JELD-WEN Holding Inc (JELD) 2018 Q4 法說會逐字稿

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the JELD-WEN Holding, Inc. Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) Karina Padilla, Senior Vice President of Corporate Planning & Analysis, you may begin your conference.

Thank you, operator. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, which we will be referencing during this call.

I'm joined today by Gary Michel, our CEO; and John Linker, our CFO. Before we begin, I would like to remind everyone that during this call, we will be making certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we are providing with respect to certain expectations for future results or statements regarding the expected outcome of pending litigation. Additionally, during today's call, we will discuss non-GAAP measures, which we believe will 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 non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation.

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

Good morning, everyone, and thank you for joining us on the call today. 2018 represents our fifth consecutive year of adjusted EBITDA growth and I'm confident that the operational progress that we've made in the year has set the foundation for consistent, profitable growth at JELD-WEN. During 2018, we completed 3 acquisitions adding to our family of leading brands. These acquisitions bring a combination of new and exciting products, increased channel access and best-in-class manufacturing capability. We also invested in new product development during the year, launching a number of key new window and door products, some of which will be on display this week in Las Vegas at the International Builder Show.

In November, we announced a comprehensive facility rationalization and modernization plan and also outlined an enhanced deployment of a business operating system, the JELD-WEN Excellence Model, or JEM. Together, these initiatives will reduce our cost structure by $200 million, increasing our ability to respond to changing market conditions and improving both the quality of our products and the safety of our manufacturing operations.

As you can see on Page 4, we are beginning to see the signs of this transformation at JELD-WEN. I'm pleased to report that we delivered our most recent revenue and adjusted EBITDA guidance. I'll also highlight that we delivered core adjusted EBITDA margin expansion in both North America and Australasia in the fourth quarter, and we have successfully implemented price increases to offset raw material cost inflation, which will support accelerating core margin improvement as we progress through 2019.

We recognize that 2018 also presented its fair share of challenges. Our core volumes were impacted by the lingering effects of prior service issues in our North America and Europe segments as well as from unfavorable mix. For most of the year, we were playing catch-up on price versus raw material and freight inflation. The actions we're taking to reduce our cost structure, driving productivity throughout the organization and developing a lean-focused problem-solving culture will allow us to better serve our customers and respond to changing market conditions. These actions built on JEM and on our productivity culture give me full confidence that we will achieve our 15% adjusted EBITDA margin target by 2022.

Please turn to Page 5 for a brief summary of our fourth quarter and full year financial results. John will follow up with a more detailed view shortly. Net revenues for the quarter increased by 11.8%, driven primarily by contribution from acquisitions, which continue to perform in line with our expectations. Core revenue growth was unchanged for both the fourth quarter and full year as compared to prior year periods, as positive pricing was offset by volume and mix headwinds. Our net income during the quarter increased by $133.4 million year-over-year due to the nonrecurrence of charges related to tax reform taken in 2017 and contributions from acquisitions made during the year. Adjusted EBITDA during the quarter of $109.6 million was above the midpoint implied in our most recent guidance. For the full year, adjusted EBITDA was $465.3 million. Net leverage at year-end of approximately 2.9x is now within the upper end of our targeted range, and our balance sheet and liquidity remain strong.

During the fourth quarter, we repurchased 2.2 million shares of our common stock for $41.4 million. We will remain disciplined and balanced deploying excess cash flow in 2019.

On Page 6, I'd like to provide you with a brief update on the steps that we took in 2018 to accelerate the deployment of our business operating system, the JELD-WEN Excellence Model, or JEM. During the year, we significantly increased the cadence of JEM implementation across the business by training over 2,000 of our associates on A3 problem solving and doubling the number of facilities that utilize JEM tools. These tools include visual management, problem-solving, demand planning and rapid improvement events as part of our standard work. As a result of these efforts, we have already witnessed a significant improvement in our service levels with over 90% of all facilities exhibiting improvement in 2018. I'm proud of our associates who have embraced JEM and who have built a deep pipeline of cost-saving projects to drive meaningful productivity gains in 2019. The JEM culture and tools are critical to achieving our productivity target of 3% net reduction in cost of goods sold annually. JEM is the cornerstone of our business and it begins with a simple philosophy of eliminating waste in all aspects of our operations and processes.

