JELD-WEN Holding Inc (JELD) 2017 Q4 法說會逐字稿

Greetings, and welcome to the JELD-WEN Holding's Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Linker, Senior Vice President, Corporate Development and Investor Relations for JELD-WEN. Thank you. You may 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, which we'll be referencing during this call. I'm joined today by Mark Beck, our CEO; and Brooks Mallard, our CFO.

Before we begin, I'd like to remind everyone that during this call, we may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we're providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation.

I'd now like to turn the call over to Mark.

Thanks, John. Good morning, everyone, and thank you for joining us. 2017 was a significant year in JELD-WEN's history. We strengthened our core business by improving adjusted EBITDA margins 90 basis points, which is our fourth consecutive year of improvement. We generated free cash flow in excess of adjusted net income. We redeployed that cash in a very successful way, closing 3 acquisitions and announcing a fourth, all with very attractive return on capital profiles. And we completed a transformational debt refinancing in December, strengthening our balance sheet and positioning us to pursue more growth initiatives in the future.

While these are great outcomes, I'm also pleased with the progress we made in 2017 with our operating model. We continue to make the investments and do the work needed to achieve our long-term growth and earnings targets. The fundamental improvements we are making to the operations will have an even greater impact on our results over time, and I remain confident that our journey is on track. Today, I'll start with some comments on the quarter and segments. After which, Brooks will take us through the financials in more detail, and we'll conclude with our 2018 outlook.

Let's start on Page 4. We are not entirely satisfied with our fourth quarter results as we have been working our way through isolated challenges in a couple of businesses. Our fourth quarter net revenues increased 0.3%, bringing the full year total revenue growth to 2.6%. As you may recall, the fourth quarter had 5 fewer shipping days compared to the prior year, which offset the extra shipping days we had in the first quarter of 2017. Excluding the impact of shipping days and the previously communicated business rationalization in Florida, our underlying fourth quarter core revenue growth was approximately 3%. While our reported volumes were lower due to the shipping days, we did see positive pricing across all 3 segments. Our fourth quarter revenues also included contributions from our recent acquisitions and from favorable foreign exchange. I'll speak more about each of these segments in a few moments.

As we will discuss later, our fourth quarter net income was significantly impacted by some distinct noncash tax charges mostly related to the Tax Cuts and Jobs Act and charges related to our December debt refinancing. From a profitability standpoint, we delivered another consecutive quarter of growth in adjusted EBITDA and margins despite continued operational headwinds in our North American segment. Margins increased 10 basis points for the quarter and 90 basis points for the full year. For the full year, while North America and Australasia both achieved our target margin improvement cadence of 100 to 150 basis points, Europe fell short. For the full year, adjusted EBITDA grew 11.6%. In the back half of the year, certain product lines were unfavorably impacted by productivity headwinds and I will get into that shortly. Our cash flow conversion performance continues to be excellent as we delivered operating cash flow of $265.8 million and full year free cash flow of $202.7 million, both of which were a significant improvement over 2016. Free cash flow exceeded net income both on an adjusted and as-reported basis.

Our M&A activities continued to be successful. We closed 3 deals in 2017, spending a total of $131.4 million and also announced our highly strategic acquisition of Domoferm in October. I'm pleased to report that Domoferm closed earlier this week on February 19. So in 2018, we will be able to realize about 10 months of Domoferm's expected annualized revenues of EUR 110 million. Our M&A integrations are going well, and we are also enthusiastic about the strength of our pipeline and ability to carry this momentum into the year.

We also closed a comprehensive debt refinancing in December with an $800 million senior notes offering and related amendments to our existing facilities. In addition to locking in historically low fixed interest rates in the notes offering, the refinancing also allowed us to extend and stagger the maturities of our debt. We also increased our secured debt capacity, which will allow us flexibility in funding future strategic growth initiatives such as acquisitions.

Next, I will move to some segment highlights on Page 5. In North America, the demand environment continues to be strong in both the new construction and R&R markets. Excluding the impact of shipping days and the Florida business rationalization, our doors product line generated mid-single-digit core revenue growth. Our windows product line experienced lower volumes in the quarter, primarily resulting from a carryover effect from our lead time and delivery issues earlier in the year. We saw continued operational headwinds impact margins in North America in the fourth quarter in 3 areas. First, in freight. We saw higher rates as well as freight disruptions, requiring us to substitute expensive freight alternatives to meet customer delivery requirements. Second, we experienced labor inefficiencies in our windows business. And finally, we saw accelerating inflationary pressures from our supplier base.

