JELD-WEN Holding Inc (JELD) 2018 Q2 法說會逐字稿

Greetings, and welcome to the JELD-WEN Holding's Second Quarter 2018 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, with JELD-WEN Holding's. 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 Kirk Hachigian, our Chairman; Gary Michel, 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 Kirk.

Thank you, John. And good morning, everybody.

I'm very pleased to formally introduce to you all JELD-WEN's new CEO, Gary Michel, but before I do that, I want to take a moment and highlight a few developments from the quarter and update you on some topics I discussed with you on our last conference call.

While we did deliver the lower end of our adjusted EBITDA guidance range in the second quarter, I would characterize our overall financial performance as mixed. On the top line we delivered strong revenue growth of 23.6% driven by our recent acquisitions as well as core growth in all 3 segments. However, we did not realize the full benefit of operating leverage on the increased revenue due to inflation on materials and freight as well as some commercial investments we're making to support future growth. Both Gary and Brooks will comment on these details in a few moments.

You'll recall on the last quarterly call I highlighted some near-term priorities for the business. We made some good progress across all areas that set us up well for accelerating momentum in the back half of this year. First, over the last 6 months, we stabilized the North American leadership team by filling key operating positions and driving a new operating cadence. At this point, all major positions have been filled, and I feel very good about the talent we've brought on board. I expect continued improvements in this newly upgraded team as they gain traction under Gary's leadership. Second, we continue to focus on using price to offset continued inflation in material and freight. Again, we previously told you that we would take pricing actions sufficient to more than offset the inflation in the second half of the year. While this is still true on the inflation side, we now have additional new tariff cost increases that will be a headwind in the second half of the year. Of course, we completed our CEO search in the second quarter, with Gary joining us on June 18. Gary spent -- has spent his first 45 days with our team members and key customers. This week, he'll begin visiting our shareholders from both New York and Boston. In addition, we've been very busy integrating the 3 acquisitions from the first quarter and delivering on our synergy plans.

And finally, we announced the share repurchase authorization of $250 million in May. And we bought back $47 million of our own stock in the quarter.

And so in summary, I'm pleased with the progress we've made in the second quarter. And I believe our overall execution and financial results will continue to improve as we realize the full potential of the business.

On Page 5, I'd now like to introduce you to Gary and describe why the board has confidence that he is the right leader for JELD-WEN. Gary has a demonstrated track record of delivering results at large, complex global industrial businesses. He has spent a good portion of his career in building -- in the building and construction products industry, so he understands our markets and channels. Gary joined us from Honeywell, where he was President of a $10 billion Home and Building Technologies business unit. Previously, Gary spent 32 years in Ingersoll Rand in a variety of executive leadership positions, often being called upon to lead businesses in need of operational improvements or turnaround.

Again on Page 5. We've highlighted 3 roles at IR where he demonstrated his deep operational expertise in driving cost productivity, margin improvement and core growth. At Residential Solutions HVAC business, Gary transformed the financial performance over a 6-year period, driving sustained core revenue growth and significant margin expansion, setting a new industry benchmark for profitability. At Club Car he guided the business through a very difficult macro environment by managing the cost structure as well as leading the diversification of the product portfolio to drive revenue growth from products outside core golf offering. And lastly, he transformed the financial and operational results at Construction Technologies. Gary has demonstrated that he has the ability to build talented teams, make dramatic operating improvements and drive sustainable financial results in different industries and under a variety of different market conditions. Gary has the experience, maturity and the passion to take JELD-WEN to the next level.

And now let me turn the call over to Gary for his early impressions on our business.

Thanks, Kirk. And good morning to you all. Thank you for joining us.

I'm thrilled to be at JELD-WEN and excited about our opportunities for growth and margin expansion. During my first 45 days, I spent most of my time traveling to see our facilities, meeting our customers and getting to know our associates. I see a lot of similarities between JELD-WEN and my previous business experience that Kirk just highlighted and expect to deliver the same type of improvements here. I'll highlight some of my early observations at JELD-WEN and near-term priorities, beginning on Page 6.

First, I believe that we have a fantastic set of assets comprised of a well-known portfolio of brands, a broad product offering and an unmatched global operating platform that allows us to service the needs of our customers. Second, we have the right strategy, operating model and team to unlock the profit potential of this business. While I will certainly have my own style as well as some new initiatives and areas of focus, I don't have any plans to change the existing operating playbook put in place by Kirk and the leadership team. We know what we need to do. We just need to focus more intently on execution. Third, I see a substantial runway to improve the margins of this business. While the team is off to a good start in its drive towards productivity using the tools of the JELD-WEN Excellence Model, I would say that we are still very early in the journey. And there is more work to be done to build a mature productivity culture that drives consistent, predictable and recurring results. This substantial opportunity for margin improvement is one of the key reasons I have confidence that we will achieve our long-term financial target of EBITDA margins of at least 15%.