On Page 7, I'll provide a brief update of our facility footprint rationalization and modernization program, which leverages the collective knowledge and experience of our associates from over 40 acquisitions and nearly 60 years in business to develop the best way to manufacture and distribute our products. We've recently announced the closure of 2 North American manufacturing facilities and a handful of smaller sites in Australia, and we will execute the consolidation of additional facilities later this year.

We currently have projects at various stages of completion within each of our 3 geographic segments. As you can see, we've provided an outline of our existing manufacturing footprint on a square footage basis, along with the expected reduction in square footage for 2019 and through the completion of our rationalization plans in 2022. Savings from these efforts will begin in the second half of 2019 and yield approximately $100 million in annual run rate savings by 2022.

As we execute our plans, we're taking all necessary precautions to minimize any potential disruption to our associates and our customers, including carrying excess inventory and retaining supplemental capacity as needed. This footprint rationalization process involves far more than consolidating square footage, as we're also modernizing many of our production capabilities and deploying standard work across the organization, which will improve our cost, flexibility, quality and safety while reducing cycle time and waste, leading to higher quality products and improved customer experience.

Before turning it over to John, on Page 8, I want to acknowledge and celebrate JELD-WEN's track record over the last 5 years of double-digit annual EBITDA growth. In less than one year, we've accelerated deployment of JEM tools to create a lean manufacturing organization and established a global footprint rationalization and modernization plan to reduce costs and increase throughput, and our execution is improving. We remain committed to our 15% adjusted EBITDA margin target by 2022 and to our legacy of profitable growth.

With that, I'll turn it over to John Linker to provide a detailed review of our financial results for the quarter and full year 2018.

Thanks, Gary. I'll start on Slide 10. For the fourth quarter, net revenues increased 11.8% to $1.1 billion. The increase was driven primarily by the contribution of our recent acquisitions, partially offset by 2% headwind from foreign currency. We reported net income of $39.7 million for the fourth quarter, an increase of $133.4 million. The increase in net income was driven by the addition of recent acquisitions and the absence of a $98 million charge associated with tax reform that was taken in the same period last year.

For the quarter, diluted earnings per share was $0.38, an increase of $1.27 compared to prior year. And adjusted diluted earnings per share was $0.41, an increase of $0.15 compared to prior year. Adjusted EBITDA increased 6.3% to $109.6 million. Adjusted EBITDA margins declined by 60 basis points in the quarter to 10.0%. While year-over-year consolidated margins declined, we did see sequential improvements in many areas of our business. The margin decline seen in the fourth quarter was primarily driven by lower margins in our core business where our core adjusted EBITDA margin decreased approximately 60 basis points, primarily due to underperformance in Europe, partially offset by core margin improvement in North America and Australasia.

I will elaborate a bit more on the segment performance in the next few slides. Slide 11 provides detail of our revenue drivers for the fourth quarter and full year. Here you can see that our consolidated core revenue growth was unchanged in the fourth quarter. We realized positive price of 2% that was offset by equal decline in volume and mix. For the full year, consolidated core revenue growth was up 1% with total full year revenue up 15.5%, primarily coming from our recent acquisitions.

Please move to Slide 12 where I'll take you through the segment detail beginning with North America. Net revenues in North America for the fourth quarter increased 13.0%. The increase in net revenues was primarily due to a 14% contribution from the acquisition of ABS. Core revenue declined by 1% as unfavorable volume mix more than offset our 3% price realization. Volume headwinds were most pronounced in our windows and Canada businesses. In our door business, we did see some volume growth but that was driven by a shift in mix from traditional distribution towards our retail channel. I will also note that 3% benefit in pricing in North America was consistent with third quarter price realization, indicating stabilization of our recent previous pricing actions. Adjusted EBITDA in North America increased by 11.6% to $68.2 million. Adjusted EBITDA margins decreased 10 basis points to 11.0%. Margin dilution from the ABS acquisition was mostly offset by core adjusted EBITDA margin expansion of 40 basis points, marking our first quarter of core margin expansion in North America since the third quarter of 2017.

