Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Jelled, one holding Inc. fourth quarter 2019 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you want me to press Star.
One on your telephone please be advised for today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today coming up here. 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, we will be referencing during this call I'm joined today by your initial or C. O engine linker or CFO before we begin I would like to remind everyone that during this call. We will make certain statements that constitute forward looking statement with.
In the meaning of the private Securities Litigation Reform Act of 90 95.
These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release provided in our form 10-K, and thank you filed with the FCC.
When does not undertake any duty to update forward looking statements, including the guidance, we are providing with respect to certain expectations for future results were statements regarding the outcome of pending litigation. Additionally, during today's call. We will discuss non-GAAP measures, which we believe can be useful in evaluating our perform the presentation of the additional information.
It 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 measures 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 Liberty Gary.
Thanks, Kareena good morning, everyone and thank you for joining us.
I want to begin by acknowledging our roughly 3000 associates in Australia and for the past eight months courageously dealt with the devastating effect of Bushfires and more recently adverse weather and flooding.
Thanks for all of our associates are safe and their operations are largely unaffected.
We're committed to supporting our employees and their affected communities.
Turning to our business performance 2019 was a pivotal year for gel one that sets the foundation for continued momentum in 2020.
We made significant progress on key strategic initiatives through the adoption and expansion of our business operating system. The Jelled when excellence model or Jim across the enterprise.
We delivered favorable productivity realized price and deployed our rationalization and modernization program to simplify our business and contribute revenue and margin expansion over the coming periods, we introduced several new and innovative products to the market that will accelerate volume growth over the coming years.
I'll highlight a few of these products showcased at the recent international Builders' show in just a few minutes.
We improved service and quality levels and remain disciplined with pricing to offset inflation.
We announced significant price changes in the North America door business across all channels, which take effect this month.
Globally, our associates delivered net productivity savings during the year through the rigorous deployment of Jim as part of our facility rationalization and modernization program. We started production in our Atlanta facility, which will deliver efficiency and cost improvements with significant reductions in labor and materials.
Compared with legacy operations overall, we made excellent progress on the rationalization and modernization program initiating projects that address approximately one third of our footprint reduction target.
We made significant progress advancing key priorities in 2019.
We also faced headwinds that impacted our growth and profitability for market headwinds due to reduced residential new construction demand in Australia in North America and plant inefficiencies in a few of our North America windows facilities.
I'm optimistic about the market outlook for 2020 that will help drive core revenue growth and margin expansion. This includes improving residential new home construction demand in North America and expected stabilization of residential new home construction demand into Australia housing market.
Additionally, the benefits from a rationalization and modernization program and our growing pipeline of productivity projects will contribute to margin expansion.
Please turn to page for for a brief summary of our fourth quarter results.
We delivered revenue and cash flow inline with expectations and we're disappointed by our EBITDA results.
We delivered year over year core revenue growth of approximately 1% in North America, including core revenue growth across all major product line.
We view this as an inflection point in the return to core growth, we delivered the fifth consecutive quarter of positive price cost as a result of disciplined pricing and along with net productivity gains Europe delivered core margin expansion for the second consecutive quarter.
North America Windows delivered sequential improvement during the fourth quarter, although slower than we hoped for as the inefficiencies that impacted the third quarter remained a headwind compared to prior year.
Operational progress continues for North America windows, eliminating the inefficiencies from last year, and we expect continued sequential improvement.
In Australia markets continued to soften sequentially at a greater rate than expected, resulting in less volume I'll provide more detail on our 2020 outlook for Australia, and a few minutes, but we continue to take a conservative approach to activity levels and continue to adjust our cost structure.
In line with current market conditions.
The use of our Gen business operating system and tools is expanding across all areas of the enterprise. One particular area of focus in 2019 was operating cash flow improve discipline in working capital and reduce cash taxes helped drive a 65% improvement.
In free cash flow, despite a 17.5 million dollar increase in capital expenditures.
As you know in lean deployment working capital efficiency is typically a lead indicator to improved operations and quality of earnings.
On page five I'll provide a summary of our market outlook and catalyst for 2020 earnings growth by segment.
For North America favorable fundamentals, including generally robust economic growth and employment, increasing wages strong consumer confidence and attractive borrowing costs continue to support us housing growth.
Late in 2019 housing activity, including starts and homebuilder orders improved and we expect this to continue in 2020.
We believe these same factors further aided by modest home price appreciation are beneficial for our and our activity as well.
While residential new construction market trends improved in both the USA and Canada Im most excited about gel one specific performance drivers in 2020.
We've announced and deployed significant product pricing actions within our doors and windows businesses in both retail and traditional distribution channels.
We introduced several innovative products in 2019, and we're delivering additional innovation to the market in 2020, including our finished field vinyl laminated windows enhance fiberglass door offering and oral line composite windows, which deliver unique solutions for our customers and will contribute to call.
For revenue and margin expansion.
Finally, and perhaps most exciting are the benefits, we will deliver from our gem and footprint modernization projects completed in 2019, and the deep pipeline of projects being executed in 2020 to further improve our operations and service capabilities and positively impact our.
