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JELD-WEN Holding, Inc. (NYSE:JELD)
Q2 2019 Earnings Call
Aug 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the JELD-WEN Holding, Inc. Q2 2019 Earnings Call. [Operator Instructions]

Thank you. Karina Padilla, SVP, Corporate Planning and Analysis, you may begin your conference.

Karina Fadia

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. Begin 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 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 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 over to Gary.

Gary S. Michel -- Chief Executive Officer

Thanks, Karina. Good morning, everyone, and thank you for joining us today. Please turn to Page 4. This morning, we announced second quarter results that were encouraging in many aspects, although revenue results did not meet our expectations. I'm pleased with the progress that we've made in cost productivity initiatives, footprint rationalization and modernization projects and the disciplined deployment of our business operating system, the JELD-WEN Excellence Model or JEM.

I'm also pleased that we delivered another quarter of favorable price realization, positive productivity and strong cost control. As a result of our improving execution, we generated second quarter adjusted EBITDA margins consistent with our expectations, supporting our second quarter outlook provided in our last earnings call. We expect to generate productivity cost savings every quarter regardless of the operating environment, and we are now seeing this consistency flow through our financial results.

We generated another quarter of positive net productivity on a consolidated basis, contributing to 3 consecutive quarters of core margin expansion in North America and 2 out of 3 quarters of core margin expansion in Australasia, even in the face of weaker-than-expected demand. Our revenue declined by 4.6% year-over-year, driven largely by market weakness in Australasia and North America as well as unfavorable foreign exchange. Despite volume headwinds during the quarter, we generated core adjusted EBITDA margin expansion of 120 basis points in North America and 110 basis points in Australasia, demonstrating the power of what can be achieved through the disciplined execution of JEM.

I'd like to thank our dedicated associates who focused on delivering this margin expansion through productivity, price realization and strict cost control. We increased our pipeline of cost savings projects for the second half of the year, which we expect will deliver future margin improvement, independent of the market demand environment. While encouraged by this progress, I was disappointed with the core margin contraction in our Europe segment. John will share with you in more detail some of the actions taken to stabilize performance and deliver margin expansion in that business. End markets performed below our expectations in the second quarter.

Most notably, the ongoing pullback in the Australia housing market accelerated as the quarter progressed, resulting in a demand environment that was much softer than our already conservative expectations. In North America, softness in residential new construction continued in both the U.S. and Canada, evidenced by weak market data in permits and starts. Together, these factors contributed to a 3% decline in core revenue. I'll speak more about markets and our expectations in a few minutes. In light of the demand we saw in the first half, particularly our second quarter revenue performance, the impact of market conditions in Australasia and a small divestiture completed in the quarter, we're lowering our outlook for the full year to approximately flat from a range of 1% to 5% previously. We're maintaining our expectations for adjusted EBITDA margins due to pricing actions and line of sight to additional productivity savings, despite reduction in our full year revenue outlook.

As we navigate near-term market headwinds, our improved execution leaves me more confident in our 15% longer-term EBITDA margin target. Please turn to Page 5 for a brief summary of our financial results for the second quarter. John will provide a more detailed view shortly. Net revenues for the quarter decreased by 4.6% year-over-year, driven by a 3% decline in core revenues and a 3% unfavorable foreign exchange impact. Net income decreased by $12.4 million to $22.4 million.

Diluted earnings per share for the quarter was $0.22, while adjusted earnings per share was $0.45 for the quarter. Adjusted EBITDA dollars decreased 4.9% to $127.6 million, due primarily to volume headwinds and adverse foreign exchange. Despite the contraction in revenues, adjusted EBITDA margin at 11.4% was flat year-over-year. Focused execution and cash from operations increased free cash flow by $44.7 million during the first half of 2019, improving our cash conversion. Net leverage at quarter end was approximately 3.2x, which is slightly above target levels due to recent acquisitions and seasonality of working capital.

We repurchased approximately 253,000 shares during the quarter for $5 million and have approximately $105 million remaining under our current share repurchase authorization. During the quarter, we closed the sale of Creative Media Development, or CMD, a full-service marketing and creative agency. Our ownership of CMD dates back to 1999 and is no longer considered core to our current operations. CMD generated annual revenue of approximately $25 million. On Page 6, I'd like to provide a brief update on our end markets and outlook for the rest of the year.

North American single-family permits and housing starts through the first half of 2019 were lower than we anticipated, leading to a weaker residential new construction demand relative to our initial expectations. We believe the key drivers of new home construction all align favorably over the long-term, and we're encouraged by some of the commentary from our national builder customers. However, there are no clear signals yet for a meaningful acceleration of activity during the second half of 2019. The North America repair and remodel market experienced mixed levels of demand during the first half, making us cautious about the outlook for the remainder of the year.

