JELD-WEN Holding Inc (JELD) 2017 Q3 法說會逐字稿

Greetings, and welcome to JELD-WEN Holding's Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, John Linker, Senior Vice President of Corporate Development and Investor Relations. 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 Mark Beck, our Chief Executive Officer; and Brooks Mallard, our Chief Financial Officer.

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

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 Mark.

Thanks, John. Good morning, everyone, and thank you for joining us. We're pleased to deliver third quarter net revenue growth of 6.3%, comprised of core growth in all 3 reporting segments, as well as another consecutive quarter of margin improvement. Additionally, our cash flow performance was excellent, with free cash flow exceeding net income on a year-to-date basis. We are also making good progress in M&A, announcing several deals in the quarter and delivering synergies from our earlier acquisitions. Overall, we continue to make the investments and do the work needed to achieve our long-term targets for the company.

Today, I'm excited to share with you the latest update on our business transformation. I'll begin today's call with a brief update on some of the key initiatives of our operating model and highlights from our third quarter performance. Then I will turn the call over to Brooks who will take you through the financials in more detail. Finally, I will wrap up the call with our updated financial outlook for full year 2017 before we open the line for your questions.

I'll start on Slide 4 of the presentation with a very brief reminder for those who are new to our story. JELD-WEN is a global leader in windows and doors with a broad product offering and a scaled platform. We hold the #1 position by net revenues in the majority of the countries and markets we serve. Our family of well-known brands is a key differentiator. We've enhanced our strong portfolio in the last few years with M&A, which I will talk more about in a few minutes.

We are leveraging a great set of assets and a talented and experienced leadership team to transform JELD-WEN into a world-class company. We've delivered more than 700 basis points of margin expansion since our business transformation began in 2013. While this is a significant improvement, we believe that there remains a long runway ahead for further gains. Our last 12 months EBITDA margin is now 11.6%, and 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 5. 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. During quarter 3, we made progress on all aspects of this operating model.

On Page 6, I would like to walk you through a few proof points of the results we have seen from JEM. Our new global JEM leader, Jim Garcia, and his team are making significant progress standardizing and providing training around JEM. Each of these examples shows some quick wins from deploying the fundamental JEM tools. Now while these examples are small, they illustrate the magnitude of the performance opportunity across our manufacturing network.

In our Ringtown and Grinnell window facilities, we held kaizen events using several of the fundamental JEM tools to streamline the process and improve flow. In Ringtown, with a 2-week kaizen, we achieved a 44% increase in throughput in the window production line, and in Grinnell, with a 3-week kaizen, we achieved a 31% improvement. Our improvements in Toronto are representative of the step changes in operational improvements that can be achieved over a longer time horizon as JEM becomes the culture of the organization. In this facility, the transformation began in 2016 with a new leadership team who embedded JEM into all aspects of the operation, and they trained the entire organization.

As a result, we've completed over 200 mini kaizens and seen dramatic changes in safety, quality and productivity. For example, the safety incident rate went from 4 to 0. Warranty was cut in half, and we freed up excess floor space while growing revenues by 19%. These JEM proof points were achieved with minimal capital investment so the paybacks and returns are quite attractive. As JEM continues to be embedded in our culture across all of our plants, we expect the impact of these opportunities to increase.

Now shifting to the pillar of strategic M&A. I'm pleased to introduce you to our most recent bolt-on acquisitions. First, on Page 7, I'll highlight the acquisition of MMI Door, which closed on August 25. MMI is an innovator and leader in providing full door systems with customizable options and features that go well beyond the door slide itself, things including the frame, sill, molding, glass, finishing options and hardware. As homebuilders and contractors struggle with labor cost and labor availability, they expect suppliers such as MMI to provide more of the value-add that historically was done on the job site.

Our strategy here is to improve the service offerings of our North American door business and improve lead times to customers. In doing so, we can create and capture more value. MMI adds approximately $90 million in annual revenue and will be immediately accretive to our adjusted EBITDA margins.

Next, on Page 8, I'll highlight the acquisition of the Kolder Group, which closed on August 31. While the majority of our global revenue comes from doors and windows, in Australia, we also have a very nice existing business in the supply and installation of glass, shower enclosures and closet systems. You may recall that in Australia, we are vertically integrated in glass processing, which enhances our competitive position in the glass-intensive area of shower enclosures.

