JELD-WEN Holding, Inc. (JELD) Earnings Call Transcript & Summary

Good afternoon, and welcome to everyone that has joined us today. I'm Susan Maklari, Goldman Sachs' homebuilding and building products analyst. I'm pleased to have John Linker, the CFO of JELD-WEN, along with me today for this discussion. Today's session will be a fireside chat with John, though we're going to start off with a brief introduction from him on the company. Questions today can be e-mailed to me at [email protected] or submitted through the webcast. And with that, I'd like to say welcome to John and turn the floor over to him.

Thanks, Sue. I appreciate you having us. I will start with a very brief intro on the company just for anybody that's newer to the name and hop into Q&A from there. So JELD-WEN is a global leader in windows and doors, about $4.3 billion in revenue last year. We have the #1 market position in the majority of the markets that we operate in, which is 20 countries around the world. And it's a company with a long history that we're looking to build and leverage some operational improvements under a relatively new management. So company was founded in 1960 as a family business and the family grew it over many years through acquisitions and successfully built up the business that way. Transitioned to private equity in 2011 and began a transformation and -- of significant growth and margin improvement. IPO in 2017, that put us into the publicly traded markets. And then new management in 2018 with Gary Michel, who's our CEO. Came out of Ingersoll Rand and Honeywell, 30-plus year career there. And I'm fairly new in my CFO role, 2018 as well. And Gary and I together are -- with the rest of the management team are driving change and trying to deliver more margin improvement. We've got clear line of sight to a margin improvement plan through cost actions, but also some opportunities for profitable organic top line growth as well. And then think about cash deployment for this business. We've got a pretty successful M&A track record, which is not exactly timely right now here in the midst of the COVID disruption. But over the last few years, we did 14 bolt-on acquisitions. We've got a nice platform to look at cash deployment in North America, Europe and Australia. Given that we operate in all 3 segments, it gives us the opportunity to look at bolt-ons around the world and create some value there. And so from a from a cash deployment standpoint, we've been -- got a successful track record in M&A. Here in the near term, a little bit more focused on preserving balance sheet and liquidity as we navigate the COVID uncertainty. But we do look at everything through a returns-focused lens and make sure we drive the most shareholder value we can through our cash flow deployment. So I know that was very brief, but maybe we'll just kind of pause there, Susan, and see where you'd like to go.

Yes. Thank you, John. I guess to start off with, let's talk about the demand trends. Can you just give us some color on what you've been seeing across your various price points and distribution channels? Were there any areas that you would say have more recently outperformed or underperformed?