During the quarter, we continued to make progress with our operational improvement projects in North America. For example, we increased investment levels in automation projects from which we expect future savings. We are also working to redesign how we forecast volumes and load our plants. And we also completed line balancing projects at our window plants, which have significantly increased our throughput at the same cost base. We exited the year with improved productivity as well as normalized lead times and delivery metrics coming out of our window plants. With these operational issues improving, our focus now is on winning back window volumes. Our major strategic initiatives in North America are on track such as the integration of MMI Door, preparing for the new volume with Lowe's and new product launches.

In Europe, the demand environment is strengthening in most regions. The pricing environment in Europe is generally good with a few minor exceptions. Margin expansion was limited due to capacity inefficiencies as a result of material availability as well as higher material inflation. The integration of the recent acquisition of Mattiovi is going well and performance is tracking ahead of plan.

In Australia, our team continues to deliver solid execution in the face of weak new construction markets. We delivered 160 basis points of margin improvement for both the quarter and full year, driven by productivity, core growth and M&A. We are, however, seeing increasing inflationary pressures, particularly in aluminum and wood. Our newly commissioned glass processing plant has completed its initial ramp-up and savings are being realized as expected. All of our recent acquisitions in Australia are contributing to the improvements, including our most recent acquisition of Kolder.

On Page 6, I'll quickly reiterate our consistent track record of margin improvement and cash flow generation. We continue to deliver year-over-year performance improvement, both on a quarterly and a full year basis.

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

Thanks, Mark. Starting on Slide 8. For the fourth quarter, net revenues increased $2.8 million or 0.3% to $976 million. The increase was driven by the contribution of recent acquisitions and the favorable impact of foreign exchange, offset by a decrease in core growth due to 5 fewer shipping days compared to the same quarter last year. Full year net revenues increased $97.1 million or 2.6% to $3.8 billion. For the fourth quarter, gross margin decreased $3.3 million or 1.6% to $205.7 million. Gross margin as a percentage of net revenue declined 40 basis points from 21.5% in 2016 to 21.1% in 2017. Full year gross margin as a percentage of net revenue expanded 140 basis points from 21.1% in 2016 to 22.5% in 2017. For the quarter, the decrease in gross margin and gross margin percentage was due to the deleveraging impact of lower volumes from fewer shipping days as well as operational headwinds in our North America segment.

For the fourth quarter, SG&A expense decreased $21.8 million or 12.6% to $151.3 million. SG&A expense as a percentage of net revenues was 15.5% compared to 17.8% for the same period a year ago. The decrease in SG&A expense and SG&A expense percentage was primarily due to onetime charges in the fourth quarter of 2016 from our dividend recapitalization transaction. Full year SG&A expense as a percentage of net revenues was unchanged compared to the prior year.

For the fourth quarter, net interest expense decreased $6.5 million to $17.4 million. The decrease was primarily due to improved terms related to our repricing and refinancing actions in 2017. For the fourth quarter of 2017, we reported a net loss of $93.7 million compared to net income of $258.2 million in the prior year. The variance in net income was primarily related to distinct noncash tax items in both the current and prior years. In the current period, we recorded noncash tax charges related to the impact of the recent Tax Reform Act as well as the impact of valuation allowances on certain tax assets. The prior period in 2016 included a significant favorable tax benefit from the release of certain valuation allowances.

Full year net income decreased $366.4 million to $10.8 million, primarily as a result of the same drivers I just discussed in both 2017 and 2016. For the quarter, diluted earnings per share was a loss of $0.89 and adjusted diluted earnings per share was $0.26. We do not 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.

For the fourth quarter, adjusted EBITDA increased $1.3 million or 1.3% to $103.1 million. Adjusted EBITDA margin expanded 10 basis points in the quarter to 10.6% compared to 10.5% a year ago. Adjusted EBITDA margins were unfavorably impacted by the reduced volume from fewer shipping days. Additionally, margin improvement from favorable pricing and operational cost savings were offset by continued operational headwinds in certain business lines. Full year adjusted EBITDA margin expanded 90 basis points to 11.6% compared to 10.7% a year ago. Impairment and restructuring expense was $9 million in the current quarter compared to $4.8 million in the fourth quarter of 2016. The increase was primarily due to the previously announced North American restructuring actions. On a full year basis, the change in impairment and restructuring expense was not significant.

Slide 9 provides a buildup of our revenue drivers. For the fourth quarter, the 0.3% increase in our revenue was driven by a 4% contribution from recent acquisitions and a favorable foreign exchange impact of 2%, offset by a 6% decrease in core revenues. The decrease in core revenues was comprised of a 1% benefit from pricing and a 7% decrease from volume mix as a result of the impact of 5 fewer shipping days and the Florida business rationalization. For the full year, the 2.6% improvement in our revenues was driven by 2% contribution from recent acquisitions and 1% from the favorable impact of foreign exchange. Core growth was unchanged on a 1% benefit from pricing, offset by 1% decrease from volume mix due to the Florida business rationalization and the headwinds in our North America windows business.