Kolder significantly expands our leadership position in shower enclosures and closet systems in the major population centers of Eastern Australia. We expect revenue synergies from cross-selling JELD-WEN's other door and window product lines to the Kolder customer base, and we expect cost synergies by leveraging our combined glass processing assets between the 2 companies. Kolder adds approximately AUD 30 million of annual revenue at immediately accretive EBITDA margins.

And finally, on Page 9, our most recent deal, Domoferm, which we announced on October 11 and we expect to close in mid- to late first quarter 2018, subject to customary closing conditions. Domoferm is headquartered in Vienna, Austria with additional manufacturing operations in Germany and in the Czech Republic. Domoferm is a European leader in steel frames, steel doors and fire doors, which is a significant expansion of our product range. In Europe, doors are typically certified and sold as a system with the frame and other components, so this acquisition will allow us to better serve the needs of our customers. We expect Domoferm to add approximately EUR 110 million in annualized revenues at EBITDA margins that will initially be dilutive for the first 12 to 24 months until we capture expected cost synergies.

On Page 10, to wrap up my comments on M&A, I want to emphasize that our M&A program is delivering excellent results and creating significant shareholder value. For the 6 transactions from 2015 and 2016 which have now lapped a full year of performance, we paid $173 million in cash and delivered over $300 million of revenue at an EBITDA margin of approximately 16%. Our 2017 year-to-date transactions are off to a good start, and we expect to create significant value with those deals as well. On a cumulative basis, our M&A investments are on track to deliver returns that are significantly higher than our cost of capital. With this type of financial profile, you can understand why we are so enthusiastic about M&A as our first choice for deployment of free cash flow.

Now turning to Slide 11. I'll discuss some highlights of our third quarter results. Our net revenues increased 6.3% with core revenue growth in all 3 reporting segments. In North America, our core revenues increased 2% on a reported basis, but the underlying core growth was approximately 4% excluding the impact of the previously announced business rationalization in Florida. Overall, in the North American window and door market, we see a positive demand environment and favorable pricing dynamics. While our North American window business is continuing to recover from the lead time issues discussed last quarter, our North American door business grew very nicely in the quarter with mid-single-digit volume growth in both interior and exterior doors. This is excluding the Florida business line rationalization impact.

From a profitability standpoint, we delivered another consecutive quarter of growth in adjusted EBITDA and margins. We continue to be on track to deliver on our annual margin improvement goal of 100 to 150 basis points. Our margin expansion this quarter was limited as we absorbed the impact of operating headwinds in our North American windows business and in the U.K.

With respect to windows, in the third quarter, we've made progress in reducing the extended lead times discussed in our second quarter earnings call, and we expect to exit the year with a normalized backlog of orders. In the third quarter, as we corrected these lead time issues, we incurred excess labor costs. Additionally, we experienced increases in freight and logistics as a result of expediting late orders and constraints on freight availability due to the hurricanes. Also, in the U.K., the timing of our pricing optimization initiatives lagged inflationary cost pressures on materials, resulting in margin compression. In both cases, we see these margin headwinds as temporary and isolated, and we do not see ongoing pressure in these areas in 2018.

Our cash flow conversion performance continues to be excellent as we have now delivered a year-over-year improvement of $94 million through the third quarter. And as we've already discussed, our capital deployment through M&A has a lot of momentum, and we are very enthusiastic about the quality of our pipeline. In the area of profitable core growth, we are seeing good traction from our investments in service, quality, innovation and merchandising.

And we've just been notified that we were awarded some new business from a major North American retail line review for doors. While the details are still being finalized, we do expect to start transitioning the business in the second quarter of 2018. Moving forward, we don't plan to publicly comment on every line review decision. However, we know that this one was of interest.

Finally, on Page 12, I will reiterate our consistent track record of margin improvement. We continue to deliver year-over-year margin performance improvement both on a quarterly and a year-to-date basis.

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

Thanks, Mark. Starting on Slide 14. For the third quarter, net revenues increased $58.9 million or 6.3% to $991.4 million. The increase was driven by core growth in all 3 segments, the favorable impact of foreign exchange and the contribution of recent acquisitions. I will address the revenue drivers in more detail in a moment. Year-to-date, net revenues increased $94.3 million or 3.5% to $2.8 billion.