Sure. Let me go geographically around the world here, starting in North America. And I would refer everybody back to our earnings call document that we had last week where we actually did put some sort of soft outlook expectations around expected volume growth for the second quarter. And beyond that, we didn't have any specifics for the rest of the year. But in terms of what we're seeing here in North America, some of our -- there's a couple of things going on. We do have a handful of plant closures and/or absenteeism, which is impacting volumes here in the short term in some of the markets that we work in, either due to government restrictions and/or some temporary closures to the extent that we have risk of illness in our facilities that we need to close for sanitation and then also some absenteeism as well. So when we talked last week about our second quarter expectations for North America being -- having volumes, excluding price, but volumes being down in sort of the mid- to high teens versus prior year, a decent chunk of that relates to just the uncertainty and disruption of sort of -- of some of the manufacturing base. But in terms of the sort of the volume trends from a demand standpoint unrelated to what we can actually produce, I'll probably take you from the strongest to the weakest. What we're seeing right now in the strongest demand, even still here in the midst of sort of this COVID disruption, is we're seeing some -- actually some nice growth in our traditional wholesale distribution channel, in doors and some of the markets that were least disrupted by COVID. So that would sort of be the south and east in our traditional wholesale channel. Some of that may be some share gain and some of that may be just markets that are continuing to perform and construction that's continuing to happen. We do lag -- our demand sort of lags housing starts by 6 to 9 months. So to the extent that we're shipping product now, then that would be activity that was started pre-COVID. I'd say what's also holding up okay is our standard stock SKUs that go into our retail customers of Lowe's and Home Depot and Menards for doors and windows. That demand is holding up okay at this point and hasn't been significantly impacted through COVID. I'd say where we're seeing sort of the weakest and most challenged demand is either market-specific where you take markets like New York, New Jersey or California where lockdown restrictions were sort of the most severe. Obviously, that's pushed out or delayed projects. And what that does to us is that it means it reduces special orders, either as people are ordering whole house packages of windows or doors for a project -- a specific project, some of those orders are getting pushed out. And so what we have seen is some pretty significant demand headwinds in our special order business, in doors and windows, in the retail channel as well as windows volume and sort of the traditional distribution channel as well, which is really more of a special order type of business to begin with. And so I know there's a lot of moving parts there, but that's kind of what we're seeing from a demand standpoint in North America, which translates to that outlook that we gave last week. Similarly, in Europe, I'll move to next and I'll hit Australia and then pause and see where you want to go. But in Europe, we did have -- we talked about an expectation for volumes, again, before pricing, but volumes being down in sort of the low teens for the quarter versus prior year in the second quarter. What's driving a lot of that is the fact that our plants in the U.K. and France, which are 20% of the segment revenue, were completely closed for the entire month of April and the first week of May. They're opening back up now and ramping back up. But outside of that, we're actually seeing demand and order entry hold up okay in markets like Germany and in Scandinavia. If you follow markets like Sweden, they never actually really shut down during COVID and construction kind of continued right through. And so what we're facing in the second quarter there is just a lack of revenue out of the sites that were closed in France and the U.K. and then some pretty decent order intake in other areas. And then rounding it out in Australia, that business was already -- it's heavily exposed to new construction and Australia was -- for those who don't follow it, was already in the midst of a fairly significant housing contraction, really spurred on by a change in government regulations around lending and mortgages. We've had a couple of quarters of negative comps there from housing starts declining. And so this COVID disruption sort of catches our Australia business right in the face of an already weak market. I wouldn't say that we've seen a huge impact yet from COVID there just given the health aspect of it has not been as significant in Australia, while I think the economic impact in Australia could still be impacted as they have shut down heavily consumer spending sectors like retail and travel and things like that. And so we were already sort of seeing negative volume comps in Australia sort of unrelated to COVID. And I think we'll just have to see sort of what this -- what the disruption from COVID does to the recovery down there. But anyway, that's kind of what we're seeing by geography.

Okay, John. That's very helpful. One of the trends that we've been tracking in the U.S. is, of course, around price. And especially in doors -- but in doors and windows really. I know that you commented on your first quarter call that you saw price increases that took effect in March. Can you maybe just talk a little bit to what you have been seeing on price and how you're thinking about that given the macro backdrop?

Sure. So we -- in our North America segment, we -- typically, our price increases take effect at the beginning of the year. In this past instance, we had a couple of different phases of price increases that varied by product or channel. Some of them started in December last year and then some of the more significant price increases didn't take effect until February. So March was sort of our first clean month of seeing all the North America price increases in our numbers. We reported 3% price on a reported basis in the quarter -- in the first quarter versus prior year. And so clearly, March would have been better than that to get to a reported 3% for the whole quarter. At this point, we're seeing pricing holding up. It's not -- I mean, typically, these are -- with our biggest customers, these are sort of negotiations that happen sort of once or twice a year. And at this point, we don't have any visibility to the pricing environment changing. We've implemented the price that we plan to implement for this building season. And at this point, we see those pricing starting to come through just kind of as we had planned for. And as of right now, given that we're sort of entering this COVID disruption with a pretty strong tailwind of building activity from housing starts that sort of took off last year and an industry that is already -- particularly in doors, which is already fairly highly utilized from a capacity standpoint. At this point, we don't see any big headwinds or changes in our pricing expectation for the full year.

Okay. And can you talk a little bit to how you think about the balance between price and volumes? And maybe what role that plays in your margin targets and profitability analysis?