Moving on to Slide 13. Net revenues in Europe for the fourth quarter increased 9.4%. The increase in net revenues was primarily due to a 12% contribution from the acquisition of Domoferm, offset by a 4% unfavorable impact of foreign exchange. Core revenues increased 1% from improved pricing. Adjusted EBITDA in Europe decreased 16.9% to $29.3 million. Adjusted EBITDA margins decreased 310 basis points to 9.7%. Margins were impacted by the dilution from the unfavorable impact of foreign exchange as well as 210 basis points of margin compression in the core business.

Core business margins were negatively impacted by a significant mix shift towards less profitable channels as well as higher costs in certain countries.

On Slide 14, net revenues in Australasia for the fourth quarter increased 11.9%. The increase in net revenues was primarily due to a 19% increase from the A&L Windows acquisition, partially offset by a 6% unfavorable impact from foreign exchange. Core revenue declined by 1% due to unfavorable volume mix, similar to what we saw in the third quarter, with the continued softening of the Australia residential new construction housing market. Adjusted EBITDA in Australasia increased 13.0% to $24.0 million. Adjusted EBITDA margins expanded by 20 basis points to 14.4%, primarily as a result of an improvement in core margins of 10 basis points from productivity and cost controls.

On Page 15, our free cash flow for the year totaled was $101.0 million, down versus prior year, primarily due to capital investments increasing to more normalized levels, funding productivity and growth initiatives.

On the balance sheet, we ended 2018 with total net debt of $1.36 billion, an increase of $307 million compared with year-end 2017. The increase in our net debt was primarily driven by the cash used to fund the 3 acquisitions we closed during the first quarter, and the $125 million of cash used to return capital to shareholders through share repurchases during the year. At year-end, our net leverage was -- ratio was 2.9x, at the upper end of our targeted range, up from 2.4x at year-end 2017.

Our balance sheet and liquidity remain strong to fund our strategic initiatives.

Now I'll turn back over to Gary to go through our 2019 outlook and provide closing comments.

Thank you, John. On Page 17, I will provide you with a brief update on our segment outlook for 2019. We expect core revenue growth in 2019 in our North America and Europe segments with a modest core revenue decline in our Australasia segment. In North America, we anticipate a stable repair and remodel market with core growth in the low to mid-single digits and modest growth in new construction. In Europe, we expect moderating economic growth to yield low single-digit market growth, and in Australasia, we expect a contraction in residential new construction, driven by tightening consumer credit standards to result in low single-digit market declines.

Turning to Page 18. On a consolidated basis, we expect 2019 revenue growth of 1% to 5%, including core revenue growth of 1% to 3%. Core revenue growth will be driven by recently implemented pricing actions and modest volume growth in North America, partially offset by moderate new construction contraction in Australasia. Our outlook for adjusted EBITDA in 2019 is a range of $470 million to $505 million, which assumes approximately 40 basis points of core margin expansion at the midpoint. The growth in adjusted EBITDA and the improvement in adjusted EBITDA margins are driven by productivity initiatives and previously implemented pricing actions. I'll also note that the impact of the stronger U.S. dollar will be a meaningful headwind to our results in the first half of 2019 compared to 2018.

We expect capital expenditures of $140 million to $160 million in 2019 compared to the $118.7 million in 2018. CapEx will remain at approximately 3.5% of sales, roughly 100 basis points higher than normalized levels through 2020, to fund our facility rationalization and modernization plan. The investments we are making will simplify operations, drive efficiencies throughout the business and result in improved return on invested capital.

On Page 19, I'd like to wrap up with our approach to shareholder value creation. First, we'll continue to deploy capital to profitably grow our revenues through investments in R&D and new products by expanding our channel opportunities and remaining disciplined on pricing. Second, we'll continue to focus on our cost structure by driving productivity throughout the business.

Great companies find ways to drive productivity improvements year in and year out, and we are building the cultural mindset to do just that at JELD-WEN. We will also remain disciplined allocators of shareholder capital, balancing returns between organic growth, strategic M&A, share repurchases and net debt reduction.