For the third quarter, gross margin increased $22.5 million or 11% to $228.2 million. Gross margin as a percentage of net revenue expanded 90 basis points from 22.1% in 2016 to 23% in 2017. Year-to-date, gross margin as a percentage of net revenue expanded 190 basis points from 21.1% in 2016 to 23% in 2017. The increases in gross margin and gross margin percentage were due to favorable pricing and operational cost savings and the absence of a $7 million charge to material costs in the same period last year. Improvements in gross margin were partially offset by the previously mentioned operational headwinds in North American windows and the U.K.

For the third quarter, SG&A expense increased $12.8 million or 9.9% to $142.6 million. SG&A expense as a percentage of net revenues was 14.4% compared to 13.9% 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 $9.1 million. Year-to-date, SG&A expense as a percentage of net revenues was 15.6% compared to 14.7% 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 $24.9 million. Both for the quarter and the full year, absent these temporary discrete expenses, our SG&A as a percentage of net revenue would have been unchanged.

For the third quarter, net interest expense decreased $1.3 million to $17.2 million. The decrease was primarily due to improved terms related to the amendment to our long-term loan agreement earlier this year.

For the third quarter, other income decreased $10.6 million, resulting in other expense of $2.9 million, primarily due to nonrecurring legal settlement income in the same period last year.

For the third quarter, net income increased $5.2 million to $51.3 million. Net income in the third quarter of 2017 was unfavorably impacted by the previously mentioned discrete items of legal costs and was favorably impacted by a lower effective tax rate compared to the prior year. Year-to-date, net income decreased $14.5 million to $104.5 million. Net income in the first 9 months of 2017 was unfavorably impacted by the previously mentioned discrete items of financing fee write-offs and legal costs, and the first 9 months of 2016 were favorably impacted by the release of certain valuation allowances.

For the quarter, diluted earnings per share was $0.47 and adjusted diluted earnings per share was $0.55. We don't include a prior-period EPS 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 third quarter, adjusted EBITDA increased $10.2 million or 8.7% to $128.2 million. Adjusted EBITDA margin expanded 20 basis points in the quarter to 12.9% compared to 12.7% a year ago. The increase in adjusted EBITDA and margin was primarily due to favorable pricing and operational cost savings, offset by operational headwinds in North American windows and the unfavorable impact of freight costs in the U.S. driven largely by higher rates and scheduling inefficiencies arising from the major hurricane events. Year-to-date, adjusted EBITDA margin expanded 120 basis points to 12% compared to 10.8% a year ago.

Impairment and restructuring expense is tracking lower than prior year with $2.3 million incurred in the quarter compared to $3.9 million in the third quarter of 2016. On a year-to-date basis, impairment and restructuring expense was $4 million compared to $9 million in the prior year. Entering Q4, we expect some restructuring activity in North America as we work to improve the pace and consistency of the operational improvements in that business segment. In doing so, we expect to lean out the organizational structure, reduce overhead and top-grade talent in certain key positions. The financial impact of these changes will be a Q4 restructuring charge of approximately $6 million to $7 million with a payback of less than 1 year.

Slide 15 provides a buildup of our revenue drivers. For the third quarter, the 6.3% increase in our revenues was driven by 2% increase in core revenues, 3% contribution from recent acquisitions and favorable foreign exchange impact of 2%. The core growth of 2% was comprised of a 1% benefit from pricing and a 1% increase from volume mix. For the first 9 months, the 3.5% improvement in our revenues was driven by 2% core growth and 2% contribution from recent acquisitions. Core growth was comprised of a 1% benefit from pricing and a 1% increase from volume/mix.

Next, I'll move to the segment detail, beginning with North America on Slide 16. Net revenues in North America for the third quarter increased $19.7 million or 3.6% to $572 million. The increase in net revenues was mainly due to core growth of 2%, primarily due to the benefit of pricing and a 2% contribution from the acquisition of MMI Door. Volume/mix was flat due to the previously announced business line exit in Florida, which is estimated to have a $50 million annualized revenue impact. We also saw continued revenue headwinds in our North American window business due to the previously discussed delivery issues and extended lead times.

Third quarter adjusted EBITDA in North America increased $3.8 million or 4.8% to $82.5 million. EBITDA margins expanded by 10 basis points to 14.4%. The increase in adjusted EBITDA was primarily due to favorable pricing and operational cost savings, offset by unfavorable operational performance in North American windows and the previously mentioned higher freight cost.