Sure. So I guess our strategy around pricing is -- and volume is to drive the best profitable growth that we can for the business. So what that means -- and I think a good example of that would be we're looking to grow with customers who want to grow with JELD-WEN and carry our full product line of doors and windows. If we're talking about North America and within doors, customers that want to carry our full product line of interior and exterior doors and not just sort of carry a one-off product line. We're looking for full sort of distributor representation in all of our key markets. And so I guess where that comes into play in terms of price and volume is that we're certainly -- we put through the price increases that we plan to for the year. But as we think about using our capacity -- manufacturing capacity and who we want to partner with as customers, we're looking for customers that will carry that full line of volume and so -- or a full line of products with us. And so I guess the implication there is as we segment our customer base and look at those customers who fit that criteria and customers who maybe don't fit that criteria that are lower in the segmentation who are less profitable or only carry a smaller number of our product lines or order quantities that are sort of less profitable for us, we would be looking to take that capacity and redeploy it to customers who would be willing to take on more volume with us. And so it's -- I don't really think that we have a price versus volume trade-off. I mean, price is sort of price. We've communicated that to the market. But from a volume standpoint, we -- if we can find a trade that would be profitable and mix our margins up by taking some capacity from a less profitable customer and redeploying that to grow with customers who would want to take -- would grow with us from a share perspective and carry our full line of products, that's generally how we would think about it.

Okay. And another topic that's come up a lot on your call and maybe post your call too is thinking about the profitability of the business. And I know that we talked a little bit on the first quarter call on decremental margins and your expectations there. Can you kind of walk us through what the drivers of that are and how to think about what the factors are that could drive that range, either lower or higher, relative to your expectations?

Sure. You're right. On the call last week, what we said is -- in addition to sort of the volume expectations that we set for the quarter, we also said that on the organic piece of our revenue change, sort of excluding FX, which will be a headwind in the quarter to revenue, but just on the organic piece of our revenue, we would generally expect high 20s, up to 30% decremental margins in the quarter. Now it's important to note that embedded in that are a couple of positive things and a couple of negative things. I mean, on the positive things, obviously we've got some price in North America that's helping lift the decrementals and probably helping them not be quite as severe and particularly in the North America segment. We've also got a cost savings plan that we committed to, at least $15 million of cost savings in Q2 versus the same period last year. And we've deployed that. And so those both help the decrementals. What's challenging the decrementals in the quarter, which is a bit different than sort of a normal environment, is we've got certain plants. Let's go back to the France and U.K. Those plants were completely shut down for the month of April and the first week of May. That's not a normal sort of decremental scenario where you're just going up or down or volume. And that's absorbing the entire cost base of that plant, the fixed overhead and variable overhead of that plant, which does make the -- in that case, would make the Europe decrementals more challenging. And so that kind of blends everything to that range that I gave. And some of that is just some uncertainty around what sort of -- what challenges we might face in the rest of the quarter around decrementals. I mean, I will tell you, I mean, I've been sitting here in early May, our decrementals in April did perform better than that range. So we're optimistic that we can hold that up for the rest of the quarter, but we also know that we've got some uncertainty of plants that are closing and maybe temporarily or disruptions from absenteeism that could unexpectedly challenge the decrementals. And so we just want to be cautious as we think about it for the rest of the quarter. And we've also got some additional cost savings that we can look at if the demand conditions require. If the demand conditions worsen, there's certainly some cost savings that we can get after intra-quarter here that would be more than that range that I gave if demand requires it so.

Okay. And John, we do have a question coming from the webcast. Can you talk a little bit to your outlook in terms of the competitive environment in the U.S.? And maybe have you seen any change in imports lately? Or how are you thinking about the role of imports in these industries?

Sure. I mean there's certainly components that get imported and that go into windows and doors, but it's pretty rare for a finished product, a finished door or a finished window to be imported unless it's a -- like a standard SKU that's going to big box retail that easily fits in a container and can make the shipping costs be reasonable. Generally, we find customers that we work with demand lead times that are quick. They demand high levels of service and quality. And given the nature of the products that we make are fairly bulky and sizable, shipping those products from any distance makes either the freight costs look pretty unattractive and/or the ability to meet expectations on lead times fairly unattractive. And so I wouldn't say that imports, for us, have been a significant course area of concern. And the competitive environment in North America, nothing really to call out on the door side. I mean, on the window side, there's been some consolidation here in the last 18 months of some acquisitions and divestitures that have taken place that have changed the competitive environment there a little bit in terms of companies that have acquired other businesses, but that's really the only thing that I would call out there.

And John, do you think that, that could actually play a role in the window side of the business and the profitability level that you can sustain even if we see housing starts down, say, 20% or 25% this year?