Margins.
Please turn to page six construction activity in Europe was mixed during the fourth quarter across channels and geographies with strength in central Europe, France, and the UK largely offsetting relative weakness in northern Europe.
We anticipate European residential new construction are in our and non residential construction activity to remain approximately flat in 2020.
We are well positioned for modest core revenue growth and margin expansion in 2020, despite generally stagnant market in Europe.
Facing actions implemented across regions in 2019 remain a tailwind to core revenue growth and margins and we will take additional pricing actions in 2020.
Jim deployment in Europe is strong and we'll continue to deliver service level improvements and margin expansion on the back of one of the strongest productivity pipeline conversions in the enterprise.
Please turn to page seven.
Australasia, we continue to face considerable headwinds in the residential new construction market related to prior government credit tightening residential new home construction during the fourth quarter declined sequentially and was below the already conservative assumptions in our previous outlook. However, our strong brands.
Leading market positions and our dedicated associates allowed us to outperform the market.
Our in our activity remained stable, providing an offset albeit modest given our lower index of our in our relative to residential new construction.
We expect Australia, new home construction activity to remain challenged through the first half of 2020, while general sentiment is starting to improve access to funding remains our hurdle for home buyers and conversations with our largest customers indicate that stabilization is not expected until at least the.
Second half of 2020.
Regardless of market conditions, we continue to drive productivity improvements remained disciplined with price and compete on product quality assortment and customer service, we expect to generate productivity savings in 2020 from the restructuring footprint initiatives executed in 2019 and from.
The efficiencies related to the startup of our new manufacturing facility in Indonesia, This and our pipeline of gem projects will help to offset the impact of volume deleverage on margins.
Please turn to page eight.
Innovation in design material composition and manufacturing processes is a major cornerstone of our strategy to drive future revenue growth and margin expansion.
I'd like to highlight several new product introductions that we're excited about these include new aesthetic enhancements through existing gel one products and product extensions that provide customers with improved performance and selection and allows us to capture share and expand margin.
The top picture shows our motor rustic interior door, which combines a fuel for wouldnt veneer with modern flat panel styles and translucent glass offered and 21 innovative configurations, providing customers with complete design flexibility and control next the gel one exterior fiberglass door system.
Leverages industry, leading technology and component to deliver superior performance and aesthetics.
Introduction of the complete system utilizes gel wins industry, leading door slab with best in class components that offer builders and contractors proven tested performance and an improved warranty.
Great for builders, great for customers and expands the addressable market for gel one.
At the bottom of the page Joe wins foundry finishes series, a first to market proprietary finishing process that offers the look and feel of real iron with the performance and customization of our Laura fiberglass exterior doors. These new products join our 2019 class of innovation.
One products like Finney shield laminated vinyl windows and oral line composite windows in North America continued to expand in market acceptance and growth contribution.
Stay tuned as we launch more gel when innovation across our segments, expanding our customer solutions and fueling our growth.
With that I'll pass it over to John Linker to provide a detailed review of our financial results for the fourth quarter of 2019.
Thanks, Gary and good morning, everyone I'll start on page 10 for the fourth quarter net revenues decreased 2.1% to 1.1 billion. The decrease was driven primarily by 2% reduction and core revenues and a 2% headwind from foreign currency, partially offset by 2% contribution from the PPI acquisition.
The decrease in core revenues was driven primarily by sequentially weaker demand conditions in Australasia.
Partially offset by slightly positive core revenue growth in North America, notably this was the first quarter of core revenue growth in North America since mid 2018, I'll speak more about the segment drivers in a moment.
Adjusted EBITDA decreased 15.9% to 89.2 million adjusted EBITDA margins declined by 130 basis points in the quarter to 8.4%.
Compared to prior year adjusted EBITDA margins were impacted by inefficiencies in our North America segment, primarily in our Windows business and the deleveraging impact of significantly lower volumes in Australasia.
These factors were partially offset by improved performance in our Europe segment, which delivered a second consecutive quarter of core margin improvement from positive productivity and pricing.
Fourth quarter net income was impacted by the lower operating results as well as a significantly higher tax rate.
Our book tax rate in the quarter was 60.7% due to the compounding effect of the guilty provisions of us tax reform as well as the impact of our annual review evaluation allowances driving discrete higher tax expense in the quarter. Excluding these items are normalized fourth quarter tax rate was 27.4%.
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Page 11 provide detail of our revenue drivers for the fourth quarter and full year.
Our consolidated core revenue declined 2% in the fourth quarter comprised of a 4% headwind from volume mix, partially offset by a price benefit of 2% favorable pricing in North America, and Europe enabled us to deliver our fifth consecutive quarter of positive price cost realization.
The 4% volume mix headwind was primarily driven by our Australasia segment due to the sharply lower new construction demand in Australia.
The impact of foreign exchange remained a headwind to revenue in the quarter, although slightly less so than the third quarter.
