Ladies and gentlemen thank you for standing by and welcome to the JELD-WEN Holding, Inc. Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Karina Padilla, SVP, Corporate Planning and Analysis. Thank you. Please go ahead.

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website which we will be referencing during this call. I'm joined today by Gary Michel, our CEO; and John Linker, our CFO. Before we begin I would like to remind everyone that during this call we will 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 are providing with respect to certain expectations for future results or statements regarding 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 the additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Gary.

Thanks Karina. Good morning everyone and thank you for joining us. Please turn to page four. This morning we announced our third quarter results which are in line with the selected preliminary results we announced on October 10. On our preliminary results conference call, I shared my disappointment in our third quarter performance. We believe the results were due to issues largely specific to the quarter, and we'll see improvement and operational performance moving forward from the mitigating actions already in place. I remain confident in our long term strategy, the strength of our business model and the engagement of our associates. Whoops commitment to our success has never been stronger. Let me walk you through some of the key points of the quarter. As discussed on the October 11 call a significant increase in manufacturing costs in a small number of our windows facilities in North America primarily drove the performance gap to expectations for the quarter. Erratic order patterns and customer-driven product resets in the retail channel tested the nimbleness of our demand planning process and systems capabilities and we were unable to adjust costs quickly enough in the quarter. We believe these issues were seasonal and isolated in nature and do not expect them to recur in 2020. I'm pleased with the responsiveness of our associates to immediately implement corrective actions by embracing our JEM tools and processes and I expect operational improvement moving forward. We continue to see volume headwinds in North America and Australasia where our businesses are more heavily indexed to single-family residential new construction markets. The Australia market weakened considerably both sequentially and year-over-year. Positive developments in the U.S. housing market in recent months have us cautiously optimistic though we have yet to see a substantive shift in our demand curve. I'll elaborate…

Thanks, Gary, and good morning, everyone. I'll start on page nine. For the third quarter net revenues decreased 3.9% to $1.1 billion. The decrease was driven primarily by a 3% reduction in core revenues a 2% headwind from foreign currency partially offset by a 1% contribution from the VPI acquisition. Diluted earnings per share was $0.17 a decrease of $0.10 compared to prior year. Adjusted diluted earnings per share was $0.26 a decrease of $0.14. Both adjusted and unadjusted earnings per share were heavily impacted in the quarter by an increase in our effective tax rate to 56.9% significantly higher-than-expected in prior year due to a combination of a greater proportion of earnings from non-U.S. higher tax rate jurisdictions the impact of the GILTI provision of U.S. tax reform and discrete items in the quarter. The impact of GILTI drove approximately 13 percentage points of the rate due to a higher percentage of our projected earnings being realized in foreign jurisdictions subject to GILTI. Additionally the onetime impact of discrete items related to other comprehensive income drove another 11 percentage points of the rate. Our cash tax rate in the quarter was in the high teens as we continue to realize the benefit of our NOL. We are now tracking toward a full year effective tax rate of approximately 40% to 44% compared to our prior expectations of 33% to 36%. Excluding the impact of GILTI and the other discrete items the adjusted effective tax rate for the full year would be approximately 28.5%. We expect the impact of GILTI to taper off in 2020 which will favorably impact our effective tax rate in the future. Third quarter adjusted EBITDA was $108.9 million generating margins of 10% down 170 basis points compared to prior year. Core adjusted EBITDA margins excluding…

Thanks John. Please turn to page 16. Consistent with the comments provided on the October 11 call we now expect full year revenue for 2019 to be approximately 2% below full year 2018. And we expect full year adjusted EBITDA to be in the range of $419 million to $429 million. Our earlier forecast for 2019 anticipated that we would pivot to growth in the second half of the year. Unfortunately market conditions in Australasia and Canada worsened while North America weakness continued and Europe performed as expected. Residential new construction markets provided mixed signals throughout the year and are showing signs of strengthening in the U.S. We have seen pockets of repair and remodel market growth although not at the expected rates and we will continue to position ourselves to take advantage of any further improvements. Please turn to page 17. Despite the impact from volume headwinds our associates have utilized JEM to deliver positive productivity in our core operations and have developed an extensive backlog of projects to drive future cost savings. And the facility rationalization and modernization plan is on track and we are now actively reducing inefficient and latent capacity. I'm confident in our strategy and believe that our ongoing deployment of JEM will improve our operations and deliver long-term value for our shareholders. Finally we have no significant update on the Steves litigation appeal process. And given the ongoing nature of the proceedings we will be unable to take any questions on this topic during the Q&A session. With that operator please open up the call for Q&A.

