JELD-WEN Holding Inc (JELD) 2017 Q2 法說會逐字稿

Greetings, and welcome to JELD-WEN Holding's Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

At this time, I would now like to introduce John Linker, Senior Vice President of Corporate Development and Investor Relations. Thank you. You may now begin.

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 at investors.jeld-wen.com. We'll be referencing the slides during this call.

I'm joined today by Mark Beck, our Chief Executive Officer; and Brooks Mallard, our Chief Financial Officer.

Before we begin, I would like to remind everyone that, during this call, JELD-WEN management may make certain statements that constitute forward-looking statements within the 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 10-K and 10-Q as filed with the Securities Exchange Commission. JELD-WEN does not undertake any duty to update such forward-looking statements, including the guidance we are providing with respect to certain expectations for 2017 results.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be 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 press release, which is posted on our website; and Page 21 of this presentation.

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

Thanks, John. Good morning, everyone, and thank you for joining us.

Firstly, I want to take a moment and thank you for your support of our secondary equity offering back in May. We appreciate the interest from both our existing shareholders as well as our newest investors.

We're pleased with our Q2 margin performance and believe these results show that our self-help strategy and operating model are in fact working. Now halfway through the year, our performance is on track with our 2017 financial plan. In spite of some largely expected softness in our second quarter top line, we are confident in delivering our full year guidance on both revenue and earnings. Additionally, we continue to make the investments and do the work needed to achieve our long-term targets for the company, but before we get into the details and given that many investors are still relatively new to the JELD-WEN story, I'd like to step back and provide a very brief overview of the company, our strategy; and then highlight some of the key initiatives of our operating model. Then I will turn the call over to our CFO, Brooks Mallard, who will take you through the financials in more detail. Finally, I will wrap up the call with our updated financial outlook for the full year 2017 before we open the call for your questions. I'll start on Slide 4 of the presentation.

As many of you know, JELD-WEN is a global leader in windows and doors with a broad product offering and a scaled platform, operating 117 manufacturing facilities in 19 countries. We hold the #1 position by net revenues in the majority of the countries and markets we serve. We have earned our leading market positions by offering well-designed, high-quality products. We've also enhanced our strong portfolio of brands with 7 strategic acquisitions over the past 2 years, including our most recent acquisition of Mattiovi in June. I'll talk more about Mattiovi in a minute.

Turning to Slide 5, I'd like to highlight several reasons why I feel confident about the future of our company. We are in the early stages of an exciting business transformation, and we've delivered more than 700 basis points of margin expansion since 2013. While this is a significant improvement, we believe that there remains a long runway ahead for further gains. We are leveraging a great set of assets and a talented and experienced leadership team to transform JELD-WEN into a world-class company. As you can see on the right, we continue to make progress towards our long-term EBITDA margin target of 15% to 20%.

I'll now get into some of the detail on how we are driving this business transformation on Slide 6. Our operating model starts with a foundation of talent management, our business system called JEM and enabling technology. Built upon this critical foundation, we have our 3 strategic pillars of operational excellence, profitable organic growth and strategic M&A. Within each pillar, we have defined initiatives with clear ownership, action plans and targets. During quarter 2, we made solid progress on all aspects of the operating model.

Starting with the foundation. We continued to embed JEM in the culture of our company. Recently, we created a global JEM leader position; and appointed a very seasoned operations executive, Jim Garcia, to the role. Jim joined JELD-WEN in 2016. His experience includes a role as Vice President of Operations for multiple divisions at Eaton and Cooper. He also held significant operational roles at Delphi as the Global Director of Operations in the U.S. and Asia, for he was instrumental in their lean journey. And he also held commercial and customer-facing roles in multiple divisions of United Technologies. Jim, who reports directly to me, is providing global leadership for the JEM journey and guides the 80 full-time JEM practitioners we have globally. On our operational excellence pillar, we see measurable improvements in safety, quality, delivery and cost. Additionally, we are making good progress realizing cost savings through our global sourcing efforts. Our pipeline of operational cost-savings initiatives continues to build.

Now last quarter, my comments focused on the first pillar of operational excellence, so this quarter, I will highlight our second and third pillars of profitable organic growth and strategic M&A. On Page 7, we have a few examples of some of the investments we have made in new, innovative products. Our new product development activity is broad based, global and across all product lines, with new features in technology, performance and design. While all of these new products shown here are exciting to me, I will take just a moment to focus on 2 of these on Page 8. So first, in North America, I will highlight our new architectural fiberglass doors. JELD-WEN's Architectural Collection is a premium line of fiberglass doors and matching fiberglass components featuring an authentic woodgrain replication made possible by a technology called nickel vapor deposition. The woodgrain is so realistic that these doors are virtually indistinguishable to traditional wood doors. Fiberglass also has a performance advantage over wood, as these doors won't rot, warp or need to be re-stained. These doors have been very well received by our customer base, and our fiberglass door product line is growing at double digits. Moving to Australia: I will highlight our Alumiere window line sold under our Stegbar brand name. This is our biggest window launch in Australia in 20 years. Alumiere is a range of aluminum windows and doors for higher-end and luxury residential homes as well as some light commercial applications. Alumiere features larger spans of glass; improved performance; bold, modern looks; and a range of high-spec hardware. We are seeing a lot of interest from our customers on this new product, and quoting activity has been brisk. Both of these examples highlight our commitment to innovation and our ability to bring new and differentiated products to the market.