As we look at a full year core revenue decline of 2% pricing performed largely as expected while volume mix headwinds were surprised throughout 2019, given the weaker than expected demand conditions for new construction in North American Australasia as we move into 2020, we see the potential for improved demand conditions and both of these mark.
Thats accelerating demand combined with a tailwind from pricing in North America should set us up well to return to core revenue growth in 2020.
Please move to page 12 were I'll take you through the segment detail beginning with North America.
Net revenues in North America for the fourth quarter increased 3.1% the increase in net revenues was primarily due to a 2% contribution from the acquisition of CPI and a slight increase in core revenues.
North America pricing was sequentially stable from a third quarter.
We implemented price increase in selected products and channels in December 2019, and given the timing we didn't see any material benefit of that price increase in the quarter.
Our second round of North America price increases goes into effect this month, including both retail and traditional distribution channels, meaning that we have now deployed our 2020 price increase across all products and channels in North America.
Given these actions, we should see meaningful improvement in price realization starting from the second quarter and through the rest of 2020.
North America volume mix declined by 1% comprised of lower volumes in our traditional distribution channel, partially offset by increased demand in our retail channel as well as higher volumes in Canada, North America volume mix sequentially improved from a third quarter and we expect to see this trend continue into 2020, we're starting to see our North America order backlog.
Build reflecting improving residential new construction market conditions.
Adjusted EBITDA in North America decreased by 12.0% to 60.4 million.
Adjusted EBITDA margins decreased 160 basis points to 9.4% the year over year reduction in margins was primarily due to operating inefficiencies in our North America window business as well the channel mix shift towards more retail volume and less traditional distribution.
Let me spend a moment on the Windows performance as a reminder, unusual ordering patterns earlier in 2019 unfavorably impacted our demand planning process and resulted in insufficient inventory levels and labor staffing to support customer demand leading to third quarter operational inefficiencies and our last call. We said that we'd expect to see sequential and.
Movement in our North America Windows business during the fourth quarter.
We did realize both financial and operational improvements in the fourth quarter, but not to the magnitude we originally expected.
Fourth quarter EBITDA margins in our North America Windows business improved sequentially from the third quarter, but we're still down significantly year over year driving the majority of the margin compression in the North America segment as the fourth quarter progressed, our on time delivery performance and backlog improved however, we faced cost inefficiencies in the quarter in material usage Les.
Labor and freight to stabilize our operations and expedite order backlog to meet customer expectations.
We do expect to see continued sequential operational and financial improvements in Windows as 2020 progresses.
Moving onto page 13, net revenues in Europe for the fourth quarter decreased 3.8%. The decrease in net revenues was primarily due to the unfavorable impact from foreign currency of 3% and volume mix of 2% that were slightly offset by positive price.
Volumes are mixed by region as weakness in northern Europe was offset by relative strength in central Europe, France on the UK.
We're very pleased with operating performance in Europe, as adjusted EBITDA increased 15.4% to 29.4 million adjusted EBITDA margins expanded by 170 basis points to 10.1%, primarily result of improved productivity and pricing.
We continue to build a productivity pipeline with new project and have good visibility to sustained margin improvement in 2020.
On page 14.
Net revenues and Australasia for the fourth quarter decreased 18.7%. The decrease in net revenues was primarily due to a 15% contraction and core revenue from ongoing market challenges and a 4% adverse impact from foreign currency volumes worsened as the year progressed from low single digit decline at the beginning of the year, which was in.
Dissipated to double digit declines in demand at the end of the second quarter and growing into the teams by the end of the third quarter.
Fourth quarter volumes sequentially weaken further to a 14% decline.
We're very pleased with a preemptive cost reduction actions by our Australasia team over the last year as they tried to stay ahead of weakening end market demand with a number of facility closures and significant cut SDMA, which combined to deliver cost savings in 2019, However, the impact of market volume decline in the fourth quarter was two great.
Overcome with cost actions alone as adjusted EBITDA decreased 31.0% to 16.5 million.
Adjusted EBITDA margins contracted by 210 basis points to 12.2% due to the deleverage impact of lower volumes.
We remain focused on productivity and cost controls and expect this segment to return to margin improvement as soon as the demand environment stabilizes.
Moving to page 15, Im pleased to report strong free cash flow performance, finishing the year at 166.5 million up 65.5 million or 65% versus prior year, primarily due to improvements in operating cash flow from a disciplined focus on working capital management and lower cash taxes with these and.
Improvements our free cash flow conversion was significantly over our target of 100% of adjusted net income.
On page 16 on the balance sheet. We ended 2019 with total net debt of 1.29 billion a decrease of 69.5 million compared with year end 2018 at year end, our net leverage ratio was 3.1 times at the upper end of our target range up from 3.0 times at year end 2018, our bank.
Sheet and liquidity remained strong to fund our strategic initiatives.
Now I'll turn it back over to Gary to go through our 2020 outlook and provide closing comments.
Thank you John Please turn to page 18 for our 2020 segment revenue expectations.
In North America, we expect favorable pricing and improving new construction demand to drive full year revenue growth of 3% to 6% in.