Next, I'll move to the segment detail beginning with North America on Slide 10. Net revenues in North America for the fourth quarter decreased $18.9 million or 3.3% to $550.3 million. The decrease in net revenues was mainly due to core revenue decrease of 7%, primarily due to the impact of 5 fewer shipping days and the Florida business rationalization, partially offset by a 4% contribution from the acquisition of MMI Door. Fourth quarter adjusted EBITDA in North America decreased $4.5 million or 6.9% to $61.1 million. Adjusted EBITDA margins decreased by 40 basis points to 11.1%. The decrease in adjusted EBITDA and margins was primarily due to the impact of fewer shipping days as well as the aforementioned operational headwinds in the windows business.

On Slide 11, net revenues in Europe for the fourth quarter increased $19.9 million or 7.8% to $276.4 million. The increase in net revenues was primarily due to the favorable impact of foreign exchange of 7%, contribution from the Mattiovi acquisition of 3% and partially offset by a decrease in core revenues of 2%. Europe's volume mix decreased 3% in the quarter, primarily as a result of 5 fewer shipping days, while pricing contributed 1%. For the fourth quarter, adjusted EBITDA in Europe increased $3.1 million or 9.7% to $35.3 million. Margins increased by 30 basis points to 12.8%. Margin improvement from pricing and operational improvement initiatives was partially offset by higher material costs and operational issues resulting from material availability.

On Slide 12, revenues in Australasia for the fourth quarter increased $1.9 million or 1.3% to $149.2 million. The increase in net revenues was primarily due to a 4% increase from the Kolder acquisition and 2% from favorable foreign exchange impact, offset by a 5% decrease in core revenues. Volume mix decreased 6% as a result of fewer shipping days, while pricing increased 1%. For the fourth quarter, adjusted EBITDA in Australasia increased $2.7 million or 14.6% to $21.2 million. Margins expanded by 160 basis points to 14.2% as a result of the accretive benefit of recent acquisitions, productivity and profitable core growth.

Now I'd like to provide a brief update on our balance sheet and cash flow on Slide 13. Cash and cash equivalents as of December 31, 2017, were $220.2 million compared to $102.7 million as of December 31, 2016. Total debt as of December 31, 2017, was $1.3 billion compared to $1.6 billion as of December 31, 2016. This reduction was primarily due to the payoff of debt using the net proceeds of our early 2017 IPO. As of December 31, 2017, our net leverage ratio was 2.4x compared to 3.9x as of December 31, 2016. Cash flow from operations improved to $265.8 million in 2017 from $201.7 million in 2016. Free cash flow improved $80.6 million to $202.7 million from $122.2 million for the prior year 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.

Turning to Page 14, I will make a few comments on the impact of the recent U.S. tax reform on JELD-WEN. As you may recall, we generate a significant portion of our taxable income from outside the U.S. So prior to this tax reform, our effective tax rate was already below the previous U.S. corporate tax rate of 39%. Additionally, from a cash tax standpoint, we have significant tax loss carryforwards that drive the cash tax rate in the mid-teens. Like many companies, we are still working through the implications of tax reform. However, on a preliminary basis, we do expect the following changes. Firstly, our effective tax rate should now be in the range of 23% to 27% compared to 28% to 32% prior to tax reform. Next, we do not expect any impact on our ability to utilize our U.S. federal NOLs. Therefore, we expect that our cash tax rate will continue to be in the mid-teens for the next several years. Additionally, we currently do not expect any material impact from the interest deductibility caps or from the changes related to expensing of capital expenditures.

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

Thanks, Brooks. I'll wrap up with our annual outlook for 2018 and some comments on the first quarter.

We'll start on Page 16 with our 2018 market growth assumptions. On this slide, we show our assumptions for market volume growth rates for our products in the specific countries which we serve in each of these geographic segments. Starting with our North America segment, which is predominantly the U.S. and, to a smaller extent, Canada. We see residential new construction growth of 4% to 6% and R&R growth of 2% to 4%. We view door and window purchases as big-ticket, late-cycle investments for most consumers. So as a result, we see our R&R demand tracking slightly below general R&R spending.

Moving to our Europe segment, which is mostly comprised of Scandinavia and Central Europe, with smaller contributions from the U.K. and France, we estimate residential new construction growth of 1% to 3% and R&R growth of 0% to 2%. We also had a significant nonresidential business in Europe, which we see growing at 1% to 3%. Finally, in the Australasia segment where our primary market is Australia, we see the residential new construction decline continuing in 2018 with a market decline of 6% to 8%. However, the R&R market should continue to remain positive at 1% to 3%.