Shifting to the pillar of strategic M&A on Page 9. I'm pleased to introduce you to our most recent acquisition, Mattiovi. While this is a small bolt-on, it is highly strategic for us. Mattiovi is a Finnish-based door manufacturer with approximately EUR 23 million of revenue; and is primarily focused on interior doors, frames and components. Mattiovi has a very strong brand and a long history dating back to 1911. The acquisition enhances our market position in the Nordic region, increases our product offering and provides us with additional doorframe capacity to support growth at our other plants in the region. This is a great example of our pan-European strategy where we can use the breadth of our existing platform as a base to bolt-on these smaller M&A targets and drive both revenue and cost synergies. In addition to Mattiovi, we are actively pursuing a robust M&A pipeline in all 3 reporting segments. We will continue to be disciplined on valuation and stay true to our core strategy.

Now turning to Slide 10, I'll discuss some highlights from our second quarter.

Our business transformation has driven a substantial year-over-year improvement in earnings and free cash flow. Despite a second quarter decrease in net revenues of 1.6%, our second quarter adjusted EBITDA increased 11.2%, with a margin of 13.2%, an increase of 150 basis points. Year-to-date free cash flow has increased by $77 million. As we have discussed before, we manage the business on a full year basis against annual targets, as there can certainly be noise in our quarter-to-quarter results due to a number of factors. The second quarter was a good example of this, as our cash flow performance was excellent and our EBITDA margin improvement was at the high end of our targeted range of 100 to 150 basis points. However, our core revenue performance was not as strong on a year-over-year basis.

Going into the quarter, we knew and we have talked about some revenue headwinds in North America primarily due to the previously announced exit of retail business in Florida, which began in April, a move that is consistent with our strategic focus on profitable core growth. During the quarter, we experienced some additional volume weakness in North America, which was partially offset by positive pricing but overall still resulted in a slight decrease in core revenues. In spite of these second quarter revenue headwinds, we delivered our margin expansion target, are on track for the full year. And we have confidence we will deliver on our full year guidance for revenue and EBITDA. Additionally, in the quarter, we continued investing in all 3 pillars of our operating model. We closed one small acquisition in the quarter and are busy working on other bolt-ons we have in the pipeline.

Brooks will now walk you through the second quarter performance in more detail.

Thanks, Mark.

I will start on Slide 12.

For the second quarter, net revenues decreased $15.9 million or 1.6% to $948.7 million. The decrease was largely driven by lower core revenues in North America and was partially offset by core growth in Europe and Australasia. I will address the revenue drivers in a moment. Year-to-date net revenues increased $35.4 million or 2% to $1.8 billion.

For the second quarter, gross margins increased $23.6 million or 11.1% to $235.7 million. Gross margin as a percentage of net revenue expanded 280 basis points from 22% in 2016 to 24.8% in 2017. Year-to-date gross margin as a percentage of net revenue expanded 250 basis points from 21% in 2016 to 23.5% in 2017. The increases in gross margin and gross margin percentage were due to favorable pricing, operational cost savings, improved mix and the impact of our recent acquisitions.

For the second quarter, SG&A expense increased $10.4 million or 7.4% to $151.5 million. SG&A expense as a percentage of net revenues was 16% compared to 14.6% for the same period a year ago. The increases in SG&A expense and SG&A expense percentage were primarily due to legal costs of approximately $7.8 million as well as fees related to our recent secondary offering. Year-to-date SG&A expense as a percentage of net revenues was 16.6% compared to 15.5% for the same period a year ago. The increases in SG&A and SG&A expense percentage were primarily due to legal costs of approximately $15.8 million as well as increased professional fees related to our recent IPO and secondary offering. Both for the quarter and the full year, absent these temporary discrete expenses, our SG&A as a percentage of net revenue would have increased approximately 30 basis points.

For the second quarter, net interest expense decreased $0.6 million to $17.5 million. The decrease was primarily due to improved terms relating to the amendment to the term loan agreement.