I'd like to provide you with a brief update on our Steves litigation. However, we will be unable to take any questions during the Q&A session on this matter. As many of you are aware, in December, we received final judgment in the company's ongoing litigation with Steves & Sons. We remain steadfast in our opposition to the jury's original verdict as well as the remedies set forth in the final judgment, and we believe that we have a strong basis for appeal. Procedural steps to pursue the appeal have begun. However, there is no material update since our last public disclosure. We expect the appeals process to last 12 to 18 months.

Before we open the lines to your questions, I'd like to take a moment to thank Kirk Hachigian on behalf of our Board of Directors and all JELD-WEN associates for his outstanding leadership and dedication to our company. We announced this morning that Kirk has informed us of his intention to retire from the Board of Directors and his role as non-Executive Chairman in May at the conclusion of our annual meeting. Kirk was instrumental in the company's transformation into a publicly traded company and was the driving force behind many of the initiatives that resulted in consistent revenue growth and margin expansion. I'd like to personally thank Kirk for his coaching and mentorship since I joined the company as CEO last year, and his dedication to a continued smooth transition.

We're all very pleased that Matt Ross will succeed Kirk as non-Executive Chairman. Matt has been on our board since 2011 and has a deep knowledge of the company and our industry.

With that, I'd like to open up the call for Q&A. Operator?

(Operator Instructions) And our first question comes from the line of Tim Wojs from Baird.

So I just had a couple of questions more on the margin side, but I guess as you look at '19, is there any way to kind of tease out what we should think the headwind from inflation should be? And if you can maybe bucket that into raw materials, wages and other inflation, I think that would be helpful?

Sure, Tim. It's John here. So as we think about the inflationary environment, just big picture, I would say '19 still looks inflationary, but certainly stabilized from the rapid pace of inflation that we had in '18. Some of the biggest areas of impact for us in '18 were around freight. Particularly in North America, we were -- for the year, we averaged -- our freight was up about 13% in North America. I think in one quarter, we peaked as high as 18% increases. We're expecting that to still be inflationary this year but moderate into the mid-single digits range. And similarly, on some of our other key inputs around glass and hardware and metals and things like that. So what I would say is, we do expect price-cost tailwind for '19. We've taken price actions here at the end of the year and into the early part of this year that would more than offset what we expect to see in inflation. And we do -- I would include in that the tariff expect. We expect -- included in my inflation number would be probably $12 million to $17 million of impact from the 25% tariffs on Chinese goods if that goes through at 25%. So what I would tell you, the big picture is moderation as opposed to being a headwind on price-cost, on materials and freight. This coming year it's looking like it will be a tailwind for us.

Okay. Great. And then when we think about the productivity savings, is $15 million still the right kind of ballpark to think about for 2019, and will bolster that during the second half of the year?

Yes, we're still good with $10 million to $15 million range second half of the year. And really the time -- the amount is just based on the timing or ability to take plants off-line and the commissioning of new plants. So we're still on track, and we like that number.

Okay. And then just lastly, if I could squeeze one more in. Free cash flow in '19, just how should we think about free cash flow conversion with the higher CapEx? And then probably some cash restructuring charges or payouts?

Yes, I mean certainly, our aspiration is to deliver 100% of conversion. We fell short of that just this year on -- in a couple of aspects we ramped up some spend in CapEx. But thinking about '19, you're right, we've got some extra -- we do have some extra CapEx as well as some cash restructuring. We're going to work pretty hard to offset that with working capital. I'd say there has been so much focus at margin improvement in this business the last 5 years that working capital is an area of opportunity for us, particularly as we lean off the operations and work with our supplier base, both on inventory and IP. So what I would tell you is, our aspiration is still to deliver 100% conversion. We're just going to have to work a lot harder with -- to get some tailwind from working capital offset the higher CapEx and cash restructuring.

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

It's actually Maggie on for Phil. Can you talk about some of the volume headwinds in U.S. windows and Canada, and whether you see that inflecting in '19? Or what's assumed in your full year guidance for those 2 pieces?