We think this is timing, but our expectations for growth within the repair and remodel channel in the second half of the year have moderated. Similar to our thoughts for North America new home construction, we believe many of the key drivers of R&R activity remain favorable over the long-term. Europe segment demand was flat during the first half of the year and varied by region. We experienced the weakest demand in Northern and Central Europe, which account for the majority of segment revenues, and the strongest demand activity in the U.K. and France. Our full year outlook assumes flat volume in Europe and, at this point of the year, it looks like we're on track with our original expectations. In Australasia, our expectation at the beginning of 2019 was for a gradual deceleration in housing activity throughout the year.

However, new home construction deteriorated at a faster rate than anticipated, particularly late in the second quarter. Australia's Housing Industry Association, or HIA, now forecasts a 17% decrease in housing starts for the year compared to expectations of an 11% decline anticipated at the beginning of 2019. While the recent election and subsequent rate cuts should be a positive for the new construction market in Australia, the timing and magnitude of any benefits are uncertain and unlikely to yield results in 2019. Please turn to Page 7 for an update on our footprint rationalization and modernization plans.

As a reminder, we expect to generate $100 million of savings through a series of footprint consolidation and modernization projects, yielding approximately a 3.2 million square-foot reduction of our facility footprint. Starting this year, we had projects in process or other approved projects in the pipeline that represent approximately a 1.1 million square-foot reduction or approximately 35% of the total projected reduction. Since then, we completed several facility closures and transitioned that capacity to remaining locations. We have added project plans for the next 700,000 square feet or about 1/3 of the remaining reduction needed to hit our targeted cost savings.

In our North America door business, we're making progress deploying modernized production lines in several locations as part of this overall footprint rationalization program. These new lines, which include manufacturing processes proprietary to JELD-WEN were designed and engineered to increase production rates, reduce costs and improve quality. We're in the process of scaling up these new lines, which we expect will increase throughput by reducing cycle time and reduce per unit production costs by 20% once older or manually intensive capacity in redundant sites is taken off-line. Last week, I visited with a team at one of our door modernization plants and was able to see firsthand the progress that we're making.

When you see the new lines operating, the impact of one-piece flow and automation come to life with the elimination of material handling and batch processes. The reduction in labor and scrap are clearly seen, and the engagement of our associates is infectious. With greater throughput and improved quality output, we know we have a winner. I look forward to updating you on these projects again later in the year. Before turning it over to John, on Page 8, I'd like to tell you about a new product launch that I'm very excited about.

You already know that we have great focus on cost and productivity, but an equal importance are the investments we're making in product innovation that drive growth by bringing new solutions to our customers. We believe our Auraline Composite Window series will be a meaningful contributor to growth in years to come. Our Auraline windows utilize proprietary technology and a blend of materials exclusive to JELD-WEN to satisfy a unique need in the market, a product with the beauty and aesthetic of wood windows and the durability of vinyl windows. Auraline boasts slimmer site lines and incorporating more glass than existing composite alternatives and at an attractive price point.

We anticipate a limited launch on the West Coast in the fourth quarter and have a national rollout planned in 2020. Customers tell me that Auraline will open up more opportunities with a larger array of architectural designs for homes. The combination of design opportunities, the ability to bring more light and better views into the home with a product that boasts the look and feel of wood with the durability and price point of vinyl is a game changer. Our solution is unique and our customers are excited, and I couldn't be more pleased with the investments we've made to enhance our product portfolio. With that,

I'll pass it over to John Linker to provide a detailed review of our financial results for the second quarter.

John Linker -- Executive Vice President and Chief Financial Officer

Thanks, Gary, and good morning, everyone. I will start on Page 10. For the second quarter, net revenues decreased 4.6% to $1.1 billion. Decrease was driven primarily by a 3% reduction in core revenues and a 3% headwind from foreign currency. This was partially offset by a 1% contribution from the DTI acquisition. We reported net income of $22.4 million for the second quarter, a decrease of $12.4 million versus prior year. Decrease in net income was primarily driven by lower revenues, FX headwinds and acquisition costs related to the purchase price structure of a recent acquisition as well as IT investment specific to the quarter.

Our effective tax rate was 35.3% in the second quarter, in line with our expectations for the quarter and full year of 33% to 36%. Excluding the impact of the GILTI provision of U.S. tax reform, our normalized tax rate in the second quarter would've been approximately 25%. Diluted earnings per share was $0.22, a decrease of $0.10 compared to prior year. Adjusted diluted earnings per share was $0.45. Adjusted EBITDA decreased 4.9% to $127.6 million. Year-over-year consolidated EBITDA declined due to the impact from lower volumes and foreign exchange.

Adjusted EBITDA margins were flat compared to prior year at 11.4%. Core EBITDA margins, excluding the impact of FX and M&A were also unchanged compared to prior year. We are pleased with our ability to maintain margins given the more challenging demand environment. We accomplished this through price/cost tailwinds, discipline and cost productivity and SG&A controls. North America and Australasia drove strong EBITDA margin expansion on lower revenue, while Europe core margins decreased, primarily due to the impact of mix, cost and efficiencies and inflation. Page 11 provides detail of our revenue drivers for the quarter.