For the second quarter, net income decreased $20.1 million to $46.8 million. Net income in the second quarter of 2017 was unfavorably impacted by the previously mentioned discrete items of legal and secondary offering costs. Net income in the second quarter of 2016 included a favorable tax benefit of $22.8 million related to the release of certain valuation allowances. Year-to-date net income decreased $19.7 million to $53.2 million. Net income in the first 6 months of 2017 was unfavorably impacted by the previously mentioned discrete items of financing fee write-offs and legal costs; and for the first 6 months of 2016, were favorably impacted by the previously mentioned release of valuation allowances.

For the quarter, diluted earnings per share was $0.43 and adjusted diluted earnings per share was $0.51. 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 earlier in 2017.

For the second quarter, adjusted EBITDA increased $12.6 million or 11.2% to $125.3 million. Adjusted EBITDA margins expanded 150 basis points in the quarter to 13.2% compared to 11.7% a year ago. The increase in adjusted EBITDA and adjusted EBITDA margin was primarily due to favorable pricing, operational cost savings and improved mix. Year-to-date adjusted EBITDA margins expanded 160 basis points to 11.5% compared to 9.9% a year ago.

Slide 13 provides a buildup of our revenue drivers. For the second quarter, the 2% decline in our revenues was driven by a 1% decline in core revenues comprised of a 1% benefit from pricing offset by a 2% decline from volume/mix. The unfavorable impact of foreign exchange in Europe reduced our total growth in U.S. dollar terms by almost 2%. The decrease in volume/mix was primarily due to our North America segment, offset by volume growth in Europe. As we have discussed previously, volume can vary quarter to quarter based on a number of factors, including weather, changes in seasonal demand, customer ordering patterns and regional mix. For the first 6 months, the 2% improvement in our revenue was driven by 2% core growth, comprised of a 2% benefit from pricing, while volume and mix were flat. Recent acquisitions in our Australia-Asia segment contributed another 1% to growth, while the unfavorable impact of foreign exchange in Europe reduced our total growth in U.S. dollar terms by almost 1%.

Next, I'll move on to the segment detail, beginning with North America on Slide 14. Net revenues in North America for the second quarter decreased $15.8 million or 2.8% to $551.7 million. The decrease in net revenues was primarily due to a decrease in core growth of 2% comprised of a decrease in volume/mix of approximately 4% offset by an increase in pricing of approximately 2%. Volume decreased primarily due to activity in our retail channel primarily driven by the previously announced business line exit in Florida, which is estimated to have a $50 million annualized revenue impact. To a lesser extent, the comparisons in our retail channel were impacted by an initial stocking order of new business with a major retail customer in 2016. Finally, we saw lower sales in our wood window product line as a result of delivery issues and extended lead times. We have action plans in place to resolve these issues and believe these should largely be behind us as we exit 2017.

Second quarter adjusted EBITDA in North America increased $4 million or 5.3% to $79.8 million. EBITDA margins expanded by 110 basis points to 14.5%. The increase in adjusted EBITDA was primarily due to favorable pricing, operational cost savings and improved mix.

On Slide 15. Net revenues in Europe for the second quarter decreased $7.9 million or 3% to $258.9 million. The decrease in net revenues was primarily due to the negative impact of foreign exchange of 4% offset by an increase in core growth of 1%. For the second quarter, adjusted EBITDA in Europe increased $2.8 million or 8.1% to $37.1 million. Margins expanded by 140 basis points to 14.3%.

On Slide 16. Net revenues in Australasia for the second quarter increased $7.8 million or 6% to $138.2 million. The large increase in net revenues was primarily due to a 5% increase from the recent acquisition of Breezway as well as 1% core growth from pricing. For the second quarter, adjusted EBITDA in Australasia increased $3.1 million or 21.7% to $17.3 million. Margins expanded by 160 basis points to 12.5% as a result of the accretive benefit of the Breezway acquisition and profitable core growth.

Now I'd like to provide a brief update on our balance sheet and cash flow on Slide 17.

Cash and cash equivalents as of July 1, 2017, were $227.7 million compared to $102.7 million as of December 31, 2016. Total debt as of July 1, 2017, was $1.2 billion compared to $1.6 billion as of December 31, 2016. In the first quarter, we received net proceeds from our IPO of $472.4 million and used a portion of those proceeds to repay $375 million of debt that was raised in our November 2016 dividend recapitalization event. As of July 1, 2017, our net leverage ratio was 2.4x compared to 3.9x as of December 31, 2016. Our net leverage ratio is now within our medium-term target range.

Cash flow from operations improved in the first half of 2017 to $66.2 million from $12.6 million in the same period a year ago. And free cash flow improved $77 million to $46.3 million from a negative $30.7 million in the same period a year ago due to improved operating cash flows and reduced capital expenditures.

Our balance sheet remains strong. And our capital structure, liquidity and free cash flow generation continue to provide us with the flexibility to fund our strategic initiatives.