On Slide 17, net revenues in Europe for the third quarter increased $18.2 million or 7.4% to $265.1 million. The increase in net revenues was primarily due to the favorable impact of foreign exchange of 4%, contribution from the Mattiovi acquisition of 2% and core growth of 1%. Europe volume growth was limited due to the rationalization of certain products and customers in the U.K. For the third quarter, adjusted EBITDA in Europe increased $1.9 million or 6.2% to $33.4 million. Margins decreased by 10 basis points to 12.6%, largely due to material inflation and pricing in the U.K.

On Slide 18, net revenues in Australasia for the third quarter increased $21 million or 15.7% to $154.3 million. The large increase in net revenues was primarily due to an 8% increase from the recent acquisitions of Breezway and Kolder as well as 4% core growth and 4% from favorable foreign exchange impact. For the third quarter, adjusted EBITDA in Australasia increased $5.1 million or 28.4% to $22.9 million. Margins expanded by 140 basis points to 14.8% as a result of the accretive benefit of the acquisitions and profitable core growth.

Now I'd like to provide a brief update on our balance sheet and cash flow on Slide 19. Cash and cash equivalents as of September 30, 2017, were $219.5 million compared to $102.7 million as of December 31, 2016. Total debt as of September 30, 2017, was $1.3 billion (sic) [$1.03 billion] compared to $1.6 billion as of December 31, 2016. The reduction in debt was primarily due to the net proceeds of our IPO earlier this year. As of September 30, 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 in the first 9 months of 2017 improved to $174.1 million from $110.2 million in the same period a year ago. Free cash flow improved $94 million to $141.7 million from $47.7 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.

Thanks, Brooks. I'll wrap up on Page 21 with our updated annual outlook for 2017. Our outlook is based on underlying market assumptions, specifically that new construction and the repair and remodel growth in North America and Europe will continue and that the housing market in Australia will be a headwind. Our assumptions also include continued margin expansion by executing on the initiatives of our operating model. Our updated outlook also takes into account our recent acquisition activity. So for the full year, our net revenue growth expectation is now 2% to 4% compared to our previous outlook of 1.5% to 3.5%. The increase in the revenue growth outlook is primarily due to the recent acquisitions of MMI Door and Kolder.

We are refining our outlook for 2017 adjusted EBITDA to be $440 million to $450 million. This is from our previous outlook of $440 million to $460 million. Our new outlook takes into account the partial year contributions of our recent acquisitions offset by operational headwinds I discussed as well as expected investments in the fourth quarter related to the line review win that I mentioned earlier in the call.

Lastly, we have reduced our outlook on capital expenditures to be $60 million to $70 million from our previous view of $80 million to $90 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 and that there will be quarter-to-quarter fluctuations in the cadence of our margin improvement. Our experienced leadership team and our operating model have us well positioned to continue delivering operational and financial improvement in 2017 and beyond.

Looking into next year, while we won't issue our formal guidance for 2018 until our next call in February, our growth outlook for 2018 is consistent with the framework we have discussed previously. In 2018, we expect top line growth to accelerate from 2017 with net revenue growth of mid-single digits, including the impact of the recently closed acquisitions. We will add Domoferm's revenue contribution and any other new M&A to our outlook after closing occurs. From a margin improvement standpoint, we continue to expect EBITDA margin improvement in the range of 100 to 150 basis points. 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.

To wrap up, before we open the line for questions, I would like to leave you with these thoughts. We are delivering core revenue growth with positive pricing. We continue to deliver year-over-year margin improvement. Our cash flow conversion is excellent with free cash flow in excess of net income, and we continue to create shareholder value through M&A by delivering on synergies from the deals we have closed as well as maintaining a healthy pipeline of future opportunities. We are very well positioned to take this positive momentum into 2018 and beyond.

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

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

I wanted to start by hopefully just getting a little bit more detail on the adjustments to guidance. And so -- I think some of the operational headwinds were contemplated in the prior guide. So could you just help us bridge how much were some of the then incremental headwinds you experienced, such as the freight and delivery versus how much of the reduction is coming from these investments ahead of the new business win?

Yes. Mike, this is Brooks. So the way that we see it in total, we're seeing about $10 million of headwinds -- if you go from midpoint to midpoint, $10 million of headwinds offset by about $5 million of favorable impact from the acquisitions. And of that $10 million, the majority of it, which I would say is about $8 million, is going to be a combination of freight -- continued freight headwinds as well as the operational and volume headwinds associated with the windows issues above and beyond what we were thinking before. And then there's $1 million to $2 million of additional expense as we get ready for this retail business. So that's a pretty -- that's a broad breakout of how it rolls up.