In Europe, we expect mixed demand across our end markets, netting to flat volume and delivering revenue growth of zero to 2% in Australasia, we expect residential new construction weakness to continue through the first half of the year with stabilization in the second half, resulting in total revenue contraction.
One of down four to down 6%.
Total revenue for 2020 on a consolidated basis is expected to grow between one and 4% our pricing actions improving volumes and productivity project pipeline are expected to deliver growth in adjusted EBITDA from $415 million in 2019.
To a range of 415 million to $495 million in 2020.
At the midpoint. This represents a 14% increase in adjusted EBITDA compared to last year.
Please turn to page 19, as I described our expected cadence for earnings improvement through the year.
We expect a number of headwinds in the first quarter, resulting in adjusted EBITDA margin contraction, although as you can see we have visibility to sequential margin expansion as the year progresses due to specific drivers in the first quarter, we anticipate continued market headwinds in Australasia.
Resulting in revenue being down in the range of mid to high teens percent compared to last year, which will have a corresponding de leverage impact on earnings in North America. The windows business continues to recover from operational inefficiencies and while sequentially improving we expect.
First quarter margins will still be below prior year.
We also face of foreign exchange headwind in the first quarter.
In the second quarter, we expect to realize the full benefit of the North America price increases along with improving productivity and ended the second half, we expect tailwind to kick in from improving market demand pricing productivity and saving from our footprint modernization and rationalization projects.
Together these factors should lead to significant margin expansion in the second half of the year.
Before opening the line for Q and eight I'd like to note that we cannot comment substantively on our ongoing dispute with season SUNS.
Some of you may have seen that Steve has filed a new lawsuit against US last week, what I can tell you is that the newest lawsuit. They filed is related to a contract dispute and is different than the existing litigation that we have appealed it misconstrues the facts in an attempt to damage our reputation and obtain an unfair competitive.
Advantage in the marketplace against both us and other competitors I assure you that our contract addresses the issues at hand and that we are abiding by all the terms. We also continue to believe that we will prevail in our appeal and look forward to stating our case in upcoming oral arguments with that.
Let's open the line for QNX.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The founder hash key please standby will be can pilot Q and a roster.
And our first question comes from the line of Phil Ng from Jefferies. Your line is open.
Hey, guys quick question on your once you guidance considering some of these ongoing operational issues in windows is expected to moderate and the trends in Australia, you called out in one Q not too different couples that you're going to see some pricing I'm little surprise at your margin.
Performance is actually going to decelerate from Q4 key give us a little more color.
Sure. So if you think about the components you just listed them in starting with Australia from the comp or we're up against Australia is it's pretty unfavorable I mean, we did see margin our Sarah saw revenue and volume contraction on Q1.
Of last year, but the downturn really didn't accelerate until Q2, three and four so we're looking at another mid teens type of.
Percentage decline and volumes and Australia, the highest contribution margin in the business. So thats.
Certainly a significant revenue headwind.
Windows will be.
We will certainly be a headwind versus prior year, although sequentially improving.
We do see a little bit of weakness in the northern European markets, while you didn't call that out in the prepared remarks on there is some demand headwinds there and then you've got about $3 million. So FX headwind that were contemplating so.
On the pricing side in North America.
Well I guess in terms of what we're Comping and Q1 of last year, just the timing of when increases when and the carryover. We had in Q1 of last year, Yes were positive price cost in Q1 of this year, but it's not it's not significant relative to year over year improvement the big step change in price goes on it.
Our next year in February and given ordering patterns and things like that we really don't see that the full benefit of that until March our MSR April and into the second quarter.
Got it thats helpful. Appreciating that there's a timing component when these pricing does come through can you give us sense you know how it's been received in the channel implicit in your guidance.
So the big pieces tides year doors business, how much is the price increase have you kind of baked into your guidance.
So Bob so as far as receptivity.
Pretty good at this point, we've we've issued our price increases and had conversations with our our channel partners and our customers really across.
Yes, all our channels, so retail and and our traditional channels as well as builders.
This is for North American doors. So we've seen some significant price increases there were starting to go as John pointed out we're starting to see some business.
Come in but for delivery later in the quarter early into next quarter is when some of the new pricing will will really hit we went out in two stages. So the first phase will start to hit sooner the second stage hitting a little bit later.
But no real push back for that and then traditionally you on our other channels Windows Europe, Australia, even in terms of our and our.
Our in our market, we go out with our traditional price increases which are a little more moderate.
Phil amount hit the guidance portion I am sure we'll get into this and the rest of the culinary, but if you think about the 1% to 4%.
Total revenue guide for the full year.
Thats, mostly price and we got FX and M&A sorta offset each other and then you've got from a volume standpoint, but the first half headwinds from volume and Australia ups are really sort of mitigate any.
Volume pickup that we're getting in and North America Stopes and most of the revenue guide as price related.
I will say the opportunity set for pricing is certainly more than we have.
Baked into our guidance, but we're moving on to sort of a step change pricing environment and wanted at this point in the year want to take a.