Lastly, this business has very good cash flow generation capabilities, and my priority for cash deployment is to continue to use free cash flow in strategic bolt-on M&A. In addition, we will look to supplement the M&A with additional share repurchases, particularly at today's attractive valuations.

Now moving to my near-term priorities for the business. First, we'll focus on operational improvement, starting with supporting our customers with industry-leading service, delivery and quality. We'll also continue to invest in JEM and deploy problem-solving tools that will allow us to drive productivity and sustain margin improvement. Second, I want to accelerate our path to become the low-cost producer of doors and windows. While our core business platform is strong and we have opportunities to improve the margins of our existing operations through JEM, I believe additional actions will be required to permanently adjust the cost structure in certain businesses to ensure that we will be the most competitive partner for our customers. Accordingly, we plan to undertake a series of targeted cost reduction initiatives to reduce overhead and manufacturing complexity while preserving our ability to drive top line growth. We'll be announcing the estimated cost, benefits and time lines associated with these actions in phases.

And finally, my focus is on ensuring the organization delivers our financial commitments for 2018. We'll do this by regaining share in North America, mitigating inflation and tariff exposure with disciplined pricing actions and driving accountability at all levels of the organization.

In summary, I'm committed to our strategy and I see the path to our long-term financial targets, but to succeed, we must increase the efficiency of our execution.

Now on Page 7, I'll hit the headlines of the quarter.

As Kirk mentioned, we delivered strong revenue growth with a 23.6% increase over prior year, comprised of 19% growth from acquisitions and 3% core growth. As part of that core growth, we realized improved pricing in all 3 regions both compared to prior year as well as sequentially compared to the first quarter. Our net income decreased year-over-year by $11.3 million due to the increased SG&A from legal expenses and a higher tax rate. Adjusted EBITDA for the second quarter was $135 million, representing growth of 7.7% and margins of 11.5%. Margins declined by 170 basis points compared to prior year due to the impact of recent acquisitions; and margin compression in our core business, from inflation in materials and freight as well as temporary investments to support longer-term core growth. We'll talk more about these issues later in the call, but I believe that we have the actions in place to return us to core margin improvement in the second half of the year.

As Kirk mentioned, we also bought 1.6 million shares of our common stock for $47 million in the second quarter. Our balance sheet and liquidity remain strong, although our net leverage is slightly elevated at 3.1x due to the seasonality of our cash flow and recent M&A investment.

Now let me turn the call over to Brooks to review the detailed financial results of the second quarter.

Thanks, Gary.

Starting on Slide 9.

For the second quarter, net revenues increased 23.6% to $1.2 billion. The increase was driven by the contribution of recent acquisitions, core growth in all 3 segments and a small favorable impact of foreign exchange. We reported net income of $35.5 million for the second quarter, a decrease of $11.2 million. The decrease in net income was primarily due to increased legal expenses and a higher tax rate than the same quarter last year.

For the quarter, diluted earnings per share was $0.33 per share, and adjusted diluted earnings per share was $0.45 per share.

Adjusted EBITDA increased 7.7% to $135 million. Adjusted EBITDA margins decreased 170 basis points in the quarter to 11.5%, as margins were unfavorably impacted by recent acquisitions and compression in our core business from a lag in pricing to offset inflation in materials and freight as well as temporary investments to support longer-term core growth. Our core business adjusted EBITDA margins decreased approximately 120 basis points.

Additionally, I'll note that SG&A expense increased $31.3 million to $175.2 million due to higher legal costs, acquisition costs and an increase in SG&A expense from the acquired companies.

Our tax provision in the quarter includes the full impact of the GILTI inclusion on our foreign taxable income as well as approximately $3 million of distinct items in the quarter. For the full year, we continue to expect a 2018 effective book tax rate of 31% to 35%. Excluding the impact of GILTI, our effective book tax rate would be 23% to 27%.

Slide 10 provides a buildup of our revenue drivers. Here you can see that not only did we deliver core growth in all 3 segments, but we realized positive price in all 3 segments as well. On a consolidated basis, core growth of 3% was comprised of 2% from pricing and 1% from volume/mix.

Next I'll move to the segment detail, beginning with North America on Slide 11.