Got it. That's helpful. And then as it relates to the new business wins, understand that you don't want to give a tremendous amount of detail, but is there anything you can frame for us relative to some of the major business wins that you walked -- or the major business that you walked away from this year? Is it comparable in size? And is this something that you're going to be able to service out of your existing assets? Or should we expect anything else on the capacity side associated with this?

Great. Mike, this is Mark. You're absolutely right. We've worked very hard to be quite disciplined and rationalize some business that was not attractive, and so as we pursue new business, it's imperative that we have that same level of discipline. And we seek to pursue business where we think it can be a win-win, where the customer is going to get some great new products, great service, quality, some innovative merchandising, and that is the basis upon which we think we've won this business. But it also has to be a win for us, and certainly, this new business that we've won does meet those criteria. We will be serving this business across multiple regions. There'll be stores in more than just one region, and we do believe that the existing capacity that we have near the stores that need to be served will be adequate. In some cases, we will need to add an additional shift. That means hiring and training more folks to come in and run the factory. But we do not need to necessarily put any new facilities in place, and any investments and equipment would be fairly minimal. So again, we're not going to say a whole lot more. Oh, you did ask about the size of it. I would say it is roughly comparable to what we walked away from earlier this year in Florida.

Okay, that's really helpful. And then last one from me. I think, Domoferm seems like a nice strategic fit in Europe. I know you mentioned that the margins are currently dilutive, and there's a 12- to 24-month plan to bring them up to line average in Europe. Can you just give us a little more detail on kind of how that business was run or structured, and what are the major things that you need to do and kind of time line for how meaningful some of the improvement could be over the next 12 months?

Mike, it's John. So Domoferm, from a manufacturing standpoint, it's a private equity-owned business for the last 4, 5 years. They've done a lot of nice things to improve certain aspects of the business, made some investments. But in some respects, I think the operations of the business looks not too dissimilar than maybe JELD-WEN did a few years ago. It was run in a very silo-ed mentality. So each of those 4 manufacturing facilities that Mark talked about were ran sort of independently, and there's really not a lot of coordination around productivity and some of the sourcing efforts. And so it's really the same playbook we're running with JEM on our core business is the same playbook we plan to run with Domoferm in terms of implementing best practices, productivity, sourcing, just sort of leaning out the operations. So there's nothing in terms of facility closures or anything like that, that we have contemplated. It's really just the blocking and tackling of productivity, and it does take a bit of time. And the cadence we're on with our core business is 100, 150 bps a year. So if you think about something that's at a single-digit margin profile, to get it up to where JELD-WEN is, it's just going to take us a bit of time. But we feel very confident about our plans to get there. And as you said, from a strategic fit standpoint, this acquisition fills a really critical gap in our portfolio in Europe, and we're excited about the prospects for revenue synergies as well.

Mike, I would just add. I think John covered the manufacturing side very well. But there is also an opportunity -- again, not unlike where we were a few years back, an opportunity around better pricing discipline that we can also bring to bear to help that business.

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

I wanted to ask about '18. Great to see the confidence, the mid-single-digits revenue growth expectation for 2018. This new business win and the acquisitions kind of get you half of the way to that mid-single digits. So core growth implies some modest acceleration. Just wanted to get your thoughts there on the core business. Obviously, the new business win is core, but I'm talking about kind of the base business. What are your thoughts there? You mentioned a positive outlook, obviously, in North America. Just wanted to get your thoughts on the core business and how you see that trending into '18.

Sure. Thank you for the question. Your -- I think your math is correct. We do see a modest acceleration of core growth. And as we think about it, there's a few drivers that I think are notable. I mean, first of all, we will not have the headwinds associated with the loss of a large chunk of retail business that we had this year. It will continue through the first quarter, but then for 3 quarters of the year, that will be behind us because that business transitioned last year in April and May. The second thing I would point out is, this year, our door business has been already performing kind of in the range that we're talking about. And so it's not necessarily we're needing a big change there. We need to continue doing what we're doing. We do have some nice new products, such as the Statement prefinished door line, which is doing very well. In fact, our entire fiberglass door line is growing well above the mid-single-digit range. And we see that continuing. What has kind of held us back a bit this year has been wood windows, where we've had these struggles with lead time. That kind of hurts you 2 ways. It hurts you as you don't get the sales as quickly because you're delayed in getting the product out, but it also hurts you a second time as some customers choose to place orders with alternative sources for a short period of time until you get your lead times back down. So we think as we get the wood window problems behind us by the end of this year, that becomes not a drag, and it's actually contributing to the growth. So you add those 3 things together, and I think we do feel confident that we can accelerate core growth modestly in 2018.