[Operator Instructions] And our first question comes from the line of Matthew Bouley from Barclays. your line is open.

Hi, good morning. Thank you for taking my questions. I wanted to touch on the implied Q4 guide. I think previously you guys had talked to seeing some potential operational improvement in the fourth quarter sequentially. But I think the guide suggests perhaps margin stepped down a bit in the quarter. So I'm just wondering kind of what's changed in your view over the past months. I know you gave a lot of detail there but just kind of any specifics around that margin profile into Q4 and then kind of timing around when you might see that inflection into 2020?

Thanks Matt. This is John speaking. Yes. So just generally speaking Q4 is going to be a weaker margin than Q3 just from a seasonality standpoint. We saw that last year. Margins went from 8.9% in Q3 of last year down to 6.5% in Q4. So traditionally we do see a bit of a step down. What we're calling for here is sort of implied in the midpoint of our guidance is around 9.5% which is just slightly under what we reported for Q4 of last year. So more or less flat core margins year-over-year. We did have negative core margins in Q3 of 170 basis points. So while we're not that yet back to core margin improvement in Q4 that is a sequential improvement. Yes. I think the things that are impacting us in Q4 Australia certainly from a volumes perspective continues to sequentially get worse. We're looking at sort of mid-teens type of a volume environment in Australia in Q4. Europe probably flat growth. And North America still slightly down on a core basis. So that would imply core volumes are still down pretty meaningfully offset by some price. So certainly operations are improving in Q4 still facing some of the volume headwinds. We expect Europe to continue its trajectory of driving year-over-year core margin improvement. So I think as we get into 2020 certainly we expect that the lag here some of the activity on the new construction side in North America to start to contribute to some volume tailwind in 2020.

Okay. Perfect. And then secondly you guys did highlight still seeing some favorable price cost trends in North America. Obviously we've seen some public announcements from your competitor in North America. Just how are you guys thinking about the pricing environment in North America into 2020?

Thanks for the question. Obviously we don't comment on competitive actions but certainly aware of them and found out about them probably at the same time you did. But I would like to highlight that we're in our fourth consecutive quarter of positive price cost. So we're going to remain disciplined about pricing. We continue to look at the marketplace both from a competitive standpoint looking at our cost plus the value that we expect in different channels. We don't preannounce our actions but we do have dynamic pricing and we're continually monitoring the ability to increase our prices as appropriate. And we look at it channel by channel and as well as product line by product line.

Our next question comes from the line of Mike Dahl from RBC Capital Markets. Your line is open.

Thanks for taking my questions. I wanted to follow-up on the pricing question understanding that there's a limit to what you can or will say but asked a slightly different way. Given the volume environment has been somewhat soft and I think that's extended to doors as well as windows. How are you thinking about the trade-off between volume and price? And can you give us an update and I'm thinking specifically in doors? And can you give us an update of where your utilization rates are today?

Yes. So I would say we've actually had a pretty good run this year on doors maybe a little softer than we would have expected. But I think we've gained a little bit of share and we've enjoyed a positive view certainly in retail point-of-sale and as well as in our traditional channels. So yes we're I don't know if there's a volume story there on doors. But when we look the way we think about pricing is we do look channel by channel product by product. We've said in the past that we believe we have a differentiated product line a differentiated service level and we expect to extract value for that. And we continue to look at the opportunity to do that everywhere that we sell products.

Just on the utilization side Mike I mean it varies a lot by product line and country and so it's tough to generalize. I mean in windows right now we've got our vinyl window plants are sold out and we're full on trying to produce the product. On the door side clearly we've got a couple of moving pieces right now as we're ramping up new capacity in Atlanta and starting to consolidate latent capacity. So it's tough to put an exact number on the utilization. But certainly we've got capacity to grow with customers that want to grow with us in 2020.

Yes. I mean that is the underlying charge that we've got with JEM is really to increase our cycle time increase our capacity and do it in a more efficient way in fewer facilities. So we're starting to see that that comes through as I talked about a couple of projects particularly in Atlanta I talked about what we're doing in Australia as well. So I think that demonstrates that we're focused on increasing our capacity and utilizing what we have as well.