Net revenues in North America for the second quarter increased 22% to $673.2 million. The increase in net revenues was primarily due to a 19% contribution from the acquisitions of ABS and MMI Door as well as a 3% increase in core growth. Pricing improved 2% over prior year, which is an acceleration from the 1% we realized in the first quarter. Our U.S. doors business generated mid-single-digit core growth, while our windows business continued to see lower volumes, largely as a result of the continued impact of our 2017 operational inefficiencies.

Adjusted EBITDA in North America decreased 0.2% to $79.6 million. Adjusted EBITDA margins decreased by 270 basis points to 11.8%. The decrease in adjusted EBITDA margins was primarily due to the dilutive impact of our recent acquisitions, price-cost lag on materials and freight as well as labor investments to support future core growth.

On Slide 12. Net revenues in Europe for the second quarter increased 23.1% to $318.7 million. The increase in net revenues was primarily due to the contribution from the Mattiovi and Domoferm acquisitions of 15%, favorable impact of foreign exchange of 6% and core revenue growth of 2%. Adjusted EBITDA in Europe increased 2.3% to $37.9 million. Adjusted EBITDA margins decreased 240 basis points to 11.9%. Margins were impacted by both the dilutive impact of recent acquisitions as well as margin compression in the core business from material inflation.

On Slide 13. Net revenues in Australasia for the second quarter increased 30.7% to $180.6 million. The increase in net revenues was primarily due to a 27% increase from recent acquisitions, 3% core growth and 1% from favorable foreign exchange. Adjusted EBITDA in Australasia increased 39.6% to $24.2 million. Adjusted EBITDA margins expanded by 90 basis points to 13.4% as a result of profitable core growth. Core margins improved approximately 140 basis points.

On Slide 14 I'll provide a brief update on our cash flow and balance sheet.

Compared to last year, year-to-date cash flow from operations decreased $74.7 million to a use of $8.3 million in 2018, and free cash flow decreased $111.9 million. The decrease in cash flow was primarily due to intra-year timing differences in working capital comparisons such as increased inventory build in our North America windows business. We expect these year-over-year working capital comparisons to normalize as the year progresses. Additionally, capital expenditures were higher by $37.2 million, as we resumed normal levels of spending after a slower start in 2017.

On the balance sheet, net debt increased by approximately $268.4 million since December 31, 2017, due to the cash flow usage from operations as well as the impact of the 3 acquisitions that we closed in the first quarter and our recent share repurchase activity. As of June 30, 2018, our net leverage ratio was 3.1x compared to 2.4x as of December 31, 2017. Our balance sheet and liquidity remained strong.

Now I'll turn it back over to Gary to go through our updated 2018 outlook.

Moving to our financial outlook on Page 16, we're providing outlook for the third quarter of 2018 as well as updating our outlook for the full year.

For the third quarter, we expect adjusted EBITDA of $143 million to $153 million compared to $128.2 million in the third quarter of 2017. Third quarter adjusted EBITDA is expected to benefit from the contribution of recent acquisitions; as well as accelerating margins in the core business from pricing, volume and productivity.

For the full year, we now estimate net revenue growth of 16% to 18% compared to our previous outlook of 17% to 19%. At the midpoint, our assumptions for full year core growth and acquisition contribution are unchanged at 3% and 13%, respectively. The only change to our revenue growth outlook is from updated assumptions for foreign exchange rates, which reduces the contribution from FX at the midpoint from 2% to 1%.

Our outlook for adjusted EBITDA for full year 2018 is now $500 million to $520 million compared to our previous outlook of $505 million to $535 million and $437.6 million for 2017. The midpoint of our guidance assumes that core adjusted EBITDA margins will improve approximately 70 basis points, which is approximately 10 basis points lower than our previous guidance assumption of 80 basis points. The reduction in our guidance is due solely to the flow-through of the impact of updated FX rate assumptions on the revenue line and the expected unfavorable impact of recent tariffs.

We expect capital expenditures of $100 million to $120 million from 2018 compared to 2017 of $63 million. The increase is primarily the result of the phasing of certain projects that moved out of 2017 into 2018. Finally, we expect to deliver free cash flow in excess of adjusted net income.

I'll wrap things up on Page 17 with a few summary comments.

Kirk and I have made excellent progress towards a smooth leadership transition. I believe in the strategy and operating model of the business, and I have confidence that we can achieve our long-term financial targets and deliver shareholder value. In the near term, we will continue to focus on our operations to improve customer service, delivery and quality while also improving cost productivity. Additionally, we will think more aggressively about cost reductions through footprint optimization and overhead reduction. We're focused on managing the substantial inflation in materials and freight as well as tariffs. We will be disciplined on price but mindful with respect to core growth. And lastly, we are focused on delivering acquisition synergies from our M&A.