A moderate view of how much of that flows into our results in 2020.
Got it it's really helpful. Good luck in quarter.
Thank you.
Next question comes from the line that Tim from Baird. Your line is open.
Hey, guys good morning.
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Maybe just on the productivity and the rationalization efforts could you just talk to us how how much you guys are baking in to the year over year and permanent EBITDA from those two items and then maybe what was that in 2019 in terms of a net realization number.
Sure. So in terms of 19, the actual realization from the footprint program ended up in our around in the 5 million range.
We we've talked in the past about making sure that we do this.
Program and away, where we don't disrupt customer deliveries in our delivery performance and so we did hold onto some of the legacy capacity. The is required for us to achieve the full savings a little bit longer than we originally anticipated. So for example, we didnt shutdown a few plants that were originally anticipated to be shutdown earlier in the year.
Just to make sure we could meet customer order demand patterns as.
As you think about 2020, certainly the improvement steps up from that by 5.002 million 20.
I guess the best way to think about it is there will continue to be some of the offsets of ramping up and ramping down from the legacy facilities, but as we exit as we exit 2020, Gary mentioned earlier, we've acted on about a third of the square footage for our overall target and so sort of our exit run rate.
Existing 2020 would be about a third of $500 million target as kind of how to think about it. So we're not going to see all that and 2020 in terms of the calendar year realization.
Certainly will be well on our way by third and fourth quarter to showing our run rate about amount.
Okay. Okay. That's helpful. And then I guess as you think about kind of full year 2020 free cash flow is there any way to kind of to kind of segment, how we should think about that for the year.
Yeah, I mean, certainly we saw a nice step up of improvement in 2019 that we were pleased about.
I think as we start to pivot towards.
2020 cash flow.
I would kind of think about it being similar to 2019 from a magnitude standpoint, capex is going to be a bit higher than 2019, as we continue to fund the footprint rationalization programs.
We saw pretty nice pickup in working capital and 19.
Some of that was was more onetime in nature as we sort of worked with our our vendor base to optimize terms and not won't be necessarily a recurring tailwind every year, but it's now included in the base. So I guess, a rough order of magnitude I would think about free cash flow as being in 2020 is being similar to 29.
I mean.
Okay. Okay. Thanks, a lot appreciate it.
Our next question comes from the line of Truman Patterson from Wells Fargo. Your line is open.
Hi, good morning, guys.
Just wanted to touch on your 2020 EBITDA guidance it looks like it implies up 55 $60 million year over year.
Can you just walk us through the drivers of the improvement you know either quantify or or possibly just rank order from.
Volumes pricing versus input costs, the gym savings for footprint rationalization and then also in that are you all baking in any sort of inefficiencies in there as well.
Sure.
So as you think about the walk that you just mentioned.
I'd start off just from an EBITDA standpoint, the small contribution from the VP acquisition, which is a carryover in Q1, that's largely offset by by FX in Q1, so really the full year.
Guidance midpoint increase that you described is really all in the core business.
So from an order of magnitude standpoint, certainly price cost realization would be the largest driver.
We will see we expect to see sequential improvement and price cost realization from 2019 into 2020.
Most of that coming from price I think inflation, we expect to be largely a similar.
To 19 on on a material and freight standpoint.
In the next largest contributor would be sort of the productivity bucket and then that I would include both our organic Jim productivity initiatives as well as the.
The contribution from the footprint rationalization and modernization program.
And then there are there are some offsets from an out from SDMA and investment standpoint.
There's some M&A inflations in growth investments, we're baking into the business that the due to offset some of those tailwinds to EBITDA.
And then I would just think about the as I mentioned earlier sort of the volume mix contribution as being largely neutral to EBITDA in the year Theres certainly some opportunity there.
They are depending on how the market's pan out, but we have not baked on.
Significant amount of EBITDA from a volume volume mix standpoint.
Okay, John and then just for clarity on that SGN AIGH investment, though is up.
Can you just walk us through I believe your corporate expense was up quite a bit in the quarter that actually led to a portion of the EBITDA minus.
Can you just walk us through what what that was.
Sure. So on on let's talk about actuals first I mean in the fourth quarter.
SGN area was actually down year over year.
And by 5 million, so what you're seeing in our segment reporting.
More geographic in nature in terms of where some of the costs are realized we had some some true ups on workers comp and health benefits.
The corporate line then there were some offsets and they don't North America segment.
Also embedded in that line, though as real year over year.
Compression of our FX hedging program Q4 of 18, we had some pretty nice FX hedge gains that we didn't see worker.
In 2019, so I would think about the year over year increase that you see in the corporate line is not real increase and dollar spend I do want to reiterate that SDMA was actually down.
Over prior year and Thats inclusive of the fact that we had BPCI.
SDMA, which we didnt have and Q4 of 18.
But I guess moving to the 2020 portion of your question I mean, I'd kind of categorize the increases and.
Four areas.
There will be some incentive accruals that we're planning to accrue at a higher level in 2020.
We're not there given 20 Nineteens EBITDA performance.