Moving to our financial outlook on Page 17. We estimate 2018 net revenue growth of 8% to 11%, which includes a core growth assumption of approximately 3%. Combining the market growth assumptions from the prior page with the contribution from continued favorable pricing, we expect mid-single-digit core growth in North America, low single-digit core growth in Europe and negative core growth in Australasia. We expect a small favorable contribution from FX based on current market rates and, therefore, the remainder of our revenue growth outlook comes from acquisitions, both the incremental carryover of our 3 closed deals from 2017 as well as the recently closed Domoferm acquisition.

Our outlook for adjusted EBITDA for 2018 is $500 million to $530 million. Compared to $437.6 million for 2017, this is an increase of 14% to 21%. Our outlook assumes improvements in operational performance, core growth as well as the contribution from recent acquisitions. We expect capital expenditures of $100 million to $120 million for 2018 compared to 2017 of $63 million. The increase is primarily the result of the phasing of certain projects that moved out of 2017 and into 2018. Finally, we expect to deliver free cash flow in excess of net income.

While we don't provide specific quarterly guidance, I will offer the following comments on the cadence of quarterly margin improvement in 2018 as well as a few specific thoughts on the first quarter. First, on the full year. We have previously discussed the cadence of annual margin improvement of 100 to 150 basis points. As we have seen in 2017, the quarters can be lumpy on both the revenue and margin side due to factors such as weather, channel inventory fluctuation, shipping days and the phasing of our self-help savings projects. In 2018, we expect to see sequential improvement throughout the year as our operational improvements build. As a result, we would expect to perform at or below the low end of the 100 to 150 basis points range in the first half of 2018 and towards the higher end of the range in the second half. There are no major variances in the timing of shipping days in 2018 versus 2017.

On the first quarter specifically, there are some timing issues that will limit core growth, including the final quarter impact of the Florida business rationalization as well as some potential delays from winter weather. We also continue to focus on regaining share in our North American Windows business. On the margin side for the first quarter, a few drivers will limit margin expansion, such as start-up cost for the new Lowe's volume and price/cost timing issues on raw material inflation. As we wrap up on Page 18, we remain fully committed to our long-term target of 15% to 20% adjusted EBITDA margin. And as we have described, we have multiple levers to drive earnings growth.

Finally, I want to leave you with these thoughts. We are well positioned to deliver core growth with positive end market demand and have a favorable pricing environment. 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 well positioned to continue delivering operational and financial improvement in 2018 and beyond. Last and certainly not least, 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.

Now prior to opening the line for questions, we would like to address our press release from February 15 on the Steves litigation. Because this litigation remains ongoing, we are limited in the comments we are able to make and we won't be able to take questions on the topic during Q&A. But I will share a couple of thoughts with you. First, we continue to believe that the claims asserted in the litigation lack merit. I will note that the Department of Justice reviewed our acquisition of CMI twice and declined to take any action. Furthermore, we believe that we acted in good faith and in compliance with our contractual agreements.

Second, we obviously plan to appeal any judgment that is entered, and believe we have strong grounds to reverse any judgment on appeal. Our grounds for appeal relate both to what we believe were erroneous rulings made during the trial and to the failure of this Steves to prove damages of the nature required by their claims. In particular, we believe that Steves' alleged future lost profits, which comprise the bulk of the verdict, are not recoverable because they are inherently speculative; and allowing those damages under the circumstances in this case would be unprecedented. We expect the initial appeal process to take at least a year. And based upon the positions we've outlined, we do not believe that the ultimate outcome will have a material impact on our ability to operate in the ordinary course of business.

Finally, regarding accounting matters. At this time, we have not reserved for any judgment related to this matter as we do not believe that a loss is probable and estimable for the reasons that we've just described. We will continue to expense legal defense costs as incurred. Unfortunately, I'm not at liberty to share more regarding this matter.

And I will now ask the operator to open the line for questions on other things.

(Operator Instructions) Our first question comes from the line of Tim Wojs with Robert W. Baird.

I guess maybe just a clarification and then a question. So on the windows operating challenges in North America, it sounds like most of those challenges, at least from an operational perspective, are behind you. I just wanted to confirm that. And really, it's more about going after new business and kind of regaining some of those customers. Is that a fair characterization?

Yes, I think you've characterized that correctly, Tim. We worked hard through the third and fourth quarter, as we indicated we would need to, incurred some additional expense along the way. But as we sit here today, our lead times are back to normal. Our backlog is a minuscule amount, the normal amount. And what we really need to focus on is getting customers back that we disappointed along the way.

Is there a way to frame maybe what the costs were related to some of the inefficiencies in '17 and maybe what the revenue impact would have been -- or was?