Prior to opening the line for questions, I'll provide a brief status update on the Steves litigation. Unfortunately, due to the ongoing nature of this matter, we'll be unable to take any questions during the Q&A session on this topic. In our last conference call, we explained that no final judgment has been entered against the unfavorable jury verdict from February 2018. The situation has not changed, as we are still awaiting a final judgment. The judge continues to consider issues related to the trial and potential remedies. Once any final judgment is entered, we intend to begin the appeal process. As we've described previously, JELD-WEN believes that the jury verdict in this case is erroneous and that there are strong bases for any verdict entered as a final judgment to be overturned on appeal. Further, we believe the remedies being considered by the court would be unprecedented in this type of case and inappropriate as a matter of law. We will continue to commit the necessary resources to defending ourselves in this matter. And we'll continue to pursue all options to achieve an outcome that is in the best interest of our shareholders, customers and employees.

And now I'll ask the operator to open the line for Q&A.

(Operator Instructions) Our first question comes from the line of Stephen East with Wells Fargo.

Welcome, Gary. Maybe we'll start with what you talked about in your press release and you touched on a little bit in the call. In the press release you said you need to improve service levels, drive out costs, discipline on price and share, substantial opportunities for core growth et cetera. Maybe if you could, could you just elaborate on the key points on each of those; and what you -- your first 45 days, sort of the conclusions you've drawn; and what you think you all need to be doing a bit more specifically than your prepared remarks?

Sure, Stephen. Thanks a lot for the question. Yes, I'm 45 days in. I've had a great opportunity to go see our people, talk with our customers and really get a good feel for where we are. And I've spent some time with our relatively new leadership team as well. What I've seen is we've got good market fundamentals for this business, strong brands, good people. And we've got the beginnings of a really good business operating system around JEM. Really what we need to do here is focus on our execution, focus on the deployment of JEM across the company, looking at how we build productivity pipeline, how we deliver on productivity and how we put standard work into our operations. We've greatly improved our service levels on windows, which was a problem for us last year. We're starting to see that benefit. We need to start to getting that business back on the windows side. Some ins and outs on doors but holding our own there. And really it's about execution, getting this productivity pipeline stronger and deployed and really focusing on how we can build that out for the rest of the year and into the future.

Okay, I appreciate that. And then the second half implies some pretty big acceleration to hit your EBITDA margin targets. I guess, if you could maybe bucket each one of them, price versus volume and why you're so confident that you'll have the price to offset the raw materials and transportation inflation.

Yes. So if you look at the second half, yes, we're -- we've got price that has basically been put in place. We started to see that show some positive results in the end of the second quarter. We'll get the full benefit of that in the third and the fourth quarter. We've got the benefits from the M&A activity that we did in the first half. We'll fully realize that. Plus, we've got productivity programs, which take a little bit longer to come to fruition, but the beginnings of that was put into place in the first half of the year. We'll see the benefits of that going into the second half of the year. We'll build more of that productivity out. We'll focus with discipline on price to offset inflation and these tariffs. And we'll continue to work the synergies on our M&A.

Yes. This is Brooks. So the one thing I would add in there too, when you look from a year-over-year perspective. If you remember the second half of '17, we were down from a margin perspective. And that was our -- the toughest part of 2017. And so we're going to run up against easier comps both from an operating margin perspective and also from an inflation perspective on both freight and materials because you start to see those creep in, in the second half of 2017. So our comps should be easier from a year-over-year perspective.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

I'll echo Steve's comments. Welcome, Gary.

Thank you.

I wanted to start with a question around North America kind of following up on a couple of those points. It seems like there has been continued divergence between windows and doors with some of the operational issues in windows. And one thing that would be helpful and hoping you could quantify, just what is the relative margin profile today of North American windows versus doors? I think it's important if you can give us some quantification just to help investors get comfortable with, "Okay, doors is kind of more or less on track. Here's the delta on windows, and here is kind of what we need to do," and just give people a better sense of what that gap is and how you can close it.

This is Brooks. Let me take that one since Gary is still relatively new. Historically, when you look back, and we've talked about this before, windows was more profitable than doors. And it was better by 200 to 300 basis points in the past. As we've improved doors and then as we struggled with some of our windows issues, that's really flipped somewhat to where doors is better than windows probably by this 200 to 300 basis points delta. Having said that, there's certain parts of our windows business that performed very well certainly at the target level of EBITDA that we want to achieve. And then there's other places where we know we need to make up ground, and that's where we're focused -- we've focused our efforts. And so we believe over the long term that both doors and windows can be at our targeted EBITDA margins of the mid teens that Gary had talked about earlier. And there are several ways that we inform that decision. One is, when we look at acquisitions in both spaces, we see targets that are at that mid-teen level. So we know that there's lots of businesses out there that are able to achieve that. And then secondly, when we look at the pipeline of what we're doing from a new product perspective and a productivity perspective and then some of the longer-term things that Gary was talking about, we feel like we see a path towards that mid-teen EBITDA margins for both businesses. But right now I would tell you that windows is definitely lagging doors.