There is some through SGN, a inflation, both on wage as well as insurance and.
Things like that.
And then I mentioned some growth investments that we're making in that business around really trying to drive core growth in future years, though innovation R&D. Some digital programs that were working on and sort of reinvesting I guess after a year, where we had.
5% volume headwinds and we really had to cut pretty hard on the on SGN Ada mitigate the impact of that we're looking to be prudent and pay as we go but but make some selective growth investments in the business to ensure we can drive core core organic growth in the future.
Okay. Thank you all.
The.
Our next question comes from the line of Rueben Garner from the benchmark Company. Your line is open.
Thanks, Good morning, everybody.
Let's see maybe can we can we dive into the north American of Windows operation issues, a little bit more can you can you quantify what what the headwind was in Q3.
From a dollar remind us what it was from a dollar perspective and then.
What it ends up being in Q4 in what you're kind of taking into the early part of 2020 and then.
Just going a step further maybe could you just tell us.
What's kind of change that's extended the pressures into early 2020, why do you why do you expect to carry on I don't think.
I think that was what you had talked about.
A quarter ago. Thanks, guys.
Sure well, let me hit the financial piece and I'll hand, it to Gary to talk about the improvements that we're seeing.
Q3.
I believe was the first part of your question I mean at that point Windows was.
About a $10 million or so.
Headwind to prior year from a good operational efficiency standpoint.
Q4 was slightly less than that we did see over 100 basis points of margin improvement sequentially from Q3 to Q4, and North America Windows, but we were still down.
Close to close to 500 basis points year over year and Windows in Q4.
And so you know relative to what we had guided to ups, we certainly anticipated a headwind and Q4.
But we did not anticipate the full amount that we end up realizing so I guess relative to sort of the midpoint of the guidance. We gave back in October and what we ended up delivering I would attribute about.
Three to 4 million.
Sorry, 4 million of kind of a miss to the midpoint of our guidance being attributed to not getting back and windows to where we wanted to be but I'll, let Gary I'm at more on the operational side, yes, as John mentioned, we sequentially improved in the Windows business up from third quarter to fourth quarter largely in part to that.
Ointment and redeployment of our gem tools as we look at exiting Q3 into Q4.
The current backlog to work down we worked on the.
Efficiency of our plants and productivity our plans getting our on time delivery out of those plans saw reset to a level that was acceptable in the channels into our customers. We've also had a significant conversations and working on planning with our our North America windows customers. So we.
I understand what the demand curve looks like or what their requirements will be and we've been able to match our supply to that demand equation. So little slower maybe flying out of it but we are seeing sequential improvement we're seeing good performance out of our highly effective plant under was no.
No recess.
Set for 2020 on and the very very close.
Hi out with our customers on demand, we feel pretty good about continuing the sequential improvement of the business and that we should see a pretty steady on time performance out of North America Windows.
Okay, Great. That's very helpful and quick quick follow up.
So you talked about some of the as DNA puts and takes are mostly takes going into 2020 is it fair to say that does the vast majority of your targeted margin expansion is going to come on the gross line this year.
Yes, yes, I think that I think thats fair.
Okay, great. Thank you does.
Yes.
Our next question comes from the line of Matthew Bouley from Barclays. Your line is open.
Good morning, Thanks for taking my questions.
So John you mentioned that you are taking a more conservative approach to layering in the pricing improvements in North America within your guide.
And please clarify that statement if I'm wrong, there, but can you provide a little color on what's actually embedded in the in the 3% to 6% growth in North America on the pricing side, and I guess kind of what the assumption is around the realization of pricing. Thank you.
Sure.
So you're right I mean, we've given the timing of when this call as and when the pricing is going in effect I mean, we have implemented and deploy the pricing at this point in North America across all of our channels. It is effective in February.
This this month, but in terms of what we will actually start realizing and ensuring that we're seeing that flow through to the bottom line a lot of that's not going to come until the second quarter. So we've taken at this point in the year taken on what we believe is a bit of a conservative approach to embedding in our outlook.
What what may actually transpire from a pricing standpoint, I mentioned before and the opportunity set for what we could realize in pricing.
As certainly greater than what we've embedded in the guide, but given uncertainty around how the market dynamics are going to pan out over the next 10 months, we wanted to be conservative but to answer your specific question on the 3% to 6% guide for for North America.
Thats primarily.
Rough order of magnitude that would be about a point of volume volume mix.
And then and then the rest of that would be sort of pricing related.
Okay. That's perfect. Thank you for that detail and then I guess sticking with North America, and you kind of highlight some of the drivers of North American margins in 2020, I notice you Didnt really discuss the channel mix I guess, just what does this improvement on the new residential side mean for channel mix between distribution and.
Retail and how should we think about that mix impact on margins.
Assuming that distribution might see a stronger uptick in 2000, Tony Thank you.
So yes, we like we obviously like the the movement in residential new construction, we think that that will allow what we saw late last year and certainly coming into this year will allow will play well for for our forward orders were starting to see some some activity there and that'll play out over.