Got it. Great. And then keeping on the topic of '18, also very encouraging to see you discussing the potential margin improvement in 2018, another year of 100 to 150 basis points. Definitely appreciate the examples you gave of that in the slide deck, but maybe if you could kind of give us a kind of state of the operational margin improvement since IPO. How does it progress to get to your expectations? Obviously, there have been some challenges here. And also, a similar vein of question, what are you kind of seeing into 2018 that gives you the confidence for that statement as well?

Certainly. So since the IPO, our -- we have continued to drive productivity. Our sourcing program, I would say, has actually exceeded our expectations. That program has great legs in that, as we realize savings, we continue to add new projects to the pipeline, and so our pipeline seems to continue to be just as robust even though we complete certain projects and take them out of the pipeline. And so I would say that one has over-delivered a little bit. I think, on pure productivity, we would say that it's under-delivered a bit, and that's primarily due to the challenges that we've seen in wood windows. And obviously, that's been a disappointment for us, and it's something that we own and that we're very aggressively addressing and going to get that fixed by the end of the year. But outside of wood windows, we are seeing productivity in our plants. The examples that I gave were actually drawn from windows because that's where we're having some of these challenges, but the same types of activities are happening in our door plants. The same types of activities are happening in Australia and in Europe, where we use these fundamental JEM tools. These are all based on the lean principles that were first created by Toyota and then brought to the U.S. by companies like Danaher and used by others such as Cooper. And as we apply these fundamental tools, we do see the productivity kick in. This is -- I like the Toronto example we used because this is what we're looking for across the network of over 100 plants. We want to embed this so it becomes a part of the culture so that everyone in the plant is thinking about productivity and bringing ideas forward. Of the over 200 mini kaizens, about 90% of those in Toronto actually came from operators on the floor who know the process best, who identified, in some cases, small and, in some cases, larger ways that they could improve the manufacturing process. And so we're deploying that across the network, and we are seeing gains. Unfortunately, the headwinds in wood windows have masked some of that.

Yes. This is Brooks. I would just add that the 60-40 split between operational improvements, which includes productivity and sourcing, and all the work we're doing there, versus 40% of core growth, which is volume accretion and pricing, that still holds. We believe that, for 2018, is right within the range of what we're looking at in terms of that overall 100 to 150 bps of improvement, where the split is coming from. So even though we've had these headwinds here in the back half of the year, we still feel confident that, that's the right number as we move forward.

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

I wanted to check in with you guys. A lot of hurricane activity, and you've got a couple of moving pieces on the North American side of the portfolio between hurricanes, a business loss and now a business win, where it seems like you've recouped that. Can you give me a feel a little bit, Mark, for what you're thinking on -- are we kind of like in a mid-single-digit volume growth area pretty consistently for the industry, you're well positioned to leverage that volume growth? Is this kind of an aberration just timing-wise? And what's the upside from rebuild activity in North America? I'm really trying to understand the discrete drivers that some other people were asking about as you go into '18.

Yes. So we -- in terms of the market itself, we do believe that the North American market does continue to grow maybe at a slightly reduced rate. The hurricane activity, we've seen a little bit of demand spike on some products related to the hurricanes. But in many cases, windows and doors are a kind of later in the process of rebuilding. We went back and did some analytics around what happened with Hurricane Sandy, and that would indicate that the tailwind that we would experience would actually not begin until 2018 if the same pattern follows this time around. We think it's a modest tailwind, and obviously, that is already baked into this guidance that we've just given. I think there is also a negative impact to the hurricane, and we didn't talk a whole lot about it on the -- in the discussion, but we certainly did feel pressure around freight. Freight availability in some regions of the country became incredibly challenging, just to get access. And in many cases, getting that access did cost additional fees or surcharges to get the freight that we needed. That's starting to break up a little bit, and we're seeing less pressure. It's not completely back to normal, but we see it heading in that direction here in the fourth quarter. And we think by early next year, the freight situation, it will probably be settled out perhaps at slightly higher freight rates than before the hurricanes, but we think sort of the acute pressure that we saw in quarter 3 will be behind us.