Okay, that's helpful, Brooks. And then as a follow-up, and hopefully, Gary, you can shed some light on your views on this part, M&A strategy is, to the prior point, there are targets out there in the market that have been mid teens, yet if we look at the contribution from recent acquisitions, it's been below company average margins. And I think part of the story was using M&A as a way to mix higher on margins, understand that every deal is different, but certainly the ones that have come through on average have been lower than company margins. Gary, how do you think about M&A strategy and kind of discipline around whether you look for that immediately accretive margin or whether it's more of a let's buy good brands with turnaround strategies? Just what's your focus there? And how do you balance that?

Listen, our M&A strategy is going to continue to be the same. It's going to be around strategic bolts-ons that really support our core business around doors and windows and kind of the accessories and ancillary products right around that. And we've done that. That's clearly what was done in the first quarter. I'd say that, if you look at -- we may have diverged a little bit of that with some of the channel plays looking at distribution. Distribution margins are going to be fundamentally a little bit lower, but there are other things that we like about those businesses that we believe we can get those margins to be accretive. So as we look at M&A, we're going to be looking for the strategy first. We're going to be looking for, like you said, good brands that will fit into our business. And we're looking for accretion certainly within the first year. I don't know if you want to add anything to that, John.

Sure. I'll add on. This is John. We've done 12 deals in the last 3 years. Some of those deals have been 15%, 20% sort of EBITDA margin profile. It just happened here, since the IPO, several of the deals we've been doing have been in the mid- to high single-digit range, but it really does start with the strategy. I mean, each one of those deals, there is a very clear strategic fit either filling a gap in the portfolio or a gap in our channel access. And we've got business cases that get those deals up to company margin levels. In some cases it might take us a year or 2 to do that, but if we look at sort of over a 4- or 5-year period, if we think the earnings CAGR and the revenue CAGR is going to be a lot stronger by virtue of having those deals in the portfolio and improve the core business, we're willing to make that trade in the short term. But you're right. Here recently it just happens the last few deals we've done have been below company margin average; and understand that, that's, I guess, a short-term headwind to the longer-term EBITDA margin target.

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

Gary, here the first question for you. I mean you indicated that the strategy is going to be basically unchanged from what's been in place. I guess we're curious. What's -- what gives you confidence that this is the right strategy? I mean, why do you think that it hasn't really worked to plan so far? And you mentioned maybe some nuances that you would bring to the table. Maybe you could help us understand some of those as well.

Thanks, John. Yes. When I -- as I said earlier, I've had 45 days to really dive into the business deeply, meet the people and see some of our operations. I've certainly got plans to do more of that going forward here in the next several weeks and months. I also had some time to kick the tires prior to joining the company as well. What I'd like is fundamentally the markets are good for this business and we have strong brands and strong positions within the markets that we play. That's a good thing. We've been able to get price here in the short term because of those brands and because of the positions that we have within the markets and the channels. That's a good thing as well. The fact that JEM is the -- our operating system called JEM, the JEM -- the JELD-WEN Excellence Model, is in place is a good thing. We're very early in the deployment, but the tools are there. We've got leaders that understand what good looks like. And we're going to be able to really accelerate the deployment of JEM across the company and use that as our standard work and our standard model for building a culture around problem-solving, around productivity. You can see the opportunities wherever you go, and that's really what I like about it. I can see it. I've seen this before in the businesses that I've been involved in, and I know the benefit that deploying this type of a model will deliver. I can tell you that, over the next several weeks and months, we'll be deploying elements of JEM deeply. We're looking at our operations and improving those as well, but I think you'll start to see the productivity pipeline building, as well as the execution there. To me this is an execution. It's a classical execution. I won't call it quite a turnaround but implementation. So if we can get execution across the organization across what we know we need to do, I see the returns coming.

Okay, that's helpful, Gary. And then Brooks, maybe on the North American margin being down 270 basis points year-over-year. I think you indicated that about 180 basis points was from the core margin. Can you just help us kind of dimension the impacts within that 180 basis points of freight, materials and then the investments?