Okay. That's helpful. And my second question and sorry if you covered this in the response to the prior question but just around the overall environment less about kind of the seasonality here and more kind of high level if we think about when the pre-announcement call happened and today are there any differences in your views either positive or negative based on how order patterns or conversations with customers have progressed over the past month as we look out maybe not just the 4Q but into the beginning of '20?

Yes. I think long term we still like the markets that we're in. We still think residential new construction has growth in it. We think R&R has firmed up and will be favorable. We like the underlying foundation of the markets that we're in. We had expected R&C to be a little stronger in the second half show some growth. Obviously we're seeing some good indicators but the lag and when they start happening for us probably is into next. So we're looking forward to that. So not really a in the last month not a market change in what we're seeing in our demand patterns but we do expect to see that going forward. On the R&R side we've done fairly well. It's been fairly stable but we do expect to see some firming up there as well. We're seeing that a little bit in the point-of-sale data. And we would expect that to be a good trajectory and hopefully a tailwind into 2020.

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

You're clearly a lot more upbeat about housing broadly and that should hopefully funnel through early next year. But a lot of the growth is coming from these entry price point more affordable homes. So what kind of impact do you expect that to have whether it's from a mix standpoint or volumes when you look out to 2020?

We Phil good question. We actually tend to be a little more indexed maybe higher up the food chain in R&C maybe more the step-up in higher-end homes. There is opening price point seems to be fairly strong but we're seeing some activity higher up in the more value homes as well. And that's where we play. We're starting to see data that suggests that we should see improvements in our demand patterns where we're indexed. Like I said we don't really play at the opening price point so much. So we don't really see that other than in data. But we are seeing firming up certainly in the move up section. And then of course there's always just a seems to be a level of stability at the higher end that we often see.

I would just add on. Generally speaking from a channel standpoint in North America our traditional distribution channel is going to be a higher margin profile than our retail channel not largely because of the mix of the products that sold through their stock versus specials things like that. So certainly a growth in new construction would be a favorable mix impact for us relative to what we've experienced this year where traditional channel has been lower and retail has been a little higher. So that's an opportunity. I'd also say we've got some particular JELD-WEN specific investments that we're making around fiberglass doors where that product category is growing very nicely for us and we believe taking some share. And as that product continues to grow into 2020 the new construction side that's a richer mix margin product for us and should be a tailwind I guess to the mix side of things as we get into 2020.

Got it. That's really helpful. And just one more for me. What's your outlook for inflation in 2020? And assuming all the announced tariffs do stick how should we think about the level of pricing you need to kind of push through to offset these headwinds? And could it be a drag on margins when we think about 2020?

So as we look at if you think about sort of the whole basket of inflation across the board for labor freight materials certainly we are still in an inflationary environment. There's things that stabilized meaningfully from where we were in late 2018 in terms of the pace of what we we're seeing. But certainly there's across the board in all three of our geographic segments we still see inflation. And so as we think about building a plan and then what we operationalize in our business certainly our goal is to make sure that we announce and realize enough price to more than offset that basket of inflation. And so going into 2020 I think this year year-to-date we've been in the ballpark range as a percent of sales kind of pricing cost tailwind of about 100 basis points. And I'm just speaking specifically there to materials and freight and excluding labor for the moment. So certainly our goal would be to continue to deliver that sort of a trajectory into 2020 as well.

But if you have to size 2020 versus 2019 in terms of the magnitude would 2020 be more manageable on a relative basis versus 2019?

Yes. I would say I wouldn't say it's markedly different at this point and we'll give guidance for 2020 on our next call.

Thanks a lot.

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

Hey, good morning, everybody. This is actually Trevor Allinson on for Truman. I wanted to touch on a on your international segments. Australia was starts down. I think you said 20% or so. I know you said that new red is about 75% of that market. But has that demand deterioration is that exclusively in the new res channel or in the res channel is that expanded to R&R as well? And then kind of piggy backing off that in Europe. We're kind of surprised that conditions haven't slowed as much with the economy stalling there. Can you give us an update on what you're seeing? Is pricing at risk of slotting back at all there?