Got it. And then just on North American profitability. If you manage through the freight issues, and I'm betting that you guys can get the window operations resolved quickly, does that provide you with a pretty healthy North American tailwind, assuming your volume outlook comes through and pricing stays the same? It just sounds like there's a lot of short-term or recent disruption in the quarter that's transitory in nature. I'm just trying to get confirmation of that to understand how margin can -- if there's just a naturally embedded tailwind going into next year.

Yes. I think there's a couple of things that are going to drive a tailwind in the next year. I think, certainly, in the back half, we're going to have a little bit easier comps when you think about some of the headwinds that we have this year operationally. I think also, when you look at some of the learnings that we've had over the course of the past couple of quarters and some of the things we're doing from an automation perspective, balancing the plants in terms of capacity and production and labor and things like that, that, that's all going to start to come to bear in the first half of the year, and that should show us some additional tailwinds as well. So I think what you'll see is we'll start to get better in the first half of the year and then we'll start to pick up steam. And in the back half of the year, we should really have some nice comps as all the hard work we put into the margin repair on that business goes up against some pretty easy comps in Q3 and Q4 of '18.

Got it. And final question from me, Brooks. Maybe you could just talk about price versus input cost inflation and how JELD-WEN is managing that.

From a price inflation perspective, we are continuing to see some pressure. Resin continues to be a pressure item, and then resin will leak over into things like packaging material with particleboard and things like that. Steel in North America continues to be an issue. And then in Europe, we continue to have lumber price inflation. And in Australia, we continue to have aluminum price inflation. I think, overall, we feel comfortable and confident that we're going to be able to be accretive on price. We still have some areas of the business from a strategic pricing perspective, where we're not where we want to be, so we're going to attack those areas -- continue to attack those areas with larger price increases to get profitability where we need it to be. On the other parts of the business, we're going to continue to -- at least maintain at level, at par with inflation. And so net-net, we think we're going to be accretive on the pricing front. And then we'll also have the sourcing initiatives, which should help us out a little bit. Lastly, some of the big headwinds we've seen from a material inflation perspective have been in the U.K., as we talked about, relative to not only inflationary pressures within the country, but then also transactional FX with the imports. And we had some fixed pricing on some contracts that are all coming due at the end of this year, and as we renegotiate those contracts with better terms and better pricing, that should provide us some nice tailwinds from a pricing versus material inflation as we head into 2018.

Our next question is from the line of Susan Maklari with Crédit Suisse.

It seems like your Australia business has held up pretty well even despite some of the macro factors that are going on down there. Can you just talk a little bit to what you're seeing and perhaps maybe some of the benefits of the sort of full nature of your offerings in that market?

I'll be happy to. So you're absolutely right, the Australian market entered a downturn late last year, and that has continued. It began in Western Australia and has kind of moved its way across the country. This downturn has been more profound in the multifamily segment of the market, where we're less exposed. We're about 85% exposed on single family, so that has helped. But even on the single-family side of the market, it's been down mid-single digits year-over-year, and yet, we've managed to continue to show growth both through price and volume. And I think there's a number of reasons for that. We've got a fantastic team down there that's executing very well. We've made some great acquisitions that have allowed us to cross-sell into new customers that we didn't have access to prior to those acquisitions. In fact, of the top 20 builders in Australia, we now have 18 of them who are buying products from us. And I would say the last thing that we did that I think was a good strategic move, as we saw this downturn coming, we repositioned parts of our business to get more exposure to R&R, where we were relatively light in Australia. And the fundamental economy in Australia is still doing well, which is reflected in R&R holding up reasonably well. And so as we've increased our exposure to R&R, that has also helped to offset some of the softness in new construction. And so at the end of the day, we think we're gaining share. We know we're gaining price, and our team is executing great.

Okay, that's very helpful. And then your cash flows this quarter were really impressive. And as you sort of have talked to some of these points around your sourcing initiatives and some of the work that you've done from a lean perspective, can you help us better understand maybe what some of the drivers of that cash flow were and how we should be thinking about that coming together as we look to 2018?