Our pricing realization in the quarter was once again strong at 2%. However, it was offset by a 5% decline in volume mix. We saw positive price realization in North America and Europe, consistent with our expectations. As previously mentioned, demand headwinds in Australasia were significantly worse than expected in the second quarter, shown by the 11% headwind in volume mix. Please move to Page 12, where I'll take you through the segment detail, beginning with North America.

Net revenues in North America for the second quarter were slightly down at 0.7% and core revenues declined by 3%. As expected, we continue to see healthy price realization of 3%, but this pricing was more than offset by a decline in demand. The volume headwinds were most pronounced late in the second quarter. Adjusted EBITDA in North America increased by 9.7%, driven by strong core margin expansion of 120 basis points. This is the third consecutive quarter of core margin expansion in the segment. I am pleased with our ability to drive continued North American margin improvement on 3% lower core revenue.

This demonstrates the progress we're making from favorable price/cost realization in addition to productivity initiatives. We clearly see the effect of our North American productivity initiatives in the quarter, as labor and variable overhead rates improved as a percent of our manufacturing cost structure, contributing to the 120 basis points of core margin improvement. As an example of labor productivity, I will highlight that our North America Windows business is now operating with 620 fewer headcount than at this point last year while also maintaining on time and full delivery rates above 90%.

We also aggressively controlled SG&A in the quarter, supported by a sizable North America headcount reduction in May to rightsize the business with the lower volume base. Our opportunity set continues to grow in North America. And since our last call in May, we increased the size of our productivity project pipelines for the second half of the year. Moving on to Page 13. Net revenues in Europe for the second quarter decreased 5.7%. The decrease in net revenues was driven primarily by foreign currency. We a saw sequential expansion in price, but this benefit was offset by volume mix for flat core revenue growth.

Adjusted EBITDA in Europe decreased 21.8% as adjusted EBITDA margins decreased 190 basis points to 9.7%. Margins were impacted primarily from mix, inflation and cost and efficiencies. As Gary mentioned earlier, we were disappointed with the continued margin contraction in our Europe segment. And as a result, we have accelerated cost actions and a restructuring of the business. In the quarter, we completed the closure of our Posio, Finland facility as well as executed a number of headcount reductions in our Central European business to control cost structure and set the stage for a sequential improvement in the second half of the year.

Our productivity project pipeline in Europe is very healthy, and we also see favorable price/cost into the third quarter. Given this visibility, combined with the cost reduction actions taken in the second quarter and the recent announcement of our Europe segment leadership transition, I expect that Europe will return to core margin expansion in the second half of 2019. On Page 14, net revenues in Australasia for the second quarter decreased 16.8%, driven primarily from an 11% contraction in core revenue and a 6% impact from foreign currency.

The softening of the Australia residential new construction housing market significantly worsened in the latter part of the quarter. We saw our volumes dropped from low single-digit percentage decline at the beginning of the year, which was anticipated, to unprecedented double-digit percentage declines in demand by the end of the second quarter. And we are still seeing these volume decreases in the low teens early into the third quarter. Price for the second quarter was flat to prior year. Adjusted EBITDA in Australasia decreased 11.9%.

However, adjusted EBITDA margins expanded by 80 basis points to 14.2% due primarily to core margin expansion of 110 basis points. Margin expansion on lower volumes was due to positive productivity from ongoing initiatives and footprint rationalization projects to rightsize the business as well as tight cost controls. Our productivity initiatives resulted in improved material usage and labor rates as a percent of our cost structure versus prior year.

We grew our Australasian productivity project pipeline nicely so far this year, giving us visibility to cost savings that will offset market headwinds in the second half of 2019. SG&A is also a focus area as we initiated a new round of headcount reductions in the quarter to rightsize SG&A in Australasian business. On Page 15. Cash flow from operations improved $44.7 million in the first half 2019 to a use of $20.6 million from a use of $65.3 million in the same period a year ago, driven by improved cash from operations through more efficient working capital utilization.

Our capital expenditures increased $6.2 million in the first half compared to the prior year. Our cash flow performance and increase in capital expenditures were both in line with our expectations and outlook for the full year. As a reminder, our first and second quarter cash flows are typically negative due to the seasonality of our working capital cycle. On the balance sheet, we ended the second quarter with total net debt of $1.45 billion, an increase of $90 million since December 31, 2018. The increase in our net debt was primarily driven by the cash used to fund the VPI acquisition we closed in the first quarter and seasonal working capital usage.

Our net leverage ratio was 3.2x and remains at the upper end of our target range. Our balance sheet remains strong and our capital structure of liquidity and free cash flow generation will provide us with the flexibility to reduce our net leverage ratio over time and fund our strategic initiatives. Before turning it back over to Gary, I'll summarize the first half of the year. We were very pleased that we executed on our margin improvement plan amid the challenging demand backdrop, and I am also encouraged with the year-over-year improvement in cash flow conversion.