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

Thank you, Brooks.

I'll wrap up with our updated annual outlook for 2017. Our outlook is based on underlying market assumptions, specifically that new construction and repair and remodel growth in North America and Europe will continue and that the housing market in Australia will soften. Our assumptions also include continued margin expansion by executing on the initiatives of our operating model.

So for the full year, we affirm our original guidance of net revenue growth in the range of 1.5% to 3.5%. While we did experience a decrease in core growth in the second quarter, we have confidence in our full year revenue outlook due to the strength of our end markets. While we don't provide quarterly guidance, I can tell you that order activities, so far, in the third quarter is in line with our expectations. Based on our strong margin improvement performance for the first 6 months and high visibility into our pipeline of operational cost-savings initiatives, we also affirm our outlook for 2017 adjusted EBITDA of $440 million to $460 million. Lastly, we have reduced our outlook on capital expenditures to be $80 million to $90 million from our previous view of $90 million to $100 million. The reduction in capital expenditures is due to the phasing of certain major projects.

It is important to remember that we are still in the early stages of a multiyear turnaround. Our experienced leadership team and our operating model have us well positioned to continue delivering operational and financial improvement in 2017 and beyond.

In conclusion, I want to thank all of JELD-WEN's employees for their hard work. We would not be able to achieve any of these results if it wasn't for their commitment and passion.

With that, I will now ask the operator to please open the line for questions.

(Operator Instructions) Our first question is from the line of Mike Dahl with Barclays.

This is Matthew Bouley on for Mike today. I guess I wanted to start out with a question on the full year revenue guidance just given the dynamics in North America. So just how do you characterize the underlying market growth you're seeing outside of the rationalization and the difficult comparison that you called out? And then just given that, I mean, what if anything has changed in your North American revenue expectations within the full year guide; and thinking about some changes in currency and the addition of Mattiovi and things like that.

All right, well, thank you, Matthew. We're glad to have you on the call today and appreciate your question. As we think about the full year and particularly the second half, one of the things that I would certainly point out is, if you look back to last year, the way we experienced the market was a very strong first half, with a second half that was not quite as robust. And so one of the things that we're certainly thinking about is the comps in the rest of the year. Obviously, we -- as we've talked about in for now 6 months, one of the biggest movers for us is this business in Florida that we exited. And we'll continue to have that as a headwind in the second half because that was in our numbers last year, but what I can also tell you is that we've been working through some other, more traditional channels in the Florida market. And we've got some early wins there, and we do plan to start to close that gap as the year proceeds. In terms of the general marketplace -- and then I'll let Brooks hop in here on the FX aspect of your question, but in terms of the general marketplace, we do see North America continuing to be constructive, R&R being in the low to mid-single digits, new construction in the mid-single digits as well. We look over to Europe. It's probably very low single digits. And particularly, the U.K. is pretty flat, while the rest of Europe is growing a little bit. And then Australia is in a downturn. We talked about this on the last call. The downturn began in the western part of the country last year. It has now clearly moved to other parts of Australia. As we described before, this downturn is felt more severely in multifamily, and we're about 90% exposed to single family. Then that's not to say single family isn't softening. It is. We think it'll be down a 5% to 7% this year, but we have a fantastic team down there that's executing very well, as shown in quarter 2 results that, in spite of the market being down mid-single digits, they turned in revenue growth through some pricing and some market share gains. And so that's why we look at all of that. We added it all together. We do a bottoms-up, very detailed analysis. And we remain confident in our forecast that we'll end the year between 1.5% and 3.5% growth. Brooks, do you want to make a comment on FX and how it's affecting us?

Yes. And if you remember, last year, as we entered the second half of 2016, the dollar continued to strengthen. And then up through the end of the year, it really strengthened. And then as we exited 2016, into '17, we saw the dollar start to weaken. And then at the end of the second quarter, it had weakened fairly substantially and then even more so in July. So the end of 2016 was a headwind. The back half of 2016 was a headwind, and as we went through Q2, it started becoming less of a headwind and more flattish. And then as we saw the rates continue to strengthen in terms of our FX translation, it's now looking more like a tailwind in the back half of the year. So that's certainly, if you compare last year as a headwind and this year as a tailwind, we certainly expect a little bit of help from the FX side.

Okay, that's perfect. Second question is just shifting to the margin side and your costs savings initiatives. So in the second quarter, I mean, it would be helpful, I mean, if you'd be able to break out, I mean, to the extent you're able to offset any material inflation with both your sourcing and productivity buckets. And so as we look to the second half, just how should we think about that dynamic within your EBITDA guidance thinking about some of the recent moves in raw materials?

