that there’s some early signs that things could potentially kind of stabilize a bit. I mean, what are some of those early signs that you guys are seeing?

Well, I would say that what we’re seeing is -- first of all, remember what caused this was a tightening in credit in Australia around residential new construction. So, we’re seeing a little bit of loosening there. That being said, homebuilders are still seeing -- they’re still seeing a decline, as we mentioned, in the fourth quarter, and we expect that to continue for the first half of this year with expected stabilization towards the second half of the year. Builders are clearly putting out some incentives at this point. The banks have loosened their credit a little bit, but it’s still the availability of getting those loans and getting the values that people want and have expected in order to buy those homes. So, there’s plenty of availability to build homes. The credit tightening seems to be loosening, if that makes sense. And people do want to buy houses. So, we’re hoping that what we’re seeing in the first half of this year will start to diminish decline and then kind of level out towards the second half of the year, at least stabilize. The residential or the repair and remodel business continues to do okay. And we continue to increase our penetration into that area as well, which will -- which is and will continue to offset the decline from residential new construction.

Our final question today will come from the line of Michael Rehaut from JP Morgan. Your line is open.

Hi. This is Elad Hillman on for Mike. Thanks for taking my question. On 4Q, would you be able to quantify what the price cost benefit in the quarter was in by segment?

I’m sorry. At the end, you said price cost benefit by segment. Is that what you asked?

Yes, as a whole company and by segment, please. Yes.

Yes. In the fourth quarter, price cost benefit was in the $7 million to $8 million range versus fourth quarter of ‘18. Most of that was in North America, a little bit in Europe and a little -- we’re actually slightly price cost negative in Australia in the fourth quarter, just given the pressures on that market, but it wasn’t material.

Okay, thanks. And then, the footprint rationalization and modernization benefit. Following the $5 million benefit in 2019 and with some of the actions already taken there, I was curious why on slide 19 the benefits are kind of expected to start in 2Q from these actions versus already in 1Q.

It’s -- we certainly see a little bit of it in 1Q. I think, we’re just trying to dimensionalize the opportunity. I mean, we’ve got some -- as I mentioned, some plants that we’ve held onto a little bit longer than we had originally anticipated that are now being cleaned out, closed. We’re getting rid of all that overhead. And so, I just -- as you think about sort of the dimensionalizing the opportunity, the ramp really begins more in sort of Q2 and beyond timeframe. It’s not that there’s not savings happening in 1Q but just trying sort of pictorially show it.

I’ll now turn the call back to our presenters for closing remarks.

So, thank you all for joining us today and your interest in JELD-WEN. We’re excited about the progress that we’ve made over the past year and our prospects for 2020. We look forward to sharing with you our ongoing progress in the coming quarters. And again, thank you for joining us this morning.

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