The new construction housing market provided mixed signals across the globe and has not shown the clear signs of modest acceleration we were hoping to see for the second half of the year. While we remain optimistic about the long-term demand drivers in our markets, we believe it is appropriate now to realign our near-term revenue growth expectation with the most current market demand trends. I'll turn it back over to Gary to take you through our latest 2019 outlook and provide you with closing comments.

Gary S. Michel -- Chief Executive Officer

Thank you, John. Please turn to Page 17. We have revised our expectations for 2019 consolidated revenue growth from 1% to 5% to approximately flat, reflecting our second quarter revenue performance, softening demand trends in Australasia, market uncertainty in North America and the divestiture of CMD. While demand in global end markets prompted the change to the full year revenue outlook, we continue to attract and win new customers in key product lines and realize favorable pricing with our existing customers.

We're maintaining our expectations for adjusted EBITDA margins for 2019, which results in a lowering of the expected adjusted EBITDA range to $450 million to $480 million from the previous range of $475 million to $505 million. We estimate that we will generate approximately 26% to 27% of full year adjusted EBITDA in the third quarter. Year-over-year earnings growth in the third quarter will be limited by the nonrecurrence of income from a $7.3 million legal settlement recognized last year as well as the unfavorable impact of foreign exchange.

We expect the core EBITDA margin will be approximately flat in the third quarter due to the 60 basis point headwind from the settlement last year. Finally, I'll note that 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, I'd like to open the call up for Q&A. Operator?

Questions and Answers:

Operator

[Operator Instructions]. Your first question comes from Matthew Bouley of Barclays. Your line is open.

Matthew Boulis

Good morning. Thank you for taking my questions. I guess firstly, on the headcount reductions across all 3 segments. Could you, I guess, size that up a little in terms of what the margin savings will be? And were these reductions in sales or manufacturing employees across the board? Just -- is there any risk to the growth side that would result from that?

Gary S. Michel -- Chief Executive Officer

I'll take the last part first. We -- we're pretty surgical in where we're taking out costs. It's certainly not putting any risk on the opportunities that we might have to service our customers, and that comes first and foremost. We're in a really good position as far as our on-time delivery and our ability to meet all of our needs in each one of the markets. But if you look at where the slowdowns occurred, typically in Australia, we had some opportunities across North America in some of our operations, plus we got the ongoing work that we're doing with our rationalization and modernization programs, which naturally give us some productivity opportunities and headcount as well as other costs.

John Linker -- Executive Vice President and Chief Financial Officer

Just to size them, I mean, is we're talking a couple of hundred heads in SG&A across the company. We won't get a full benefit in Q3 and Q4, just given the timing of when those fetter in, but I would just categorize it more as this is a pay-as-you-go mentality, and when we see the volume, we're going to invest. And until then, we got to make some short-term savings to make sure we hold margin.

Matthew Boulis

Okay. Perfect. And then secondly, the modernized production lines in doors that Gary mentioned as part of the overall rationalization effort, are those savings included in the $100 million or incremental to that? And just anything we should understand around like the capex and timings of those savings related to that?

Gary S. Michel -- Chief Executive Officer

Yes. So those are included in the $100 million savings for that program in particular. That's what we've talked about. Now, identifying, when we came into the year, we probably had about 1/3 of that identified. We've added about another 30% to that. So we're kind of halfway in the identification and now starting the execution. We've been closing some facilities this year already, building new modernization plans.

As I talked about earlier, we visited one last week. It's just amazing to watch the new technology and the new operations just -- it's visible when you see where the cost comes out, fewer people, less material handling, single-piece flow, very efficient and then the quality of the product coming off the line is just significantly better. All of that is going to build up. Obviously, we're into kind of the -- the bigger investments are upfront to get things started. We will realize some savings this year as we've mentioned before, but it really starts to pick up and accelerate in year two and year three.

Matthew Boulis

Okay. Thanks for the details.

Operator

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

Mike Dahl -- RBC Capital Markets -- Analyst

Gary and John, I wanted to follow up on some of the market commentary and just ask for a little more detail. I think you talked about on the new construction side, just no clear signs of reacceleration and then some stability in R&R. On the new construction side, clearly, the homebuilder order trends, at least the public ones, have inflected and reaccelerated to a somewhat notable degree. And so I was hoping outside of just your normal lag between orders or starts and when that impacts your business, just give us a little more color on why you don't think that's been a clear indicator. And maybe give us some comments around the cadence of what you saw in terms of North American growth or U.S. growth through the quarter and into July.

John Linker -- Executive Vice President and Chief Financial Officer

Sure, Mike. It's John. I'll start. Certainly agree with you that during the earnings season, we've seen some more positive commentary from the builder community in terms of order rates, even some of the distributors talking about the work starting to increase year-over-year in the wholesale channel in terms of growth. I would just say from our standpoint, as the quarter progressed, certainly June was meaningfully weaker than in terms of North America on the wholesale channel than April and May.