Okay, so a couple things on that. First of all, we always do look at the inflationary pressures. We have seen steel make a move here in the U.S., and we gone out with a steel door price increase to help alleviate that. Having said that, we continue to see our sourcing program deliver in excess of what the inflationary pressures are, and then our productivity programs continue to contribute as well. So the guidance that we gave in Q1 is pretty similar to what we have now or through Q2, as about half of that EBITDA improvement is coming from core growth. And obviously, for Q2, that's mostly pricing. And then the other half is coming through our cost-savings initiatives, both a combination of net inflation and then also -- net deflation from a materials perspective and then also our productivity initiatives. Does that help?

Yes, perfect.

Our next question is from the line of Bob Wetenhall with RBC Capital Markets.

Just as a reminder, can you really give us a more comprehensive view of kind of what's happening in core North American volumes? It looks like you've made the decision to walk away from some low-margin business in the Southeast, and it sounds like you have pretty good visibility into the second half of the year on the volume side. Could you just step us through what kind of visibility and what's giving you the confidence to look into what I would anticipate as decent acceleration in 2H?

Sure, Bob. Let me start with the first part of your question, which was walking us through the volume movement in the second quarter. So when you talk about the Southeast and stepping away some -- from some volume, I think what you're referencing is the -- we have a large retail partner who had a line review late last year. We looked at that line review and the opportunity and the price points. And we did decide to step away from, as Brooks mentioned, about $50 million of business in Florida. That's $50 million on an annualized basis. And then as I said earlier, we've been working through some other channels there to gain new opportunities in that particular market. The other thing that's driving the numbers in quarter 2 from a volume standpoint and a growth standpoint is that, in 2016, a different retail partner, another large, big box type operator, they decided to go all in with us on buying windows. And in quarter 2 of last year, we had a fairly significant stocking inventory build for them. That obviously did not repeat. That business is -- it's a multiyear agreement and it's going extremely well and growing, but we just don't have that huge onetime build that we had a year ago, and so that obviously affects the year-to-year comparison.

And then the third thing that's -- that we talked about is our wood window business, and let me just talk a little bit about what exactly is happening with our wood window business. This is a good business, a business set that has been and can be accretive to our overall company, but we have had some challenges recently. And I think it really comes down to the magnitude and the pace of the change that we're driving. Keep in mind that this is a major transformation of a nearly $4 billion company with operations in 5 continents. And as I've talked with several of you before, I think the trickiest part of this is not that knowing what we need to do but knowing at what pace we can drive the change. And right now as we look back, we feel pretty good about the pace. We think it's been a pretty aggressive pace, with 700 basis points of improvement since 2013, 160 basis points so far this year, and yet I wouldn't say that we get it perfect 100% of the time. And in wood windows, we may have pushed for too much change too fast. We upgraded the leadership team. We have 3 product lines there, a good, better, best; and we have 3 factories. We changed out 2 out of the 3 factory managers, and we also launched 2 of the 3 lines. We launched completely new lines in the line that serves the better segment of the market. And the line that serves the luxury or the best part of the market, we've launched 2 complete new lines there.

And so as we entered the busy season this summer, we then felt that there were -- we saw and realized that there were some manufacturing gaps that were exposed. And we've been challenged to achieve consistent and timely order fulfillment, so those led to some extended lead times and some back orders, which obviously have impacted sales. So we do have a detailed recovery plan. We've been adding additional resources, and we feel confident we'll get the wood window business performing to our expectations as we exit the year. And I think, more importantly, I'm certain that we will emerge on the other side of this with an even stronger and more competitive window business than we had before. And as I said, this is a good business, one that can be accretive to the company. So that's sort of what's happened in quarter 2. Much of it was expected and known. And then one piece was something that we did not necessarily expect, but I think we're all over it. In terms of this -- the rest of the year, we have very detailed funnel management processes in North America where we identify customer by customer, region by region what our opportunity set is. We track our conversion rates. We know -- in areas where we have walked away from business, we're now gaining business back through alternative channels. And again, I can just say that, when we put all of that together in a backdrop of a construction market that we think the first half this year was not as strong as the first half last year and if we look at the order intake and the funnel that we've got, we think the second half is -- of this year will be a little stronger than the second half of last year.

That's I appreciate the candor and the details. That's extremely helpful. And in spite of the fact that sales was probably a little bit light versus what I think some people might have thought, you made big strides on the margin front. Switching gears: It sounds like the M&A machine is still intact and operating. You picked up Mattiovi. It would be great if we could get some kind of color or details just to frame the size of the acquisition, what kind of revenue and margin contribution it would -- it's going to make to the consolidated entity and what you think. You're cutting down CapEx. Free cash flow is going to be robust. What's your appetite for M&A and capital allocation priorities?