Yes, I'll jump on the revenue impact and then let Brooks talk about a way to frame the cost. In terms of revenue impact, we believe that the Windows business was a 2% headwind to North America last year. And it's a combination of some of the operational issues that we've already talked about at length. I think there's also a little bit of that, that relates to mix. If you recall, we have a good, better, best offering. And our strongest position is with the better and the best products. And frankly, that serves the very highest end of the market, which is growing a little bit lower than the lower end of the window market. We do have some new products in our pipeline that we believe will help us be more competitive in that good end of the range. And so we think along with the operational improvements that, as we said, are now behind us, we're in a good position to grow the business, and this will be a highly accretive part of our portfolio.

Yes. This is Brooks. I think from an impact, from a dollars standpoint, we've often said that our split between core growth, margin accretion and productivity, margin accretion is going to be 50-50 and then moving more up to 60-40. I think if you think about the back half of the year, I mean, certainly, the margin accretion from the productivity side was limited probably more in the 20% to 30% range. And a large part of that was really the windows operational headwinds, when you think of overtime and you think of additional freight expense incurred as we sub-optimized our shipments and our loads. So it's difficult to put a dollar value on it, but it was several million dollars of operational headwinds that we experienced, probably approaching, I would say, over $5 million and under $10 million in terms of the operational headwinds we experienced and almost entirely in the back half of the year.

Okay. And then maybe just on price/cost. It sounds like there might be some timing issues in terms of offsetting price and cost this year. For the full year, is there a way to think about what price/cost should look like in terms of the impact to margins? I mean, should it be positive?

Yes, this is Brooks again. I think for the year, it will be positive. As we exited the year, we started to see resins and vinyl start to accelerate in terms of inflation. And then I think we saw freight, instead of -- starting to return more to the norm, actually may have gotten worse with some of these -- the electronic mission tracking and data logging and things like that. And so I think as we got to the end of the year, there were some additional price increases that we were rolling out as we exited the year that probably won't be into -- won't go into effect -- not probably, will not really go into effect until end of Q1 to middle of Q2. And so I think as we ramp through those through the balance of the year, I think we've got all the inflationary pressures quantified. And I think we're going to be in good shape to at least offset the inflation and probably be a little bit accretive as we get into the back half of the year.

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

The first thing I want to talk a little bit about is you noted some higher freight costs that are coming through in there. And at the same time, you also talked a little bit about how you are, really as part of your JEM process, thinking about how you're taking forecasting volumes, loading your plants, working sort of through your backlogs in there. How should we think about freight then as we go through? Do you have any abilities to sort of offset some of that headwind and some of that inflation just through some of the work that you're doing internally?

Yes. So while Brooks mentioned already that we're seeing freight cost moving up. And frankly, in the fourth quarter, we did some things to take care of customers that also didn't optimize our freight. We are making investments in supply chain. We've also made investments in what we call integrated business planning. In some other places, this is called S&OP or SIOP, where we've enhanced our ability to connect the demand picture to the production picture to the shipping picture, all with the intent of increasing our efficiency the way we use freight. I think the last thing that we've also talked about is building inventory. There are a number of products that we make that are high runners that we can depend on selling year in and year out. And in past years, we have had an inventory program that during the slower part of the year, we build some of the inventory and then we focus more on special orders during the busy time of the year. And we've actually studied that and decided to enhance that program. And I think that will also translate into more efficient use of freight; as we have the inventory there ready to go, we can make sure that we ship off full loads.

Okay. All right, that's helpful. And then as we sort of think about, I guess, this ramp that's coming through at Lowe's, can you just sort of help us think about any other quarterly cadences, maybe how we should think about that coming together as we move through 2018?

I'd be happy to. So this program is going very well. We've put a great team on it and Lowe's has been great to work with. What I would say is the initial 4 stores that will be converted as a test case will be done within the next 2 weeks. In fact, I just had a chance to see yesterday some photographs of the first of those 4 stores, and it really looks fantastic. Those 4 test stores there are basically set up to kind of work all the kinks out. So far, there don't seem to be many kinks because of the great planning that's taken place. Then, the full ramp of the several hundred stores will begin at the beginning of April. And the whole process -- because it's that many stores, the whole process is likely to take 2 to 3 months to get everything ramped up and converted over. And so then we would say by the beginning of the second half, we would have all the stores reset and be able to fully enjoy the benefits of this new business.

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

Starting with the '18 guidance. Just kind of reconciling the 8% to 11% revenue growth and the 100 to 150 adjusted EBITDA margin growth. That gets you to a slightly different range than the $500 million to $530 million, gets you to kind of $515 million to $550 million. So just wondering what the difference is there.