Yes. So Australia it is really focused the downturn there is really focused on residential new construction. It's very much attributed to the credit tightening activities of the government there. The R&R segment remains fairly stable. And the opportunity there that we've been working on for a number of years we've talked about is gaining share in R& R and that's really where we're working toward seeing growth. But yes it's very focused on residential and construction in Australia. The as far as Europe the markets are mixed. It's a broad basket of different conditions. I guess for us what we've seen is the markets that have been stronger for us markets like the U.K. and France we've seen growth. It comes at a little bit of an expense to us but to our basket as it's a little lower margin than what we realized maybe in the Central and the North. But as you take Europe as a whole for the way we look at Europe it's about flat from a market standpoint. The ups and the downs offset each other and the difference really just becomes a channel mix. So hopefully that answers your question about Europe.

Yes. Yes. And then with MI set to acquire Milgard just wondering how has that changed in industry dynamics and how do you view that going forward?

There's I mean there's been a lot of consolidation in the window market certainly over the last two years and particularly on the vinyl side. The Milgard business is a nice business largely focused on the West Coast. Our vinyl window business is more nationwide in scope. So I think just generally speaking we think consolidation in the market the window market is a good thing. It's bound to happen. It will probably continue to happen. But in terms of that specific transaction we don't see really any sort of competitive or operational impact to us.

Our next question comes from the line of John Lovallo from Bank of America. your line is open.

Hey, guys, thank you for taking my questions. First one is during the pre-announcement call you mentioned that JEM had been rolled out in a number of your businesses but not all of them. I think you also indicated that some of your businesses are operating at or above that kind of target 15% EBITDA margin. Can you just help us to mention how many of the businesses have JEM rolled out and are operating at that margin level? And how many are left to go?

Well I think the at this point those are two separate subjects. As far as JEM is going we've actually rolled out if you will JEM is our operating system across the entire enterprise. We're at different levels of maturity in the different places of deployment of the various tools. So as we go to certain plants on certain businesses we have model plants where we've deployed more and we continue to push the envelope on how fast we can go as we try the tools. And as they adapt we adapt the tools of our operating system to JELD-WEN making sure that we learn and we continue to push the envelope so that we can use those learnings and those processes to deploy more broadly across the enterprise. So we are continually looking at all of our plants. We kind of rack and stack on the deployment of the tools as well as on performance. I would tell you that we have a lot of plants. So it's hard for us to say that every single one of them is at the same level on any given tool. I would say problem-solving visual management day-to-day, day-to-day hour to hour-wide operations we're pretty consistent across. We're starting to see functional utilization of our business operating tools as well. But we'll it's early very early stages. So we continue to move forward. We continue to learn and we continue as an organization to improve. As far as talking about which businesses are above or below it's a particular target. I can tell you that we have exemplars in every area of our company on different metrics including EBITDA performance on performance on-time delivery on quality safety and we continue to benchmark those as we look at developing our business operating system best practices. And deploying what's working in one area becomes kind of the standard the best-known way that we deploy everywhere else.

Okay. And then John in your prepared remarks I think you bucketed three different headwinds for margin. So the volume and mix the window efficiencies in North America and then the legal on a year-over-year basis which are about 400 basis points. And then on the positives you mentioned pricing cost productivity and SG&A actions. So I was just hoping you could maybe break those out or quantify each of those positive impacts.

Yes. I mean I think so price/cost was in the ballpark of about 100 basis point tailwind to margin. And then productivity probably made up to rest. And I think SG&A is more of an issue of just holding SG&A flat in a sort of declining volume market as opposed to seeing significant reductions. But certainly it was a contributor to helping the profitability.

And our next question comes from the line of Keith Hughes from SunTrust.

I'm Questions back to Europe. You had first EBITDA gain year-over-year in Europe we're seeing since really the beginning of 2018. So a couple of short and long-term questions on that. Number one do you think that will continue with the cost saves you highlighted for the next couple of quarters? And then looking longer-term at Europe it doesn't seem like a place where you're never going to get a lot of volume growth. What's sort of the long-term plan to grow that business after we get this profit bounce?