All right, thanks, Bob. Yes, we're very pleased with the Mattiovi acquisition. And I'm going to ask John Linker, who runs our M&A activities, to delve into those questions that you asked, but in terms of capital allocation, we -- you are absolutely correct. We have a very rich pipeline and we do have an appetite. And I would be surprised if we don't have some more things to talk about throughout the rest of the year, but John, why don't you tell them about Mattiovi?

Sure. Thanks for the question, Bob. So as Mark mentioned on the call, the revenue of Mattiovi, it's about EUR 23 million, so it is a bit on the smaller side but very strategic for us in terms of the benefit it brings to our Nordic business, improved market position in a market where we already have a very nice presence; and also brings us some critical capacity for doorframes at a time where it's much needed to grow that business. But from a financial metrics standpoint, it is accretive immediately to EBITDA margins, to overall JELD-WEN EBITDA margins. And from a multiples standpoint, we're not going to break out individual deal multiples for small bolt-ons like this, but I can tell you this is consistent with deals we've done in the past, which we've suggested that on average for the 7 deals we've done we've been buying for around a 6x EBITDA multiple or less, including year 1 synergies. So this deal was in the ballpark, and certainly everything we've got in the pipeline. As you think about, as Mark mentioned, our capital allocation for the remainder of the year for the free -- both the free cash flow that we're expecting to generate in the second half as well as the cash reserves that we have, we've got a healthy pipeline of similar-size bolt-on deals, $50 million to $100 million type enterprise value transactions that would be close to our core business and strategy and also very, very accretive and attract good deals as well.

Our next question is from the line of Nishu Sood with Deutsche Bank.

I wanted to start in Australia. Mark, you were mentioning obviously the evolving downturn there. Given that, if you look at your year-to-date performance, you factor out those extra shipping days we had in 1Q, it seems like you've held volumes steady there, which is obviously a good performance considering the market backdrop. So is that perhaps a case where there might be some delayed impact from the housing recovery into your volumes? Or are there market share gains? Obviously, you mentioned the new aluminum high-end product line Alumiere, I think you called it. So is it a case of market share gains, or might we expect some weakness as the year unfolds?

Sure. So I think the first thing is that the headlines that we all read about Australia will be for the sort of the market and its entirety. And if you think back to how this began, there was a little bit of a bubble that formed there, particularly from foreign investment that took place, and that bubble was primarily in the multifamily area. And as I've already said, we think our exposure to multifamily is it's probably less than 10% of our business there. And so I don't think you'll ever see us feeling the impact of the downturn in terms of what you'll read in the headlines, because of that exposure profile. Secondly, we've been anticipating the downturn and have taken a number of steps to prepare ourselves. Many of us in the business have come from industrial -- the industrial industries where things can be a bit cyclical, and we believe we have a playbook for this. And so for example, one of the markets that seems to be untouched from this downturn in Australia is R&R, and so over about a year ago, we began reallocating resources to increase our participation in the R&R piece of the market. Lastly, we have picked up share. There are very specific, meaningfully large builders who have made a decision to come over to the JELD-WEN family in Australia. And frankly, one of the things that helped convince them that, that would be a good idea was the investment we made in the new glass plant. We invited quite a number of builders, both existing customers and prospective customers, to tour the glass plant when it was opened earlier this year. And as they saw the state-of-the-art factory, how well things were laid out, the quality that we could produce and at a favorable cost, we actually won some business as a result of that. So I think we are gaining share. We have been carefully and selectively getting some price. And then we're managing our exposure so that we're exposed the least to the places that are seeing the most pain.

Got it, got it, very helpful. Switching over to North America: I think there was some sense maybe from discussions in North American pricing that there might be a slowdown '17 versus '16 because there were some stories such as interior doors and vinyl windows where the pricing momentum was perhaps slowing, but looking at your first half results, the pricing momentum has -- seems to have sustained. I know that's obviously across a very broad portfolio of products, so I was wondering if you could dig into the first half and the second quarter continuation of pricing gains and kind of talk us through where that's coming from and where it might have turned out to be a little bit better than expected.

We'd be happy to. I think the first thing I would say is that we actually don't -- we try not to give forward guidance around pricing. And the reason for that is we don't ever want to put ourselves in a position where we have to deliver on a pricing number and then do that at the expense of the other levers around mix or volume. We want to be free to look at all three and look at what's happening in the market and then do what's best for our investors. And so there may be situations where we decide that a little more volume would actually create a greater return. And there may be situations where we see the opportunity to get a little more price but maybe at the expense of volume and we think that will drive the greater return. And so we're constantly watching the market and making those trade-offs in real time, and so that's why we don't give any forward guidance on pricing. Now in terms of what happened, looking backwards, we are willing to share what happened and what some of the drivers were, and I'm going to invite Brooks to do that.