And so I guess from the commentary that Gary made, we certainly acknowledge that there looks like there's some green shoots out there in terms of translating that into building product sales and millwork for us in Q3 and what's in our pipeline. We just haven't seen that yet. So I would attribute that more to the lag that you kind of referenced between orders and starts commencing and then falling through to being a supplier to that.

Gary S. Michel -- Chief Executive Officer

Yes. Just to underscore that, we're prepared for an uptick in demand in those channels. We're well-positioned from an inventory production capacity standpoint. So we're there to answer the call, and we're staying very, very close to our customers. In addition, we've picked up some new channel partners along the way, and those can definitely contribute to growth as the market improves.

Mike Dahl -- RBC Capital Markets -- Analyst

Got it. Okay. Thanks. And then second question. Clearly, despite the softness in the top line and your ability to hold margin guide is a positive. It sounds like price/cost is helping. Can you give us a little more color on from a price/cost perspective how you're thinking about the balance of the year and then specifically related to tariff impacts? And what does your guidance now include? And is there any potential impact from the proposed List 4 to your business?

John Linker -- Executive Vice President and Chief Financial Officer

Sure. So I guess price/cost in the second quarter, we reported 2% price realization for the whole company, I would size material and freight inflation at about 1.5% as a percent of sales. So there was about, call it, a 50 basis point tailwind in the quarter on material and freight. We are seeing freight moderating. It's certainly not as bad as it was at this point last year. It sort of stayed at these higher levels. And then the inflation side is, I guess, performing in line with our expectations.

So I guess as we build up the rest of the plan for the back half of the year, I don't really see that materially changing -- that landscape changing. If anything, in Europe, we might see a little bit more acceleration on price/cost just given the timing of some increases there. And then second part of your question around tariffs. It's really a moving target right now with all the rhetoric and diplomatic activity that's going on.

I would say for what we go into place for the rest of the year, that's embedded in our guide. It's interesting, this most recent round, if it's enacted, the currency devaluation actually mitigates some of that on R&D. So between that and some of the activities that we're taking to meaningfully move product outside of China, we believe that we'll be insulated. And I'll just remind you guys, it's $100 million of spend roughly was what we spent in China last year to import into the U.S. On a COGS basis, that's $3.5 billion. So as we shrink that -- those purchases down from China, this becomes less and less a material issue for JELD-WEN globally.

Mike Dahl -- RBC Capital Markets -- Analyst

That's really helpful.

Operator

Your next question is from Josh Chan of Baird. Your line is open.

Josh Chan -- Baird

The first question is on, sort of, the footprint rationalization. Could you just kind of update us on what kind of savings you are expected -- expecting this year? I don't think a lot. But then into 2020, what kind of savings should we expect from that program?

Gary S. Michel -- Chief Executive Officer

So we've previously said we expect to get around $10 million of realized savings this year on the program so far. And that will accelerate year two and year three as we go forward and more of the projects come online. The first year has been more about the investment in getting -- kind of getting the pilot plans in place. So we're already seeing plans in all regions coming off-line.

We were a little bit slower in taking capacity off-line in the early spaces so that we didn't impact our ability to serve customers as we're making those transitions, but we're now at that point of the year and in the process -- the first phase where some of that capacity will be coming off-line, Josh. So we do expect to see that. We're right on plan. We like where we are in terms of what we're seeing with the new plans and our ability to take off more capacity as the rest of the year progresses.

Josh Chan -- Baird

Okay. And then my second question is sort of on the guidance. Basically taking what you've done in the first half and then the Q3 guide, I think it implies a more meaningful step up of EBITDA, at least on a year-over-year basis in Q4. Is that -- am I looking at it the right way? And what kind of provides you the confidence about the EBITDA improvement, I suppose, in the fourth quarter?

John Linker -- Executive Vice President and Chief Financial Officer

Yes. You're right. So I guess the implied guide here for Q3 means that core margins are going to be pretty flat year-over-year in Q3. Gary called out that there's a nonrecurring headwind that we had from last year. That's about 60 basis points, so the core operations are actually performing better in Q3. But we've got to lap that Q3 item. And then Q4, I mean you just asked about the footprint savings. Most of that $10 million has really fallen through in Q4 just given the timing of when we're taking some of the redundant capacity off-line. So that really starts to benefit us in Q4.

And then just, I guess, remember that Q4 of last year was a pretty challenging quarter for us, both top and bottom line, and so we've got a favorable comp there in Q4 which will contribute to the margin expansion as well. But I guess if you look at all the components sort of price, productivity, those tee up well for Q4. And then I think we are assuming some level of modest volume acceleration sequentially from Q3 to Q4 in North America. It's not much but certainly, we're assuming that Q4 will be a little better than Q3, and that contributes to a sort of eliminating some of that volume mix headwind in Q4.

Josh Chan -- Baird

Great. Thanks for the call there and thanks for taking the time.

Operator

Your next question comes from Reuben Garner of Seaport Global Securities. Your line is open.