Really the next several quarters of the year and we believe that that will off that will certainly favor our traditional channel likewise, our and our remains pretty stable.
So the retail channels continue to to plug along there as we said earlier, we are getting price and all those channels for North American doors, we're well positioned with our our recoveries in our factories from North America window. So we feel that weekend we cannot.
We can take on the new business in both of those areas.
When it comes and we had the opportunity as well with the work that we talked about last year on our customer segmentation work to make sure that that we're focusing traditionally particularly in the traditional channels.
With customers channel partners that take our entire product line and that that we feel that we can grow with.
That will grow along with residential new construction piece of the business, but also will position all of our products.
We look at whole home packages and incomplete solutions. So we're pretty excited with the market dynamics in North America that that we expect to play out over the next several quarters.
Okay I appreciate the color. Thank you.
Our next question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Good morning, Thanks for taking my questions.
Just wanted to follow up on the.
Comments around North America, and specifically the volume environment.
If we look at housing starts we started to see a real inflection.
Almost six months ago, now and obviously tierpoint. The last couple of months have been even stronger but the demand recovery has been in place for.
For give or take half a year and on the margin is our homes that are getting built.
More like four or five month build cycle, probably just given its its greater proportion entry level. So I guess the question is why isn't this why isn't this hitting your results sooner is is it some of the windows headwinds that are.
Perhaps a detracting from it or house would you characterize why it's such a lag between that and your comments, suggesting it's a second half 20 recovery.
Yes. So it was do we typically think about on our products on the new construction side at more of a six to nine month lag between I'll start and our sales that we are lead times are pretty short so sort of two two weeks on the door side for three to four weeks on windows, depending on the product types. So we don't have a ton of.
Visibility in terms of long term visibility in North America, but I'll just say that's our.
Early in the year. It has started a little soft from order activity in a few of our markets.
And the January timeframe, but our backlogs now moving into February our building quickly we're starting to see.
We are starting to see some nice backlog improvement across all of our product lines and.
In North America. So we do we are starting to see that signs of recovery I'd, just say coming off of a year of a 5% volume headwind to revenue and North America, you're just hearing us be a little bit conservative in terms of what we're actually embedding in our outlook for volume, but we certainly agree with you that the demand environment as improving.
And believe that there is some some nice opportunity there for us.
Okay. That's helpful. The second questions related I guess and maybe if you think found that the soft patches in.
In January.
It would you attribute that to kind of geographic market related issues or is there was there kind of pre buy ahead of your first round of of price increases and how would you characterize kind of pre buy environment and inventory in the channel and indoor specifically specifically in the U.S.
Yeah I'd say.
The the softness that I mentioned it was really more on the the retail side I mean, the way our retail partners work as they typically will will come to us with a sort of us a significant host order to start the the building season.
And the timing of those post orders has done a little bit delayed which would mean that could be inventory in the channel that they're trying to work down I'm not totally totally sure what's driving that I mean, I'll tell you that.
All of our all of our partners and we both retail and our traditional wholesale distribution are art across the country are giving us a.
Our view that they're expecting to see growth and demand and unit demand. This year. So I would this distributed timing or more than anything I don't think theres anything else going on there just in terms of when when the ramp actually starts.
Got it okay. Thank you.
Yes.
And our next question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
Thank you good morning.
My first question is can you.
Just give us a little more color around inflation, how you're thinking about that for 29 for 2020 I know you mentioned that you expected to be similar to 2018, but just a little more color on where you are in terms of catching up with that especially maybe as it relates to terrace in how we should be thinking about it going forward.
Sure. So 2019 material freight inflation ended up being an inclusive of tariffs included update and being around 1% of sales what was the it was the headwind.
As we look to 2020, we see a similar 1% of sales sort of.
View, that's coming out of primarily on a glass and vinyl in North America, and then in Europe logs in lumber our inflationary.
I also embedded in that 1% for 2020 would be about a 10 million dollar headwind from tariffs.
And related to China, So I.
I would just say right now the inflation environment as predictable we do have some categories that are deflationary. It's not all the is not all bad guys. There's definitely some areas, where we're making some nice progress, but I think the best way to characterize it as a stable versus prior year. We can plan for it we can embedded into our pricing strategy for the full year.
Okay, that's helpful and.
Gary in your prepared remarks, you mentioned that you've got a growing price pipeline of some productivity initiatives around jam in some of the cost improvements that you're making can you give us a little more color on that how we did evolving and how should we think about that coming through this year.
Sure well weve topic typically when we talk about.
Our productivity and we get on these calls we thought we talk a lot about kind of the bigger refresh or.
Modernization rationalization programs as we start working through those obviously those are contributing but in other we've got a lot of other plants, where we're we're just focused on good old fashioned lean deployment working on cycle Redux cycle time reduction and.
And deploying gem pools in those plants. So as we we work through those plants, we do.
Improvement events in those plants, we're starting to identify places where we can take waste out and we can improve the processes and take cost out so in each one of our segments, we've been driving towards.