Yes, let me start off and then I'll have Gary sort of talk about where the pipeline is looking like. I would say within the Q4 for North America volume and mix, if we kind of lump those together for windows and Canada was in the high single-digit range for kind of the headwind coming out of that. Obviously, we got a little bit of price to offset it from a core growth standpoint but it was a pretty meaningful headwind. I would characterize a lot of that again with hangover from some of our service issues that we had back in '17. And I'll -- maybe Gary can kind of speak to how the pipeline is building, but I think as we move into '19, we're starting to lap some pretty favorable comps there.

Yes, so when you think about it, it's a little bit of a myth story as well between retail and traditional channels that we saw. And when we think about those service issues that we saw in 2017, we're starting to see -- with that behind us, we're seeing revenue come back. We're seeing that share recapture coming back, primarily windows. And that's looking favorable for us and supporting our revenue projections for 2019. So got those service issues, as I said earlier, we saw improvements in operations in almost all of our plants through the second half of last year. Those issues are all behind us, customers are coming back to us, and we're starting to win some project business. So we feel pretty good about the support there.

Okay. Got it. That's really helpful. And then in terms of pricing, can you talk about what kind of traction you've gotten so far on the December price increase and kind of what the competitive response to the increase has been -- have your competitors been matching that? Just what's going on there?

Yes, so we've announced and deployed pricing really across all our channels and really across all geographies. Kind of got ahead of it this year. It's been very disciplined in the marketplace as well. So we feel pretty good about where we stand. No real pushback at this point. Inflation has been pretty well documented through last year. As I said earlier, we were a little bit behind through most of 2018. We got ahead of that in 2019 and got really all of our seasonal price in and deployed at this point or in the process of being deployed. We've got a couple of -- certainly, on a global basis, we've got a couple of price changes that are seasonal but ahead of us. And that's just kind of a normal course of business. So feeling much better about this year's position than we did last year.

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

This is Elad on for Mike. I wanted to drill down a little bit more into the pricing comments you are just mentioning. And I was curious if the pricing which you are getting in 2019, which is now -- I think you mentioned was ahead of some of the cost inflation. Was that only -- or is that primarily in the wholesale channel? Or were you also able to get some of the price in the retail channel?

We've been able to get in the wholesale channel and in the retail channel as well. So we've done pretty well across all of our channels in North America as well as in Europe and Australasia. I'll tell you with a slowdown in Australasia, it's probably going to be a little harder to get the price, but we do expect to see realization in all of our segments.

Okay. Great. And then could you also expand a little bit more on the shift. I think you mentioned the shift to retail from wholesale volumes in 4Q and you're starting to see that come back in 2019, and maybe have that split between the windows and the doors business if you're seeing a similar trend in both of those, and really kind of what you're seeing on the wholesale side?

Yes. So the mix issue was really between traditional and retail. So we're -- some of that's a little bit of a hangover that we have from service issues, now it's primarily windows. Doors is actually up. So we've got the share recapture piece for windows. It took a little bit longer to come back after the service issues. As I mentioned, those our all behind us. We have a good pipeline, in fact, a very strong pipeline of business coming into 2019, which includes that share recapture as well as additional share gain with customers that we've not done business with previously. So this is business that based on our site line products and some other new product developments are highly desirable and customers are coming for those as well.

I'll just add on. A lot of the -- our windows business in North America while we do, do some retail has predominantly weighted towards the traditional distribution channel. As you think about the product, they are being more of a -- primarily, more of a make-to-order type of a product that's more suited for distribution. So when I spoke earlier about seeing negative volumes in windows, a lot of that was felt on the traditional distribution side. So where we were getting the growth was more on the retail side.

Okay. Great. And in the -- in your North America guidance, the 3% to 4% growth. Is that assuming windows business has some of this volume growth and regain share? Or is -- would that represent an incremental upside to the guide?

I would say that we've been pretty conservative about our assumptions for volume growth in North America in that 3% to 4%. You got to remember there is some Canada in that North America. It's only about 10% to 15% of North America, but it is a headwind to the rest of North America. So we have really good visibility around that 3% to 4% from where we sit today, based off of the pricing actions that have already been taken and implemented. And so with some level of modest assumptions around core growth and share recapture in North America, we've got good confidence around that 3% to 4% number.