Reuben Garner -- Seaport Global Securities. -- Analyst

So maybe in the North American segment, can you talk about any -- whether it's year-to-date or the quarter or just in general, differences in the volume and/or price trends between your windows business and your doors business? Just trying to see if there are maybe different market drivers right now, whether it's inventory in the channel or that sort of thing.

John Linker -- Executive Vice President and Chief Financial Officer

Sure. We did talk, I think, last quarter about Windows being down in Q1 versus prior year and then Canada being down in Q1 versus prior year pretty meaningfully. I'd say the windows piece, still down in Q2 year-over-year but some sequential improvement. I think we're more aligned with the market there as opposed to some of the share headwinds that we've had in the past. Canada is still a pretty big headwind for us in Q2. And then we believe our door business sort of performed in line with the market. We've spoken a little bit about the new construction side. Maybe, Gary, you want to comment on, sort of, what we saw in the retail side in Q2?

Gary S. Michel -- Chief Executive Officer

Yes. So we talked about residential new construction earlier. The -- on the retail side, we saw a little bit of choppy order patterns in retail. It was really toward the end of the quarter and coming into the quarter for Windows and then end of the quarter a little bit. So we're expecting that to clear up. We've got a -- it looks like a pretty good backlog building and capability to deliver on that. So we're -- we think it's timing. It was timing in the retail channel more than anything else.

So we're pretty hopeful that, that'll straighten up and come back in. On -- as far as differences between the businesses go, we're seeing our productivity program pretty consistently across all the categories as well across all our geographies, which is -- that's the swing for this business over time. And we're pretty excited about seeing that, and that's going to help us through as well on this margin expansion regardless of the product category.

Reuben Garner -- Seaport Global Securities. -- Analyst

Okay. Great. That was helpful. And maybe that kind of leads into my next question. So it seems like you're maybe ahead of -- or definitely ahead of schedule in some of your initiatives, at least from a facility rationalization standpoint. As we look into next year, how should we think about savings targets between your 2 buckets, rationalization and operational excellence? What kind of visibility do you have as you move down to 2020, particularly if you guys are pulling some of these things forward?

Gary S. Michel -- Chief Executive Officer

Well, I think I'll wait to give you guidance later on 2020. But at this point, what I would tell you is we're probably right where we expected to be on the rationalization program. We're -- the good news is that it's working as we planned it to work. The folks are really engaged in delivering quality products, quality processes in our new rationalized facilities. So what I'd say is we're really right on track in terms of being able to take latent capacity off-line. So I'd probably call it that.

But that allows us to continue to move forward with the next phases sequentially and with good confidence and maybe get more of the latent capacity out sooner in subsequent periods than we did in the first phase. So we feel really good about that. The other thing that we feel really good about, and maybe there we are a little further along than we thought we'd be, is on the deployment of the JELD-WEN Excellence Model, or our business operating system. We've got good visibility to our productivity pipelines in all the businesses and all the regions. A lot of rigor around that cadence. And that's what you're seeing come through, even as -- we said when we set up these programs, we weren't going to rely on revenue. I guess we got our first test in the quarter. We were able to hold or expand margin in a declining market. Unfortunate to have to show it this way, but we're pretty -- we feel pretty good about where those programs are leading us.

Reuben Garner -- Seaport Global Securities. -- Analyst

Great thank you guys.

Operator

Your next question comes from Michael Rehaut of JPMorgan. Your line is open.

Michael Rehaut -- JPMorgan -- Analyst

I was wondering if you could bucket out the drivers of the lower margin in Europe this quarter, the relative impacts from mix cost and efficiencies and cost inflation.

John Linker -- Executive Vice President and Chief Financial Officer

Sure. So if you look at the Europe segment, I believe, rough numbers, Europe was down around $5 million to $8 million in the quarter of EBITDA. It would be $8 million in the quarter. I'd bucket that as FX probably around $4 million. Mix being, with a little bit of volume, around $4 million, and then some cost inefficiencies and distinct costs that hit us in the quarter in the $5 million range. And then that was offset by productivity and price to get you back to the reported results. So we did see some nice productivity. We did see some price. But unfortunately, it was wiped out by the mix and some of those distinct costs that we faced in the quarter.

Michael Rehaut -- JPMorgan -- Analyst

Okay. And just a little bit more on the mix. Was that related to a change in exterior versus anterior -- interior business or anything else that would be impacting mix that would have had that impact on margin in Europe?

Gary S. Michel -- Chief Executive Officer

Yes. It's primarily channel, so where we got our revenue. We were a little slower in Central and Northern Europe and a little stronger in the U.K. So more about geographic and channel mix.

Michael Rehaut -- JPMorgan -- Analyst

Thank you.

Operator

Your next question comes from Phil Ng of Jefferies. Your line is open.

Margaret Eileen Grady -- Jefferies LLC -- Analyst

This is Maggie on for Phil. John, you touched on this a little earlier, but can we get an update on your efforts to regain share in windows in North America? It seems like these operational issues have been resolved for a while now but volumes haven't really come back. So what needs to happen to turn this into a tailwind? And how do the new product launches kind of factor into this?