This is John speaking. I don't think, Nishu, we're trying to signal any sort of difference there. Just that we're consistent with our goal of delivering margins of 100 to 150 basis points depending on where we come in with the phasing of some of the revenue from the acquisitions and the synergies and how those come in that could drive us towards the top end of the range. And then depending on how we end up with the Windows volume when we get back to the summer busy season, that could drive us to the lower end of the range on the margin improvement side. So not intended to be a disconnect there between the 2.

Yes, I think -- adding to that, it's important to note that the reason that's important is the -- when you think about the leverage and the accretion to margin, the core business is going to lever and add to margins at a much greater rate than the acquisitions are, simply because the acquisitions are adding at their EBITDA rate. But we're leveraging, as you've seen over the past 3 years, over 40% on a year-to-year basis. And I would say the core business should be in that range, kind of to continue to lever as you think about 2018 in that range, while the acquisitions will add at their first year EBITDA targets.

Got it. Okay. Right, so acquisitions at a lower rate than the core business. Makes sense. On the margin improvement, so this 100 to 150 basis points, obviously, you came in a bit short of that at 90 in '17. And I think on a step-back basis, related mainly to the operational challenges in the U.S., we're still looking for 100 to 150 in '18, so still committed to that longer-term goal. How do those operational inefficiencies get resolved in '18 kind of bringing us back up to 100 to 150? The windows issues, obviously, you've mentioned you've worked through those. There were still some lingering effects, but that situation should normalize, but then you're talking about other issues such as transport and input cost, which may linger for a little bit longer. And I guess thinking about that, January and February, how have the trends been there? So kind of what bridges the gap between the 90 basis point improvement in '17 and getting back to the long-term target range of 100 to 150 in '18?

Yes. So this is Brooks. So what I would say is the operational headwinds that we had, we think obviously will make almost all of those up as we head into 2018. In addition, we still have capital projects in place and lean projects in place that should deliver additional accretive benefit in 2018. So in a sense, we'll get a little bit of a doubling up impact, we certainly hope, from an operating margin perspective and from an EBITDA improvement perspective. Having said that, we do things that the economic environment we're heading into is a little bit more difficult this year. We think inflationary pressures are higher than we've seen in some time. Our VP of Sourcing and I were talking over the past couple days, he said that it's a pretty inflationary environment, more so than he's seen in the past 6 or 7 years. And we're working hard to offset that with price, as we talked about earlier. So while we feel comfortable and confident in our ability to improve our margins, to make up the lost ground in '17 and deliver accretive margin on top of that, we are being somewhat conservative in terms of our view of the environment and walking that back a little bit from an overall improvement perspective. So I don't know if that answers your question, but the way you bridge that gap is the 90 to 100 to 150 is really the makeup work that we're doing from the lost margin in 2017. When you think about the overtime, you think about the inefficiencies in the operating environment of the windows business, that stuff we ought to be able to make up in 2018.

Got it. That is helpful. And then January and February are on track with that -- with the rebound back to the long-term targets? Or how does it look so far this year?

As I said earlier, I think what you're going to see is our EBITDA expansion improve sequentially throughout the year. And so there are a few timing mismatches. Brooks talked about some of the pricing actions not hitting until the end of the first quarter. Some of the inflation in freight, we're already feeling. So I think you'll see this pick up steam as we go through the year.

Yes. And I would say that our comps in the first half of the year, particularly in Q1, are the most difficult comps. And the comps in the back half of the year in Q3 and Q4 are easiest comps. And so I think we'll build momentum as we go throughout the year, this year.

Our next question comes from the line of John Lovallo with Bank of America Merrill Lynch.

First question here is kind of given the inherent uncertainty around the ultimate outcome for Steves here, I mean, is there going to be any limit on your appetite for acquisitions in the near term?

Our acquisition pipeline remains quite robust and we plan to continue to pursue our M&A strategy. And I don't think that Steves litigation is going to deter us from doing that.

Okay. That's good to hear. And then in terms of your North American new construction growth outlook of I think 4% to 6%, seems a bit conservative relative to most expectations. I mean, what's kind of underlying that 4% to 6%?

So remember that the 4% to 6% that we showed in the slide includes both the U.S. and Canada. And frankly, the Canada market is not as robust as the U.S. market is right now. And then it's also weighted towards the products that we sell, the different mix characteristics, as I talked a little bit about earlier on one of the other questions, about where our products are playing and which parts of the market are driving the most growth. So it is a little bit lower than perhaps some headline numbers you might read, but I think ours had a few more nuances to it. And then, lastly, there could be just a little conservatism in there as we have struggled a little bit to bring strong core growth to the business. We wanted to make assumptions that we're more leaning towards the conservative side.