Our next question comes from the line of Truman Patterson from Wells Fargo.

Just hoping -- in North America, I was hoping you guys could talk about the nice turnaround in your fourth quarter margins, really outside of kind of the pricing-cost relationship so kind of the core operational improvements. And then also just bigger picture on your margin expectations for 2019 from here. Really hoping that you can give us an update kind of the doors versus windows business as I know windows has really been a problem area.

Truman, yes, so I would say in North America, we did get some productivity and cost reductions in the fourth quarter, as we already talked about price cost being a slight tailwind in the quarter. So we were able to deliver that core margin improvement in North America of 40 basis points even with the headwind of the volume mix. I would say that, that volume mix headwind for North America segment EBITDA margins was definitely over 100 basis points, just from that alone, so we were successful on the price-cost, we were successful on the productivity, but lost a lot of that back on the volume mix side of things. And I think what was a pretty good quarter, could have been a great quarter had we had some more contribution from volume mix.

So yes, our focus on really putting JEM, our JELD-WEN Excellence Model, business operating system tools out into more plants and driving a productivity program in the second half of the year has started to pay off. We're seeing great improvements in the factories that we deployed JEM and are starting to see some continuous improvement in each one of those. So that productivity pipeline really started to build in the latter half of the year. And that's really what we're also looking at 2019. We've got a stronger pipeline as we continue to deploy the JEM tools across really all of our operations across the enterprise.

Okay. Second question more on Europe. North American margins seem to be turning the corner, but Europe continues to face pressures. Could you just discuss what the drivers of this are? Is it weakening demand? Is there a Brexit impact? And then how should we really think about Europe, specifically, on the margin front in 2019, and what's kind of baked into your guidance?

So I think what we've seen in Europe is a shift towards some of the lower-margin project business away from some of the higher-margin resi channels. And we -- in those resi channels, we've seen some greater price competition, quite frankly. And it's primarily been in the north and the central. We still have a pretty strong business in the U.K. It's done fairly well. So as we look into 2019, which was the second half of your question, we do think it's moderating a bit. We'll see probably a little bit of the same type of mixed pressure. But still, a modest growth as we're -- or low growth, I guess, as we're looking at 2019 is what's built into our plan.

Yes, I would just say that in -- just add on that we are expecting some core margin improvement in Europe this year. I would strike a cautious tone, particularly in the first half. But as we get into the back half, clearly, we're going to have some pretty favorable comps given the last couple of quarters in Europe. But just to confirm, we are looking at core margin improvement in Europe.

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

This is actually Chris on for Susan. So my first question is just on your CapEx outlook. Given that much of the footprint, rationalization is expected to come through after 2020. How does your future CapEx spend relate to -- or compare to the kind of 2019 estimate?

Yes. So -- it repeats back there. Our normalized CapEx run rate is around 2.5% of sales. It's what we think we need to run the business both for sustaining as well as growth and productivity investments. As we mentioned before, we think we've got about 2 years of 3.5% of sales CapEx to a fund a footprint project. It's a bit front-end loaded. So if you think about what we're doing here, we're not only consolidating sites but we're also modernizing some of the equipment in the sites that we're consolidating. And so there is a fair amount of investment on the front-end as we sort of optimize some previous processes that were pretty labor intensive in some of the legacy plants and consolidate that into centralized plants, the best-in-class manufacturing capabilities. So after about 2 years of higher investments to fund the footprint projects, we do see it going back to normalize to sort of 2.5% of sales run rate. But the savings around the footprint reduction don't match year-on-year with the capital investment. It's a little -- we got to spend some money up front to get the savings and so you'll see the run rate of the savings start to accelerate as we get into '21 and '22.

Yes, I think it's important to also underscore that as we're doing this rationalization and modernization, we're actually -- because we're deploying standard work modernizing the plants, even though we're consolidating, we're actually adding capacity in our system for our product supply. So I think that's an important point.

Got it. And that's just my second question is on cap allocation for 2019 given these internal investments. Could you just rank order your preferences right now currently in terms of deleveraging, share repurchases, M&A, just given your current outlook?