Yes. I would say a couple of things. And the first, it lines up exactly with what Mark just said. When you, when we look at our entire manufacturing network and the demand that's coming in, we look at all the levers and we figure out which one we think is going to pull the most profitability for us. And so I would say we'd probably been pulling more on the price lever in the first half of the year, as opposed to the volume lever. And you can see that in the numbers obviously, right? Volume is down somewhat for a number of different reasons, but price is up. And so -- and then that's resulted in nice margin accretion. I will say the other thing is I think we're seeing -- we took a fairly conservative view heading into the year in terms of how sticky we thought the price would be, and I think we're just seeing better realization overall. We always assume there's going to be some level of breakage when we go out with price increases. And I think, this year, we're seeing less of that breakage and more of a drop-through to the bottom line. Now as we look forward, obviously as Mark said, we want to be able to use both the price lever and the volume lever to drive the best results to the bottom line. So we'll continue to evaluate that as we move through the year and make sure we make the best decision for our shareholders.

Our next question is from the line of Stephen East with Wells Fargo.

Mark, maybe you could talk a little bit on North America replacement of the Florida business. What's your time line to recover all of that?

Happy to talk about that, Stephen. We identified a number of opportunities, so literally about a dozen or more, where we felt that perhaps our participation in the retail channel had prevented us from getting some penetration. And I'm pleased to say we have some early wins. I think it'll take a little bit of time as we ramp up some of the early wins and as we continue to convert more of those customers over to JELD-WEN. It's a lot of volume, and I think it'll probably take us outside of a year to get all of that volume back in the region. I think we have a good chance of, within a year, replacing the vast majority of that EBITDA because generally speaking this -- these other channels are accretive relative to the business that we exited.

All right, perfect. And then another building products company yesterday said vinyl and aluminum pricing had spiked pretty sharply for them. You all didn't really mention that, so one, I was hoping if you could talk to that issue a little bit. And then on SG&A, legals hit you pretty good in the first half of the year. Maybe your expectations moving forward. And if you just backed out the charges, what type of run rates do you feel comfortable with over the next 2 to 4 quarters or so?

Okay, so first of all, I'll let Brooks jump in on the SG&A question after I answer your question about pricing in vinyl. So we actually don't break out pricing gains on a products-by-products basis. We think, for competitive reasons, it's to our advantage to talk to this in a little bit broader strokes...

I'm sorry, Mark. I meant cost-wise, are you seeing, they were, seeing it come through? I apologize. They were seeing it come through, yes, yes.

I am sorry. I misunderstood your question, Stephen, about costs. Sorry. I heard "price." My mistake. So in terms of raw material costs, Brooks already mentioned steel as one where we've seen some impact. And we're able to quickly go out and issue a price increase on our steel doors. In terms of vinyl, we've seen -- what are we seeing, Brooks?

Well, I think overall we have seen some increase in resins and those petroleum-based products, but we've actually seen that more in doors. We've -- we went out with a new RFP for vinyl not too long ago, and we signed some new contracts with some new suppliers. And so we've largely been insulated from any of the market movements related to vinyl, so we feel comfortable and confident in our vinyl supply as we move forward. And just hitting on just a couple of other things: We have seen aluminum go up both in Australia and the U.S. And Australia, most windows are made of aluminum. And then we have seen timber, both supply and price, take a bit of an upturn; well, capacities -- capacity, I'm sorry, going down but then pricing going up in Europe as well. So just to give you a little broad base of what's going on from a material inflation perspective. And then on the SG&A side, if you think about it, if you look at quarter 2, we were up on SG&A about $10 million year-over-year. About $8 million of that are these legal expenses, which we expect to be temporary in nature. Right now we expect those to continue through, best estimate is first half of 2018, before those are complete. Absent that, $1.3 million of the increase was related to acquisitions. Then you had about $2 million related to labor increases and normal salary inflation, things like that; and then offset by about $2 million of FX help. So if you take those legal expenses out, we feel pretty comfortable and confident in our year-over-year SG&A net spend. We have not layered a lot of new SG&A on, and so we're pretty confident that, that run rate will continue.

Our next question is from the line of Jason Marcus with JPMorgan.

First question, just within North America. I know Canada is not a huge part of your business, but I wanted to see if you can give a little bit more color about what the trends you're seeing there relative to the U.S. from both a demand and a pricing perspective. And I guess also, within Europe, if you can talk about the U.K.