So thanks for the question. Yes we actually like Europe quite a bit. We think we have an we actually to take the second half of your question first. We actually like our opportunities for growth there both in looking across the landscape of products that we sell in one market that maybe we don't sell in another. There's a lot of cross opportunity across solutions that quite frankly we started to demonstrate with our acquisition of Domoferm for example but taking those technologies and those capabilities from Central and North bringing them into the UK and France for example and likewise vice versa. So we think there's a lot of opportunity to gain share in the markets that we currently serve. And we do think that there's some adjacent markets that are underserved by JELD-WEN today that we believe that we can grow into and expand the business. So we actually like the growth prospects for Europe. We also like what we're doing in terms of how we're going after that which is looking at the business in a more pan-European approach. We've made some leadership changes there that we announced earlier in the year and they're very, very focused on bringing that organization together continuing to look at our cost structure. And just as we've talked about we didn't mention any examples in Europe today for our rationalization modernization program but the same type of efforts are going on there as well. And we'll continue to drive efficiencies drive our performance and provide capacity for growth. So we actually like Europe. We think there's a great opportunity for us to grow there.

And on the profit side is should we have a couple of quarters of a tailwind ahead from this cost work you had highlighted earlier in the call?

Yes. I would say the visibility that we've got around the productivity pipeline right now in Europe is very healthy. I mean in terms of what we'd expect to get out of the next few quarters certainly. In order for us to continue on the same trajectory we got to have the projects identified at this point and know exactly what it is we're going to go execute on. And we're certainly in that position as we look into early 2020. And from a pricing action standpoint at this point in the year we've taken all the pricing actions that we're going to be taking for the most part in 2019. We'll look for additional opportunities in 2020 in Europe. And so yes there's really nothing changed on the landscape here that would imply that we should not continue core margin expansion in 2020 in Europe.

[Operator Instructions] Our next question comes from the line of Michael Rehaut from JP Morgan.

This is Elad on for Mike. You touched on some of the opportunities for the top line in Europe and in fiberglass doors perhaps. I was also curious what other opportunities you're seeing to grow the top line especially from a product mix or new product standpoint and where you see the most opportunity for growth?

Yes. So certainly in and your question is just generally right? You weren't just speaking to Europe I believe. Certainly in North America one of the biggest opportunities we've got that we talked about on the last earnings call was a composite window launch which we're as we get into 2020. That is going to be ramping up to a full-scale nationwide launch. We believe that has the opportunity to be a meaningful contributor to North America growth over the next few years. So that's certainly an example of new products let's say in Australasia. There's some new opportunities there as well both from a product and a capability standpoint where I believe Gary mentioned on the last call getting ready to commission a new joinery door facility in Indonesia that will have the capability to sell doors into Australia as well into other markets as well and we've got good demand from customer base there. So that those are just a couple of other examples of things that we've got visibility to. But certainly continuing to invest in new products and innovation and service innovation is are key priorities for us as we look into the future.

Yes. You couple that with what we're doing in customer segmentation our service delivery work as well as in the digitation and modernization of our commercial aspects of our business. And we feel like we're really structured to start seeing some significant core growth in this business.

Okay. Great. And then I also just wanted to follow-up on some of the comments in the North America windows. So during Q2 you had mentioned you reduced headcount there by about 620 employees year-on-year. This quarter you mentioned you guys encountered some overtime costs in the erratic order patterns in the Windows segment so from the retail channel. I'm just curious if part of the efforts to restore stability of the windows business at least in the short term as you continue to roll out the JEM practices how are you thinking about the right level of staff for that business?

Listen there's no doubt that that's what you point out is part of the problem that it's part of the problem right? And part of the solution. We've doubled down on our efforts with JEM and our tools in order to apply problem-solving to that business. We do believe that the issues were isolated in the quarter and that we'll see sequential improvement there. It comes down to staffing. It comes down to our build cycles and it comes down to how orders are placed and how we plan for them. So it's the combination of all of that. And when you got we've got to take the signals that we get from the market. We need to deploy those through our SIOP process and our planning processes to ensure that we've got the right capacity the right manpower and the right throughput in order to meet customer demand. So we'll continue to monitor that. We feel like we've put the right tools into place and the right remediation actions into place as I said earlier. And we expect to see operational improvement sequentially in the business.

There are no further questions at this time. I will turn the call back over to Gary Michel for closing remarks.

Well, thanks again for joining us this morning. While our third quarter performance was disappointing, we believe the issues are specific to the quarter and isolated, and we do not expect them to recur. I remain excited about our progress with JEM and the rationalization and modernization programs. While we're in the early innings of the deployment of both of those, we are in the stage where we expect to begin to see P&L results. I'd like to thank you again for joining us today. And we look forward to sharing our progress in the coming quarters.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.