Gary S. Michel -- Chief Executive Officer

So this is Gary. I'll start. The -- so you're right. A lot of the effort -- we put a lot of effort over the last, call it, 12 to 18 months on ensuring our operations in our windows business. We're able to meet customer demand. We've done that, and we're getting kudos from customers about that. We've been on a targeted program to, first of all, regain share with existing customers, demonstrating our ability to meet their demand and not disappoint them on projects. We're seeing that turn for us, and we're seeing sequential improvement in the windows business in that realm.

Additionally, we're able to take the new product launch -- or, well, it's not that used today, but the Siteline product, which is a very desirable product, we've been able to use that to gain new customers as well. And the time to invert customers, maybe it's been a little bit longer, a little bit slower than we had hoped, but it's certainly been positive. We get the initial commitment for the conversion and then it takes time to work through their process of training, stock up and getting their customer base online with our new product category since they work through clearly somebody else's product at the time. So there is a little bit of timing there.

But we feel pretty good when we look at it sequentially. The operational issues are behind us. Certainly, the Siteline product is playing very, very well for us. And then as I pointed out earlier, we've got some great new products in our windows business coming that we think are really going to be a growth driver for that business going forward.

Margaret Eileen Grady -- Jefferies LLC -- Analyst

Got it. And then switching to pricing, that was a positive in the quarter, and I think a lot of that was carryover pricing from 2018. So how are you thinking about pricing in the second half, especially given the softer demand outlook? And can you maintain a positive price/cost spread with just carryover pricing? Or do you need to get incremental pricing in the second half?

John Linker -- Executive Vice President and Chief Financial Officer

Sure. I -- on pricing, we'll be a little cautious about making a lot of forward-looking statements on our -- any pricing actions or strategy. The cadence of price increases is pretty structural in the industry, and we've made largely, for the most part, the actions that we're going to take in our key markets at this point in the year. So to your point, most of what we're seeing is, at this point, is the benefit of pricing actions that were taken at the end of last year or earlier this year.

Obviously, we are going to continue to monitor the markets. We certainly feel like we have to recoup any material or freight or tariff inflation to the extent that, that environment changes. We will absolutely be on the front foot and take additional actions as we need. But for now, in terms of the updated guidance that we've given you for today, there is really no additional pricing actions that are required to get there.

Margaret Eileen Grady -- Jefferies LLC -- Analyst

Awesome. Thanks guys.

Operator

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

Truman Patterson -- Wells Fargo. -- Analyst

This is kind of a multipart question, so I'll ask this one and then hop back in queue. But it revolves around Europe. I was expecting with as much pricing as you got, the margins would have been a little bit better. Can you just walk us through a little bit more in depth of the 120 bp core margin decline? It seems like there have been some persistent issues from product quality, I believe some input supply issues, price/cost timing mismatch. I guess what's occurring in the segment currently?

Can you dig into the steps that you're taking to keep from an up margin from deteriorating in the back half of the year? And John, you gave increasing back half margin guidance. What gives you the confidence that you guys will be able to expand margins in the back half, especially given the new leadership changes that have come from outside the company?

John Linker -- Executive Vice President and Chief Financial Officer

Yes. No. Fair point. We're certainly not satisfied with how the Europe segment has performed. We've got now a number of quarters in a row of core margin contraction. It's a fantastic business for us. We have good market positions in a lot of these markets. We really like our footprint there and great brand names. And so it's a business we like. We're just not satisfied with the operational performance.

For the most part, I'd categorize the performance, while there have been some volume headwinds in a few markets, this has mostly been a mix story for the last few quarters as well as a -- just an execution story for the last few quarters in terms of -- prior to this quarter, we were negative on price/cost in Europe going back into the last few quarters. That should now flip into the back half of the year. Productivity is certainly improving and the pipeline of visibility we've got there. We talked about the one facility closure that happened in the quarter. There's more activity coming in that regard that we can't talk about publicly yet that we have visibility to.

So I guess if I think about the back half of the year, just comparing the first half to the second half, price/cost will certainly be an improvement. We're seeing inflation starting to wane in Europe and then we'll get the benefit of pricing. Productivity should be a step up in the back half of the year. And then just the nonrecurrence of some of these cost inefficiencies that have hit us in the first half of the year and a few of our business units will contribute to the margin improvement.

Gary S. Michel -- Chief Executive Officer

Yes. I would say, to add to that, is John and I have taken a hands-on -- a very deep hands-on approach to the cadence of productivity programs and operational performance with the team in Europe. We did make the leadership change that we did announce, somebody that's going to bring that vigor and discipline to ensuring that our operational performance improves. We like what we see in the productivity programs. We like what we see in the restructuring and modernization programs in Europe. And we're pretty confident that we'll see that inflection here in the second half.

Truman Patterson -- Wells Fargo. -- Analyst

Okay. Included -- embedded in that guidance, are you expecting to see a return of mix? Or are you guys still expecting mix to be a material headwind?