Yes. It's about half and half. So when you look at inflation, we've seen the freight inflation especially accelerate -- continue to accelerate. And it's hitting us not just from a rate perspective but from a driver availability perspective. It impacts your efficiency in terms of how you're able to use freight, the different companies you have to use and different things like that. So it's a kind of a multitiered impact from a freight perspective. And then on the investment side, like I said, I think it's about half. So if you think of last year, we took costs out in the first half. We're not ramped up from a seasonal perspective as we needed to be as we entered the busy season, and then that really caused us some problems in the second half. And so I think we've been more thoughtful in terms of the costs that we deploy to make sure that we're able to ramp into the busy season this year.

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

The first thing I wanted to discuss was your comments around the tariffs. And I guess, can you give us some color around your ability to get pricing as it relates to that, how it's different perhaps relative to some of the inflation pressures you're seeing? And then, I guess, as you think longer term and maybe bigger picture about it, are there any thoughts around shifting any of the supply chain or making changes in order to also help offset some of this?

Yes. So I'll start out with the answer is yes, absolutely. We're working on offsetting the effect of tariffs, as we would with any inflation, with price. We've been successful to date with the programs that we put into place in the late second quarter, which are starting to take hold now. We'll see some of that. The new tariff is announced next week. We've got to react to those. And obviously we'll pass those. So far, there's been a good, disciplined approach in the marketplace, and we've seen price sticking around those items in most of our channels. As far as looking at our supply chain, we're always, always looking at that. And we will -- we're obviously accelerating that, to move around our supply chain in order to get the best possible price position that we can. As I mentioned earlier, we'll be doing some work on our footprint rationalization. Along with that will come our supply chain rationalization as well and looking at the best opportunities. We'll also build productivity programs around our key materials and commodities in order to benefit from that as well.

Yes. And I would add to that. If you remember, one of the first things that we really got after in our productivity program was sourcing. And so we've built out a fairly good sourcing program in terms of suppliers and in terms of cost out. So we look at -- when it comes to tariffs and tariffs being implemented, we have multiple sources for things like steel and aluminum and things like that from different countries so we can move around some of that capacity as needed based on what the prevailing winds are from a tariff perspective. So we've built out a pretty good supply chain capability relative to sourcing, and we'll continue to try to optimize that based on the ever-changing tariff outlook out there.

Okay. That's helpful. And then just in terms of some of the sort of bigger changes, I guess, that are coming through. You mentioned the need to kind of reduce your footprint, reduce complexity, some of this permanent cost take-out. How do we think about that coming through relative to JEM? I know that you said that you're continuing to roll JEM out, but do there need to be certain structural changes that are made before JEM can sort of fully come through and really see the benefits of that in the margin and in all these different parts of your business?

So yes, I think that's a great question, Susan. The deployment of JEM needs to be in a structured way, and we need to do it deep and across the entire organization. This is our standard work. This is our business operating system. This will be the way that we implement the productivity, that we look at our footprint, that we look at our markets et cetera. So good, solid operating system that would be familiar to you from other companies and in industry. That's what JEM looks like. And it's been developed by the leaders that have joined the company and know what good looks like. So that's number one. When we look at our capacity and our footprint today, we have plenty of capacity to grow. What's great is we have the ability to look at these projects. And I'm in early days of looking at them, but we have the ability to rationalize this footprint not only to benefit our cost position, but while we're doing that, we'll actually add capacity into our manufacturing footprint. So it's a you kind of win twice on that one. You get your costs down. You -- and you improve your cost position and you simplify the operations as well. So JEM, to me, is the operating system. We're teaching problem-solving. We're going to teach productivity pipeline and productivity execution, and we'll use that as the basis for our footprint rationalization. To answer the last part of your question: As we're preparing to deploy this footprint rationalization program, we'll provide you with the timing and the costs and benefits on an ongoing basis as we execute the different phases.

Our next question comes from the line of Tim Wojs with Robert W. Baird.

Welcome, Gary.

Thank you.

So maybe just kind of going back to pricing, I just wanted to make sure I heard it right. So did realization on pricing accelerate through the quarter, basically implying that the pricing contribution in the second half of the year should be better than it was in the second quarter?

Yes.

Okay. And then just from a kind of a comparisons basis, I just want to make sure I'm set right, but if I remember correctly North America, the inefficiencies in windows last year, was that about a 100 basis points negative impact to North American margins in the second half of last year?

Definitely -- I think it's approximately correct.

Okay, okay. And then lastly, I just want to kind of sneak one in on Steves. I mean there was a remediation trial last week. I think the judge stated that the divestiture is off the table. Is there any way that you can confirm or deny that?

Yes, we're really not going to take questions on Steves today.

Our next question comes from the line of Michael Rehaut with JPMorgan.