Our next question comes from the line of Samuel Eisner with Goldman Sachs.

So you called out a few items that impacted the North America this quarter, freight, wood windows and inflation. Can you put some dollar amounts around those? I know you tried to do that before, but trying to get a direct answer to a direct question.

No, we don't call out specifics -- we don't call a specific dollar amounts related to specific product lines based on the way we report. As I've said before, the headwinds that we had on freight were millions of dollars. The headwinds we had on the operational -- on the windows business was in the millions of dollars range, right. And so when you think about our productivity and, as I said, typically, we expect our margin improvement to be half split between core growth and half split between productivity. And I could say in the back half of the year, we didn't get much productivity. And so that can kind of lead you -- I mean, I'm not trying to be obtuse. I'm just trying to -- it's difficult to -- I don't want to give you a number that's difficult to quantify, right. There are several moving pieces in there in terms of freight rates, in terms of freight availability and in terms of our efficient use of freight, right. And so being able to kind of trifurcate all 3 of those out is somewhat difficult. But I can tell you that if you think about kind of the midpoint of our range like 100 to 150 bps and then where we ended up the year, the biggest part of that was the operational headwinds we had in the North America business in the back half of the year. Hopefully, that's helpful enough.

Yes, maybe we can take that off-line to try to hammer that out. Kind of similar question to the first quarter here. You mentioned start-up costs associated with Lowe's. Obviously, you're front loading investments. Presumably, you're investing in people, investing in inventory, things of that nature. What is the dollar amount that you expect to put in here in the first quarter? Again, you said it's going to be under what your expectation is in terms of full year for margin expansion, but any way we can put a finer point on those start-up costs and the price/cost headwinds that you again called out a somewhat discrete items that are impacting your first quarter.

I mean, again, I'm hesitant to put specific numbers on those. That could really get us more into a quarterly guidance question and we specifically stay away from quarterly guidance. And you can see some of the reasons for it last year. The business is chunky, the seasonality is chunky and so we try to stay away from quarterly guidance. Again, as I said before, on the Lowe's piece, it's certainly impactful, but it's not nearly as impactful as, say, some of the operational headwinds that we have in the back half of the year in terms of our investment. On the pricing and on the material inflation or on the freight [piece], that is more impactful. That is going to be a pretty significant headwind in Q1 that's going to come back to us in Q2 and Q3 and Q4. But again, difficult to put exact numbers on that, but we don't want to give quarterly guidance.

To that last comment, the expectations for that coming back your way in 2Q to 4Q of 2018. Are you effectively assuming that pricing or inflation kind of stops from here, that you kind of hold that constant going forward? Are you modeling to a curve? What gives you confidence that you'll be able to cover and ultimately, effectively expand margins based on what you've seen recently?

Well, it's based on our expectations of inflation right now and we do have inflation modeled throughout the year and it's also based on the pricing actions that we either have in place or going to be in place for the balance of the year. And then it's also based on the fact that if we were to see material inflation above and beyond what our current expectations were, then we can always take additional pricing actions. So that's always somewhat fluid. We think based on the current picture, we're in good shape. Were inflation to get significantly worse as we progress through the year, then we'd have to take a step back and maybe take a look at what we do from a pricing perspective.

Got it. Maybe just lastly with Domoferm now closed, you said EUR 110 million. I think it's about $135 million or so in dollar terms. How much are you embedding in your guidance from an EBITDA standpoint associated with Domoferm in 2018?

So I think we said when we announced the signing that this is not yet accretive and would take 12 to 24 months to be accretive. In terms of in our guidance, there's kind of mid-single digit million dollars of EBITDA that we're assuming.

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

Brooks, I hate to do this, but I'll ask the inflation question one more time. If we're just looking at -- ignoring freight and all that, I'm just more interested in what's going on with raw materials. How much inflation did you have in '17? And what are you all forecasting in '18?

Yes, let me -- I'll try to – put it this way. We have inflation and then we have our sourcing activities that we have going on. I would tell you that inflation in 2017, in the first half of the year, was relatively low. And then it accelerated as we got through the year, particularly after some of the weather events with the hurricanes in 2017. And so I would say it was less than 1% of our material cost. But I think as we head into 2018, it's going to be more than 1%. I think it's going to be more like than 1.5% to 2% of our material cost as we look into 2018, right. And again, that's just the inflationary side. That doesn't include any of the sourcing activities or any of the cost savings activities that we have going on.

Sure, I appreciate that. Okay. And then if we look at Europe and Australia, Europe, you had some issues with material availability et cetera. One, have we -- is all that rectified? Is the business back running in a normalized way? And then in Australia, you've got a market downturn like you're talking about. Can you still grow those margins in that environment in a 100 to 150 type of pace?