Towards improved pipelines for productivity programs like those and and we have been transforming those plants and those operations to twoq to do that so as we build through last year. The pipeline certainly increased we started to execute and realize benefits from those productivity.
Just coming into 2020, the pipeline is much stronger.
Kind of right in front of us, we get a little bit of benefit obviously from programs that were.
Deployed in 2019, and then we will continue to deploy those throughout the year and get get the benefits from them as well so cycle time reduction, obviously material cost improvements, but really deploying John and more broadly across the organization.
Okay, and then just a quick follow up to that.
Pardon me in working capital that you saw in 2019 and I know you mentioned that you are working with your suppliers and got some benefits from that should we expect a similar level coming through in 2020 or kind of further improvements in comedies.
Cycle time and material improvements come through.
Yes, I think the as John mentioned.
Working with suppliers on on.
Rationalizing our terms was one of the benefactors last year as we continue to improve our cycle time and and deployed jam across more operations will start to see inventory turns.
Improved as well.
Even more so I think that's that's a place where you'll see that that happen and.
We'll obviously continue to work on receivables as well, which.
As as cycle time improves you should see gas cash or working capital.
Utilization improves well.
Okay, great. Thank you good luck.
Thank you.
Our next question comes from the line of John Lovallo from Bank of America. Your line is open.
Hey, guys. Thank you for fitting me in here.
John I think you had initially frame the December price increases in North America, as being kind of mid single digits Unimplanted basis.
How should we kind of think about or dimension to the magnitude of the second round of increase.
Yes, and just to clarify that was selective and the December round or price increases in North America that was selected product line just within our traditional distribution channel and no impact on our retail channel.
So I mean as you think about.
What's going through and and the February timeframe.
A view it as sort of a sector round of increases.
So kind of cumulatively.
Between the two different rounds that we've now got between the December phase in the February phase in North America, you've got interior doors increases anywhere from.
15% to 25% you've got exterior door increases more in the mid single digit range.
You've got windows increases probably more in the low to mid single digit range kind of across the board. So.
And there is a piece of our North America revenue area through our Lps and into my businesses that as more non residential products and nature, the nonresidential doors and that that piece of the business doesn't have quite the same magnitude of a pricing improvement.
Okay. That's helpful and then Gary I think in Australasia, you'd mentioned that Theres, some early signs that things could potentially.
Kind of stabilize a bit I mean, what what are some of those early signs that you guys are seeing.
Well.
I would say that what we're seeing is.
The first of all remember what caused causes was a tightening in credit in Australia around residential new construction. So we're seeing a little bit of loosening. There on that being said homebuilders are are still seem to theres still seeing a decline.
As we mentioned in in the fourth quarter and we could expect that continue for the first half of this year with expected stabilization towards the second half of the year.
Builders are are clearly putting out.
Some incentives at this point.
Banks of loosen their credit a little bit, but it's still the availability of of getting getting those loans and gain the values that people want and as expected in order to buy those homes, so theres plenty availability to build homes.
The credit tightening seems to be loosening, if that makes sense and and people do want to buy houses. So.
We're hoping that.
What we're seeing in the first half of this year, we'll start to diminished decline and then and then kind of level out towards the second half of the year at least stabilized.
The residential or the repair remodel business continues to do okay. We continue to increase our penetration into that area as well, which will law.
Which will also which is and will continue to offset the decline for residential new construction.
Okay. Thanks, guys.
Our final question today will come from the line of Michael Rehaut from Jpmorgan. Your line is open.
Hi, This is a lot helmet on for Mike. Thanks for taking my question.
For Q.
Hi, defy what the price cost kind of quarter.
Hi segment.
Im sorry at the end he said price cost benefit by segment as I want you Jeff.
Yes for the whole company and by segment. Please yes.
Yes, and the fourth quarter.
Price cost benefit was in the.
$7 million to $8 million range versus fourth quarter of.
18, most of that was in North America, a little bit and in Europe, and a little were actually slightly price cost.
Negative and Australia, and the fourth quarter, just given the pressures on that market, but it wasnt wasn't material.
Okay. Thanks, and then.
Footprint rationalization and monetization benefit.
The 5 million back in 2019, and some of the actions already taken there I was curious fly.
On slide 19 that benefit are kind of starting to queue from these actions versus already in one Q.
It.
We're looking certainly see a little bit of it and one q. I think we're just trying to dimensionalize the opportunity I mean, as we've got some as I mentioned some plants that we have held onto a little bit longer than we had originally anticipated that are now being cleaned out close we're getting rid of all that overhead.
So I just as you think about sort of the dimensionalizing opportunity.
The the ramp really begins more in sort of a Q2 and beyond timeframe, it's not that theres not savings happening.
And one Cuba, just trying to sort of pictorially show it.
Okay. Thank you.
I'll now turn the call back to our presenters for closing remarks.
So thank you all for joining us today and your interest in gel when we're excited about the progress that we've made over the past year and our prospects for 2020, we look forward to sharing with you our ongoing progress in the coming quarters and again. Thank you for joining us this morning.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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