Gary, welcome. I wanted to circle back to some of your earlier comments as well, specifically around Susan kind of remarking around the -- some of the plans that you've stated or hope to lay out regarding cost and footprint rationalization. You said that you'll be laying it out in phases. And obviously you're just joined and first 45 days, but I was hoping to get a sense of timing for expectations around when we might expect some type of announcement around this and kind of in particular interested in if we're to think of some type of announcement perhaps in the second half of the year but if this would be kind of a one-shot announcement where we hear 2018, 2019, 2020 in kind of a longer runway. Or is it something that, every 6 to 12 months, we'll kind of hear an additional phase and more details? Just trying to get a sense of how we should expect your plans in this area.

Well, thanks for the question. Yes, the way I would think about it is, as I said earlier, we will look at this in phases. Got some high-level ideas at this point. We're starting to put pencil to paper and eyes to the footprint and really looking at where the opportunities are and where we can get the biggest opportunities. Again, it's going to be around a disciplined approach deploying the operating system and making sure that this consolidation and rationalization not only gives us the cost-out that we're looking for but also the productivity and the increased capacity that we would need to grow. So we've got to do that. I would expect that, during the fourth quarter, we would tell you about Phase 1 and kind of the direction we're going, with the expectation that there will be some execution on Phase 1 in '19.

Mike, I'll just -- this is John...

That's great -- yes.

I was just going to add on. We are looking at sort of capital allocation holistically here between restructuring projects, M&A, share repurchases, where we can drive the greatest return. And we're going to be having an eye to where and how quickly we move with some of these restructuring projects. We'd be looking at sort of the ROIC of these business units to make sure that we're driving the best return out of each of the geographic segments that we can. So that would be sort of the angle we'd be looking at as well.

Okay, to -- just to clarify as well on this before I get to my second, if I could. When you talk about these cost improvement or announcements in the different phases, would this be kind of conceptually should we think about it as being more supportive of the adjusted long-term EBITDA margin target of 15%-plus or sort of incremental to that?

No, I would say that this is supportive to that. We've got to take cost out to do that, but I can see where that is. These projects are a part of that. Building this general productivity type of culture here at JELD-WEN is the other part of that. We do those 2 things. We get there. You get the opportunity, the improvements off of those operational improvements as well; help us grow above and beyond that kind of at that 15%.

Great. And then just secondly, from a price-cost perspectives. I guess you mentioned that, in the second quarter, the pricing initiatives are still lagging the various cost inflation buckets, particularly freight but others as well. You mentioned that you expect a greater impact of price in the second half. I would assume, if 2Q was about a 2% contribution, we're talking about 3% to 4% perhaps in the back half. Brooks, I'm curious if that's kind of the right way to think about it. And when would you expect to -- for price-cost to hit neutral?

Well, I would say we've put in multiple price increases as more information has become available, right? And so most of our price increases are complete as of the end of the second quarter. However, there were some new tariffs that were announced kind of mid-second quarter, where we've got price increases that aren't going to be effective until August. So what I would say is, in Q3, we should at least achieve parity in terms of price-cost. And in Q4, we should get more accretive both in terms of run rate and in terms of year-over-year comparison, but there -- when the environment, the external environment, is changing the way it is and you're in an inflationary environment, you are going to play a little bit of a lag in terms of trying to catch some of these bigger inflationary pressures. And some of these inflationary pressures are big swings. And so we've got a good system in place, from a pricing process perspective, to react quickly. We're able to get out to our customers and have discussions with them relatively quickly, but it still does take some time to get those pricing measures in place. So -- but to recap, net-net overall we should be at least on par through Q3 and then accretive as we get into Q4.

Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey.

A question for Gary. We've talked a lot about some accounting changes. Will -- getting out of product lines or getting out of individual countries, is that on the table? Or is this more just internal operations what we have now?

Yes, what we've -- Keith, one of the what we've been talking about so far is really about operations and the culture around productivity. We will continue to always look at market opportunities and product opportunities, not on the table at this point. This is really a classic operational improvement opportunity, so it's how we execute and how we look at our footprint going forward.

Okay. Second question, on the you referred to the margin decline. Half are materials. Can you just kind of tick off 1, 2, 3 which were the biggest headwinds in the quarter?

Yes...

Well, I would say -- yes. I mean I would say our biggest headwind has been freight probably from a percentage perspective, maybe not from a raw dollars perspective, but from a percentage perspective, we've seen bigger freight increases than anything. And you've seen rate increases not even including the efficiency rate increases of 20%-plus in the market. And then secondly would be material. And then you always -- and then thirdly, I'd say you have your every-year inflation that you have with labor, but you're probably seeing some more inflation, some carry-on impact of the freight inflation and some of the materials inflation and some indirect materials and different things like that. So you're seeing a little bit more inflationary pressure across the cost statement simply because some of these cost drivers that affect everything are impacting our whole cost of goods structure.