Gary S. Michel -- Chief Executive Officer

Yes. We expect it to start lapping that actually in the second half of the year. We started seeing that really toward the end of -- really second half of last year. So there's some lapping there. We're expect -- we actually, in Europe, are expecting the market to be about where we expected it to be this year, which is flat net-net when you think about what's up and what's down. So it's just been a mixed market but overall, flat. And we would expect it will start to lap that mix.

Truman Patterson -- Wells Fargo. -- Analyst

Okay. Thank you.

Operator

Your next question comes from John Lovallo of Bank of America. Your line is open.

John Lovallo -- BofA Merrill Lynch -- Analyst

First, can you just give a little color on the overall North America window and door market and how that performed in the second quarter and what your 6% decline in volume and mix may have represented in terms of share loss?

Gary S. Michel -- Chief Executive Officer

Yes. I would say that we probably at -- we were right with market on that. I would say that we've been seeing, as I said earlier, on the windows side, we've been seeing sequential improvement in that business but some, I'll call them, erratic or choppy order patterns in the retail side. But with the residential new construction business never really taken off in the first half. We're probably right in line with market. Doors, we've been kind of solid performers, and I don't think -- I think shares will probably stay pretty even in that environment.

John Lovallo -- BofA Merrill Lynch -- Analyst

Okay. And then John, in terms of the second half, I think you had initially thought there might be some IT spend that would have driven higher corporate expense. Is that still the case? And how should we be thinking about kind of the corporate expense on a quarterly basis in the back half?

John Linker -- Executive Vice President and Chief Financial Officer

Sure. We did see that in the second quarter. There was about $2 million to $3 million of distinct costs to some projects that we had going that hit the P&L in the second quarter. That -- I don't expect that to recur in Q3 and Q4. So I guess in terms of actual corporate costs, there should be nothing surprising there. I mean it should probably perform largely in line with the second half of last year, I guess, is how I would characterize it in terms of Q3 and Q4.

John Lovallo -- BofA Merrill Lynch -- Analyst

Okay. That's helpful. And then one quick one here. The Creative Media Development, what was the EBITDA contribution on an annual basis?

John Linker -- Executive Vice President and Chief Financial Officer

I would just say that, that business was below company margins. It was positive EBITDA margins, but it was below company level margins. And so pretty small, I guess, on $25 million of annual revenue.

Operator

Your next question comes from Keith Hughes of SunTrust. Your line is open.

Keith Hughes -- SunTrust -- Analyst

A question on the inventories. Where do you think you stand on inventory levels now versus demand? And any kind of regional variation detail would be helpful as well.

Gary S. Michel -- Chief Executive Officer

I would say that we are in a pretty good position given that we would've expected a little bit better performance on the top line in the quarter. So we were certainly at that point. Nothing outrageous, but certainly well-positioned. We also have good capacity so that if there were an uptick in demand, we're well positioned to take advantage of that. Probably in the -- in Australia where we saw the -- it's a more short cycle business there and much more -- build to order, so we're pretty matched up in terms of where we are there. Europe again, we talked about it being mixed. So it's -- even within Europe, it's a mixed position. And here, in North America, we feel like we're in a pretty good shape as far as we're concerned.

John Linker -- Executive Vice President and Chief Financial Officer

Yes. I would just add on to that. If you recall in the past, we did struggle with window inventory being below expectations and attributing to some service issues. And at this point, this year, we're in a very strong position from a stock build standpoint where we can build stock in windows, so to the extent that some of these positive developments that the home builders and distributors are starting to see, if that flows through to us, we're very well-positioned to service our customers and maintain service levels where they are.

Operator

There are no further questions at this time, I will now return the call to Gary Michel for closing remarks.

Gary S. Michel -- Chief Executive Officer

Thank you. And thank you, everyone, for joining us this morning and your continued interest in JELD-WEN. I'm really pleased with the progress that we're making in our productivity and process improvements as we deploy JEM, our business operating system, around the world. With market headwinds that are disappointing, we're committed to delivering productivity and margin expansion regardless. The pipeline of projects and programs, including our rationalization and modernization program, in addition to our continued improvements in execution will ensure that we deliver favorable results. We look forward to sharing additional progress on these in the coming quarters. And again, thank you for joining us today.

Operator

[Operator Closing Remarks].

Duration: 57 minutes

Call participants:

Karina Fadia

Gary S. Michel -- Chief Executive Officer

John Linker -- Executive Vice President and Chief Financial Officer

Matthew Boulis

Mike Dahl -- RBC Capital Markets -- Analyst

Josh Chan -- Baird

Reuben Garner -- Seaport Global Securities. -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Margaret Eileen Grady -- Jefferies LLC -- Analyst

Truman Patterson -- Wells Fargo. -- Analyst

John Lovallo -- BofA Merrill Lynch -- Analyst

Keith Hughes -- SunTrust -- Analyst

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