Yes, so let me -- I'll answer the wood question then I'll defer to Mark on the Australia question. So on the wood question, earlier in the year, there was a couple struggles. One is the demand for wood was going up and so we were struggling on 2 counts: one is the quality of the wood we were getting, so how much yield you get from the wood; and then the second was kind of the wetness of the wood, so how long does it take you to dry it and then process it. And so those were both causing us some issues in Europe. Both from an inflation -- cost inflation perspective and then from an efficiency perspective, in terms of having enough supply to run your factories as efficiently as you can. I think as we exited the year, we had made some good agreements with some of our vendors and we felt better about our position, but there's a couple of other things that are going on right now. There's still some scarcity of supply in Northern Europe that's causing us a little bit of a problem. And then also the weather in Europe has been abnormally mild this year, which has made it difficult to harvest the wood in some areas because the ground is a little bit soft. So there's a little bit of availability issue there as well. So things are getting better. We still have a couple of headwinds in terms of that wood equation, but we're working through those, and we don't think it's going to be as big an issue in 2018 as it was in 2017. So that's probably more detail than you want, but I'll turn it over to Mark.

Yes, I think the other point I would make is -- we talked about this on a previous call. In the U.K., we had a situation where we couldn't take prices up in certain accounts, and that's also been rectified and we've got new pricing in place there. In Australia, yes, we've been in a downturn now for a better part of the year. Our team continues to execute very well, and last year delivered 160 bps. I think they'll probably be challenged to hit that number again, but I think they will be able to deliver in the target range of 100 to 150 based on the strength of their portfolio. They're winning share, winning new accounts. And then M&A has helped us with that as well. So I think, yes, we do expect them to continue to grow margins in Australia.

Our last question for this morning comes from the line of Michael Rehaut with JPMorgan.

First, I just wanted to circle back and appreciate the comments around the first quarter and cadence throughout the year. I think it's very helpful in terms of setting expectations. And if possible, just to drill down a little bit just to properly set those expectations. When you talk about the top line being limited by some of the issues you mentioned as well as the EBITDA also being impacted by start-up cost, price/cost, how should we think about that relative to your full year guidance? Should we be still expecting top line core revenue growth in the first quarter? And similarly, are we talking from an EBITDA margin expansion perspective? Are we talking like in the 50 -- 0 to 50 bps range? Or 50 to 100 bps range? Any help there would be helpful just again, in terms of setting the proper expectations.

I apologize for sounding like a broken record, but we're trying to give everybody as much information as we can without providing guidance on a quarterly basis, simply because the year can be so choppy. The way the seasonal demand comes in can be so choppy. I think we're going to have to leave it on the EBITDA expansion side. I think we're going to have to leave it as the first quarter will likely be the lowest of the EBITDA expansion quarters that we'll have throughout the year. And the momentum will build throughout the year, which is probably -- which is more guidance than we've given in the past; but we do want to help everyone frame up their expectations. On the core growth side, I think Q1 is certainly going to be our toughest quarter from a core growth perspective. When you think about working through some of our windows volume issues, when you think about the uncertainty in the Australian market in terms of how that's going to develop and then when you think about the continued headwinds that we have from the Florida business rationalization with The Home Depot and then the fact that the Lowe's business doesn't really kick in until the latter half of Q2. Q1 is certainly going to be our most challenged in terms of core growth for the year. So hopefully, that provides enough color for everybody to get their modeling done.

Yes, I appreciate that. Maybe we can discuss more offline. I mean, it's very helpful but we'll see what we can discuss there. I guess, secondly, just thinking about the North America mid-single-digit growth for the full year on a core basis. I was curious about the Lowe's impact and how that impacts the full year because on a market basis, you're talking about new res 4% to 6% and repair and remodel 2% to 4%, which would be a touch below what a mid-single-digit range implies. Is the difference the Lowe's business in the second half? Or is there any additional making up the lost windows share? And should the first half be maybe more of a mid-single -- low single-digit because the Lowe's doesn't kick in until the back half?

Yes, I think that would be the way to think about it, is it's going to be lower in the first half than the second half. Certainly, we've got 2 things on the retail side. So we've got Lowe's kicking in, in the second half, but then we also finally lap 1 year from when we transitioned The Home Depot Florida business out. And so once we pass that 1 year mark, that's not working against us. We also have price where we think, as we deal with inflation on the one hand, it's going to actually help us get more -- a bit more price this year, we believe, than we got last year. And so you need to factor that into your thinking as well.

All right. Thank you, Michael. Thank you, everyone, for your questions and for tuning in today. We sincerely appreciate your interest in JELD-WEN, and we wish you a great day.

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