Yes, I'd be happy to do that. So first of all, you're right. The Canadian housing market does not necessarily mirror what's happening in the United States. We've seen strength in certain parts of Canada, and others have been really challenged. The Toronto market has been very, very robust; and continues to be so, although a number of experts are saying it may be overheating and due for a correction. I would say that the western, the British Columbia area has also been strong, not as hot as Toronto but it's been strong. And then the rest of Canada has actually been quite weak. Our business in Canada has made great strides as part of this overall business transformation. It's been a story that's similar to other parts of the world where we've been changing the portfolio in terms of products and customers to a more favorable mix. We've been bringing operational efficiency into the plants. And we're very pleased with the performance we see this year in our business in Canada, but it's not driven by some super high demand or a strong market. It's sort of in the wake of a mixed market where we're seeing some really nice gains. The U.K., ever since Brexit has been in a little bit of a state of confusion, we've not seen a huge drop in the housing market. They've got a pent-up need. They're behind the curve in providing enough housing for their population. And so we've seen very low growth but still growth nonetheless in the U.K. market. I would say that the U.K. is probably the one place where we still have the most work to do in terms of rationalizing the portfolio from a customer and product standpoint, and that work is underway. We've done some of that in quarter 2. We have an outlook -- some more we're doing here through the back half of the year, but that's a market that we're watching closely to see is it going to regain its footing and get on a stronger growth path or will it just remain in sort of this malaise.

Great. And then on the new products side, can you just talk a little about some of your new product introductions and how much growth you think they've contributed over the last couple quarters? And then as you think about your 2017 outlook for the rest of the year, how much are you embedding from new product introduction?

Okay, yes. So we're very excited about the improvements we have in our new products. As -- I highlighted a couple of the actual new products that we think the customers are most excited about, but that's really what I highlighted on the call is such a small sample relative to the number of new products that we roll out. If you compare it to where we were just 2 or 3 years ago, we are now rolling out new products on a rate of about double what we were doing then. And that means that there's over 100 new products that will be rolled out this year. Now the way we think about these products is they take a little while to get some traction in the marketplace. There's a natural ramp. They have to become -- the distributors and dealers. And the retail channel has to bring it in, start to show it. It has to get designed into people's projects and sent to their homes. And so we actually think about it from a 3-year ramp-up. It takes about 3 years for them to ramp. And then we measure over a 5-year period what percentage of our sales are coming from new products. We believe that the number of -- the amount of sales that'll come from new products will double over the next 3 years, but we're starting from a fairly low place. We're -- new products as a percentage of our sales is probably in the mid-single digits. And as I said, we think we can double that with the rate at which we're launching new products in all 3 regions.

Yes. And the only other thing I would add to that is you can't think about all this being incremental, right? I mean because a lot of what we're doing is introducing new products that are replacing products that haven't been updated or replaced in many, many years. And so a lot of what we're doing right now and as Mark talked about earlier with the wood window product line, we're just replacing a product line that needed to be updated. And so we've updated it, and so it's replacing sales from the previous product line. So having said that, we do expect to get accretive margins and help drive additional volume as we introduce products that our customers like more, that are designed better, designed for manufacturability, those kinds of things.

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

It's actually [Pete Gallo] on for John. Just a couple of quick ones. Brooks, I think on the lower CapEx guide you might have mentioned that it was kind of phasing of investments, and I'm just wondering if this is related at all to a slower rollout in Australia glass plant or maybe even a slower rollout of your ERP system. Just any color there would be helpful.

No. I think what it is, is we -- there was a lot of replacement CapEx that needed to be done over 2015 and 2016 as we improve the margins and the cash flow of the company. And as we look forward now, we're looking at a lot of bigger projects. When you think about things like automation and designed for manufacturability and a little being more vertically integrated, things like that, they're just bigger projects. And those have to go through a tougher screening process. And so we have a lot of projects in the pipeline and we have plenty of liquidity, so it's certainly not an issue where we're constricting CapEx in any way. We're just making sure that we go through the right process in terms of everything being able to launch flawlessly and be accretive as quickly as possible. And so we do have several big projects in the pipeline. The ERP implementation is on track. There's been no holdup with that. And so it's really just a matter of timing and phasing. And some of these things may get approved in the back half of the year, but then some of the money may not get spent till the first half of 2018. So it may be lower in 2017, but then we'll make up that ground in 2018. A lot of that is just the timing of when things finally get approved.

And [Pete], just specifically to the glass plant in Australia which you asked about, it is right on track. We've told you guys it would be a little bit of a headwind in the first half and will start to become a tailwind in the second half, and we believe that's still the case.

Got it. No, that's all really helpful, guys. And then maybe just a couple quick clarifications for modeling purposes. Just an update on the shipping days impact, how we should think about that in 3Q and 4Q. And then Brooks, any update on the tax rate for the year?

Yes. So the -- as we said before, no impact on Q3. And then the impact on -- if you just look at Q4 alone, should be in that 5% range, the same as the impact in Q1. So those should really offset each other, and no impact in Q3. And then on the tax rate, 28% to 32% GAAP tax, mid-teens cash tax, we continue to see that rate through the -- those rates through the balance of the year.

All right, unfortunately, with that, we have to wrap up the call. Thank you all for your attention and your interest and your support. And we wish you all to have a great day.

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