Yes, I think it's important that -- first and foremost, we are investing in our own consolidation and modernization programs and in profitable growth. Second, we've made a number of acquisitions last year and certainly over the last 18 months. We are in the process of consolidating those and getting the benefits out of those. Part of that acquisition last year is giving a foundation for the rationalization program as well. So that's helping us. Saying that, those are our 2 primary focuses right now: the consolidation and the profitable growth investment. We continue to

(technical difficulty)

and there is opportunities out there for M&A. And -- obviously, it's got a higher bar at this point for us to make a decision to make an acquisition versus buying our stock back at this point. So that's where we would have to make that decision. So first and foremost, investing in profitable growth and in our rationalization program. Second would be really looking at share repurchase, but scanning strategic M&A against that.

Our next questions comes from the line of Matthew Bouley from Barclays.

I wanted to ask about the first quarter guidance. The 18.5% of full year EBITDA, how should we think about North America specifically in that, thinking specifically about the core growth side in light of what's been a pretty clear soft patch in housing over the past couple of months?

Yes. So what I would tell you about the quarter, we do have one quarter of carryover of the 3 acquisitions that we did in the first quarter of last year. So embedded in our guidance is we're assuming we pick up that benefit. That's mostly offset by the FX, the stronger dollar that Gary mentioned. It's a pretty significant headwind for us here in the first quarter. Revenue headwind, we're currently estimating in the $45 million, $50 million range from FX standpoint in the first quarter. So if you kind of net those 2 things out, we are still implying some modest core improvement in the business. I would tell you from a North America standpoint where we don't guide specifically on segments, we are forecasting some modest core growth in the first quarter. We're going to get there through pricing and then some conservative assumptions around starting to get the share back on the windows side.

Okay. That's helpful. And then I wanted to ask about the Australasia business. You're obviously being pretty measured in the 2019 guide there as well, but a lot of moving pieces around macro and housing there. So just any additional detail about what you're hearing from customers in Australia? And kind of how you're managing through this, I guess, housing softness there?

Yes, so the housing softness is really we've been talking about it apparently for a couple of years here. But we've seen a slowdown there. Our business is indexed more towards -- has been historically indexed more towards residential new construction. What's interesting about our business in Australia versus our other 2 segments is that we're -- we have a broader product portfolio beyond windows and doors, which allows us to spread our revenue around. And as we're reindexing the business for repair and replace, there's still a good market there plus that's -- a lot of that is gain for us. It's new business that we're -- they have done a real nice job down there of being able to secure new business in those new areas. With that, we're -- because of our index towards residential new construction and the newness of moving towards a greater repair and replace business, we're a little cautious on the growth levels there. But we have a really good team down there that's done a great job on cost containment and on structuring the business for the markets that we serve.

Congrats on the quarter and to Kirk as well on his retirement.

Our next question comes from the line of Steven Ramsey from Thompson Research Group.

This is Brian Biros on for Steven. I wanted to ask about the 2019 outlook. I think you touched on those aspects of this question in responses to other people. Just wanted to see if I could phrase it a little differently. Is there anything to call out between windows and doors that might be materially different between the 2 going into 2019, whether that be industry dynamics, volume, pricing, anything that comes to mind to call out between the 2 that would be different than the guidance?

Not really. I would say that they're going to act similarly. We look at pricing in the channels certainly by product and by channel. But the one thing that I mentioned earlier is that the overhang from service issues in 2017 and the share recapture and share gain is probably a little more indexed toward windows than doors. But we continue to see growth in both of those. And we see the same productivity programs and the opportunities for rationalization and modernization of both.

Yes, I would just add on to that. Exactly right. I mean the cost savings opportunities are similar. The price-cost dynamics are similar. As you think about the guidance that we have outlined here for '19 to deliver the midpoint, we've got a headwind on FX that we already talked about. For the full year, we've got the contribution of acquisitions. And so on that core improvement, we told you we've made some modest assumptions around volume and the rest that we've got very good visibility to our productivity pipeline of projects that are phased throughout the year as well as the price-cost side of things which again, we've already taken action on.