So within the materials, what were the top 1, 2, 3...

So I would say resins and vinyl; and then metals, so aluminum and steel; and then thirdly, packaging.

So the resins and vinyl, that's not really a tariff issue per se. It's more just...

No...

No.

It's a combination of inflation, just regular material inflation, and then also tariff impacts which we view as inflation. So whether you're paying the tariff or whether you're sourcing from somewhere else and paying a higher price, it's still an inflationary pressure, right?

And within the metals, you're using aluminum obviously on some of the windows and are using a -- is it a cold rolled steel on some of the steel doors?

Yes, steel doors, and then we also use aluminum. In Australia almost all of the windows we make are aluminum, 90%-plus.

Our next question comes from the line of Phil Ng with Jefferies.

Margins in Europe were a bit lower than we -- the margin compression in Europe was a little larger than we thought. Can you provide some of the headwinds you saw? I would imagine in that market you're not seeing as much freight headwinds but certainly raw materials broadly.

Yes, well, there's -- certainly the Domoferm acquisition has been dilutive overall to margins, and that's probably the biggest driver. Then I would say overall we've seen logs and lumber both in terms of material costs and supply, particularly in the North where our supply chain is a little bit more complex, really driving some of the margin compression in that particular region. And so we're out there get -- trying to get price out in the market. And most of these supply concerns are past us. We've still got the inflation out there, but that's what's really driving the Europe results, Domoferm and then Northern Europe with logs and lumber supply.

But would you expect some of that price-cost dynamic to moderate in the coming quarters? Is that how we should think about it in Europe?

Certainly...

That's right, certainly, yes.

Okay. And then for your windows business, I believe you called out some relative weakness due to the operational issues from last year. Are you seeing any lingering operational issues this year? Or is this more of just winning back share after losing some of that business last year?

Yes, we're seeing, our operation, we're back stabilized around our historical service levels. So now it's about winning back the business that was lost during that issue.

Okay, that's helpful. And just one last one for me. Brooks, your guidance for the full year makes a ton of sense, but it implies a pretty big snap-back in the fourth quarter. I suspect that's part of some of the price increases you've mentioned on the call that's kicking in August, but I just want to understand that dynamic a little better.

Yes, that's correct. And then also, from a run rate perspective and from a last year comparison perspective, Q4 was the toughest year that we had in -- sorry, excuse me, toughest quarter that we had in 2017 from a labor impact and from a margin dilution impact with some of the operational issues in windows. And then also, that's when we started to -- you -- we started to see the, feel the full brunt of the material and the freight inflation that's been hitting us over the past 12 months. So when you think about what happened last year and you think about some of the tailwinds we should have as we head into fourth quarter this year, those are the big drivers.

Our next question comes from the line of Matt Bouley with Barclays.

Welcome, Gary. You mentioned the commercial investments that are intended to drive longer-term growth. It sounded like labor was highlighted there, but if you could elaborate a little more on exactly what's involved with these investments and how to think about the payoff on these.

Yes. So I mean the primary investment there is to support new business that we got, primarily in the retail channel, so labor to affect that and ensure that we have the ability to deliver on that. Additionally, there are some other startup costs around taking on that kind of business, but it's good business for us. It's accretive business. And we'll start to see the benefit of that growth in the second half of this year, so we're pretty excited about it.

Okay, got it. And then secondly, just following up on the North American windows business and recovering share there. You mentioned your lead times are back to normal. You've made these labor investments and built some inventory as well. Can you just make any additional comments on kind of regaining that share and how to think about volume recovery in that side of the business in the second half?

Yes, listen, at this point, it's about demonstrating our capability to our customers. We've got to -- it's face time. It's -- and then it's saying what we can do and then doing it. And that's really the essence of execution in general, but for us right now on the windows side it's proving that we have the service levels, we have the inventory and the ability to meet their needs. And as we do that and continue to do that, we'll earn back that business. At the end of the day, we still have a very strong brands -- a very strong brand in windows. We have a strong team. We have strong relationships within the channel. We disappointed them, so now we've got to bring them back and prove that we won't do that again.

Thank you. Ladies and gentlemen, that concludes the time we have allowed for questions. I'll turn the floor back to Mr. Michel for any final comments.

Well, thank you all for joining us today, really appreciate your time and interest in JELD-WEN. We look forward to following up with you throughout the day. And I look forward to seeing and meeting many of you later this week, in our trip to New York and Boston.

Again thank you very much.

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