Yes. This is Brooks. I'll take that one. So a couple of things. Our long-term goal is to always be accretive when it comes to free cash flow versus net income. So that's our -- always our long-term goal, which will align nicely with our strategic capital deployment and what we want to do from an acquisition perspective. One of the things that's helped us out this year compared to last year is, last year, we had some terms changes with some of our larger customers where we were trying to align our discounts and things of that nature. So last year, from a working capital perspective, we were a little bit sideways compared to what we normally want to do, and so that's one reason we look better year-over-year. The other thing is, from a capital perspective, as Mark said, we've got some pretty big projects in the hopper from an automation perspective and from a wood components capacity perspective and different things like that, and those just aren't going to hit until the beginning of next year and into next year. And so we're a little depressed in our capital spending this year compared to what we would normally be. Our depreciation and amortization runs in the $100 million to $105 million kind of range, and we would like to be spending more in the $90 million range, probably not full depreciation but certainly pretty close. And so we're down a little bit this year, and that will be a little chunky. Maybe next year, we'll be a little bit up. I would tell you the upside that we have is, as we've put all these lean initiatives in place, the one place we really haven't attacked quite yet is working capital. We've been very focused on margin repair, very focused on driving gross margins through pricing and through operational improvements. So I think the upside there over the next 2 to 3 years is, as we start to deploy JEM across our working capital, we've really got an opportunity to drive some cash flow there as well. And so as we think -- as we move forward, you think about our capital spend, you think about our working capital initiatives, we really feel confident that we're going to be able to drive cash flow in excess of net income, and then also our tax attributes, where our cash tax rate is going to be significantly lower than our GAAP tax rate, you add all those up, and from a cash generation perspective, we feel very confident over the next 2 to 3 years.

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

First question is on Europe. I just want to understand. Can you give us a little bit more color on what you're seeing there from both a geographic and product standpoint? And then, if any -- is there any geographies that really stand out from a demand standpoint? And then, I guess, lastly, in terms of pricing in Europe, if you could just kind of walk us through your footprint and let us know what you're seeing.

Sure. So we have organized the parts of Europe that we serve into 4 regions. We actually don't serve the most southern parts of Europe. And so the 4 regions are Northern Europe, which is primarily Scandinavia; Central Europe, which is Austria, Germany and Switzerland; and we have France; and the U.K. So that make up the 4 regions. I would tell you that Central Europe and Northern Europe are great markets. We have very strong positions. We are the leader in those markets by quite a bit. We are the only pan-European player, so in each of those regions, we are basically competing with locals. And the growth there has been steady, kind of low single digits, roughly equal to GDP. Northern Europe has been a little bit more robust this year than the rest of Europe, and that's been a good strong market. France was down for about 3 years in a row, each year roughly 5% or 6%. And so after 3 years of contraction, we're very happy to say that we saw earlier in 2017 the contraction stop, and actually, through the back half of the year, we're seeing the beginnings of some expansion in the French market. While that market was contracting, we took advantage of that time to restructure. We reduced our footprint. We went from 3 factories down to 2, and that's allowed us to drive some significant margin expansion now as things have stabilized and begin to grow. The U.K. is now our most challenged region, and I think Brooks already spoke to that in terms of there were some contracts that actually predate this team that did not give us much flexibility around price. And many of those contracts are ending here at the end of the year, and we're in the process of renegotiating those in ways that will give us more flexibility going forward but also an immediate reset at the start of the year. And so we think that will certainly help us better offset the inflationary pressures we've seen in the U.K. that we think are basically tied back to Brexit.

Yes. I would add, too, that I think, on the pricing front, the U.K. is -- was the main area in Europe where we needed to do some rationalization. And so we did some SKU rationalization, a pricing rationalization around making sure that our margins were where they needed to be for all of our products. And so that's been a big part of what they've been working through. And I think that also, just from an internal perspective, our pricing execution wasn't as crisp as it should have been through the second quarter, so we've rolled out, where we can, some price increases in Q3 to help offset some of this material inflation that we've seen. So between the price increases we rolled out for Q3 and between the SKU and pricing rationalization we've done and between the new contracts that are going to kick in next year, we feel good about the U.K. business coming back strong in 2018.

That question is coming from the line of John Lovallo with Bank of America.

Maybe just a couple points of clarification here. First, on the North American restructuring, the $6 million to $7 million, that is not included in EBITDA. Is that correct? You're backing that out?

That's not the reason why...

That's correct.

Okay. So that's not the reason why the EBITDA outlook came down?

Correct.

Okay. And then, as we look to the fourth quarter, I think we had the shipping day reversal to keep in mind. And then also, were there any load-ins -- any significant load-ins that we should be aware of in any of the regions?

No, I don't think so. I don't recall anything, so...

All right. Thank you, everyone, for attending our call today, and we appreciate your questions and your interest in JELD-WEN. Have a great day.

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