Got you. Second one also on the 2019 guidance. The 40 basis points of margin improvement at the midpoint. Can you guys add some color or give us some confidence around the levers behind that, whether that be volume, price, cost takeout? And say, if volumes underperform, are there enough moving pieces on the other side to make up for that lag?

Yes, so the 40 basis points a year for end to that's the kind of the core margin improvement, the all-in margin improvement at the midpoint is 20 basis points if you take out acquisitions and FX. But to your point, I think, it's kind of where I was going with my answer to last question is, there are some investments we're going to have to make next year on the G&A side, product development side, IT side, based off of some of the projects we're working on. So it's not all tailwind from price and productivity. There are some investments we're going to have to make. But if you think about sort of breaking down the 40 basis points. Again, with the modest assumption around how much volume we're going to get, we've got good visibility with that 40 basis points through the price-cost as well as the productivity pipeline. I think in terms of what could move faster is, as Gary mentioned earlier, just the -- as we're working through this facility rationalization project, just the timing of when we actually take some of those new facilities online and the timing of when we're able to take some of the older facilities off-line, that could be a piece that could move the needle one direction or the other in terms of how much savings drop through into 2019. But again, good visibility on that 40 basis points.

(Operator Instructions) Our next question comes from the line of John Lovallo from Bank of America.

The first question is, on Slide 7, one of the comments there was that there's going to be some buffer stock built just to avoid disruption. Mention out how does that kind of play into the opportunity for working capital improvement? And then also in that same sentence, I think, it talks about new facilities coming online. I'm just curious, if -- or these actually new facilities that are being brought on? Or is it just new capacity within the existing facilities?

Yes, let me answer the specific question first and I'll ask Gary to kind of elaborate on how the process is working from a strategy standpoint. But the specific comment around inventory was really more of an intra-year sort of a comment, for example, we're in the process -- in North America, we have a project going right now where we're getting ready to bring some capacity online in the facilities that we believe will be impacted by that in terms of being taken off-line. Of course, one of the strategies before you do that is to build a little extra stock before you take the old facility off-line. So I would consider that more of an intra-year type of move as opposed to something that would impact the full year working capital. But do you want to elaborate on that?

Yes, so one of the things that we wanted to make sure in the -- certainly in the early phases of this project is that we made sure that our new facilities that come online are at full capacity and fully able to handle customer demand as well before we take latent capacity off-line. So we're just trying to take a "go slow to go fast" approach in the first phases. That being said, we've got -- we're building a lot of standard work. We're building a little bit of, as John said, inventory to buffer that. But overall, really just looking to make sure that we don't affect our ability to deliver for customers as we're making these transfers.

Okay. Got it. And then second question is, you guys talked about a shift or somewhat of a shift from distribution to retail. Can you just help us kind of think about the margin differential between the distribution and retail channels?

Yes, certainly, the margin profile in North America of retail versus traditional is pretty significant. I would say it's largely due to the nature of what's being bought in the 2 channels. So in the retail channel, we still have much higher proportion of stock goods as opposed to make-to-order, special order goods. By nature, that's going to be a lower-margin profile. And then on the flip side, traditional distribution, we're going to see a higher percentage of special order or make-to-order type products, which is going to carry a higher profile. So it's sort of less about one channel being structurally less profitable than the other or anything like that. It's just more about the mix of what's going through those channels. We haven't disclosed margins by channel, but it is a pretty significant shift, obviously, enough to move our margin here in the fourth quarter in North America.

Yes, and as you look at some of our new product launches and the things that we're doing, particularly what we're showing (inaudible). You'll see that the types of products and -- that we're launching and where we launch them in even both of the channels also have an effect on shaping that demand and shaping that margin picture. So we're always looking to improve both the mix within a channel as well as the mix across the channels.

And we have no further questions in queue. I'll turn the call back to the presenters for closing remarks.

Well, I'd like to thank you all for joining us today. We delivered our guidance for EBITDA in the fourth quarter. We're looking good for 2019. And we appreciate all of your support in questions today. We'll be available for follow-up calls later today as usual and look forward to talking to you all soon.

This concludes today's conference call. You may now disconnect.