I mean, certainly, the fragmented nature of the industry is -- definitely makes it a different business than our -- some of our other businesses. What I would say is that we find, for the most part, builders and our customers are very brand-sensitive and brand-loyal on windows. They want windows with a high level of reputation and high standards. And so we find the customer base to be fairly sticky in that regard. And so I'm sure there -- if there is a slow and new construction, we will feel our fair share of that. It's just a result of being a participant in the industry, but I don't know that our personal -- or our company performance in windows will be any different given the fragmented nature of the industry.

Okay. And we have another question that's coming through, which is around input costs. Can you talk to what you've been seeing there? Do you expect any deflationary benefits this year as -- given what's been going on with some of these commodity prices? And how do you think about your ability to maybe capture some of that?

Sure. So I mean, let's take oil, for example. We -- in terms of shipping costs, we don't own our own fleet in North America. For the most part, we rely on third party carriers. And so to the extent that lower oil prices are reflected and freight costs going down from our freight carriers, that would be a benefit. We're not seeing that yet. I think there's such a constrained amount of freight carriers in North America. And given absenteeism and virus impact, we're definitely not seeing any benefit of freight going down just because oil is going down. I'd say the biggest areas of opportunity for us seem to be in the steel and aluminum, where those prices have come down pretty meaningfully. We use a decent amount of steel in our steel door business here in the U.S. as well as aluminum for aluminum windows in Australia. There's certainly some opportunities to pre-buy there and/or look at some hedging instruments to sort of lock in some benefit. But that said, there's been other pockets of disruption. There's -- between tariffs and getting components out of China during a COVID scenario and we've got our -- some of our suppliers and -- of other commodities have been disrupted by COVID, which has limited supply. We're certainly not seeing broad-scale deflation in our commodity base at this point. There's pockets of opportunity. But at this point, the disruption from COVID has sort of made it -- I don't think you're seeing our supply base costs sort of drop in line with commodity costs just given sort of operational disruptions in the supply chain.

Sure. Okay. And something else that I want to touch on is the cost savings in JEM and thinking about the role that that's going to play. Given the change in the macro environment, can you talk a little bit to those plans that you have to remove costs and implement some of the efficiencies associated with JEM? Are there any projects that you can accelerate or reprioritize to drive some incremental cost savings?

Yes. So for those who are newer to our name, we've previously articulated 2 buckets of cost savings. One is around our JEM, JELD-WEN Excellence Model productivity program, which is, year in, year out, pursuing production efficiencies through deployment of a lean manufacturing process. And that's still very much on track, that's part of our DNA. Nothing about the COVID disruption will detract from our plans to deploy those projects. And some of those don't require any capital. I mean those -- these are using lean tools to improve our operations. The other category of cost savings, as we had articulated, $100 million multiyear savings plan around facility rooftop consolidation and modernization. And we are already pretty far into that program. JELD-WEN has a history of acquisitions and we've got a number of rooftops that gives us the opportunity to think about consolidating and not only consolidating, but as we consolidate the number of rooftops, sort of eliminating legacy manual-intensive manufacturing processes and replacing that with more efficient -- with some investments in technology and manufacturing automation. And so yes, I think this environment certainly gives us the opportunity to think about some of the projects that we had maybe slated for 2021 or 2022 and thinking about pulling those forward. So these are the types of projects that you would want to be doing anyway if there is a downturn, eliminating fixed costs. And so I think we're fortunate to be able to have the ideas already. And so we are pulling those forward. We did a capital raise a few weeks ago and put another $250 million of cash on the balance sheet, which gives us -- our liquidity is at historic levels at this point, which gives us the flexibility to be a bit more opportunistic about pulling forward some projects that maybe we would have otherwise done later. And so yes, I would say particularly in North America and Australasia, there are a number of ideas that we have had slated for the future investments that we were looking to pull forward and perhaps act on a bit sooner in terms of going after that cost savings number related to the facility rooftop rationalization program.

Okay. All right. That's helpful. And can you talk a little bit to the world that volume plays as you work through some of those JEM initiatives? What is the importance of that? How do you think about the change in volumes? And what it will mean in order to kind of determine your success with some of those plans?

Sure. So some of the -- I mean some of the cost-saving projects are eliminating fixed or variable overhead from the consolidation of our manufacturing operations. Those savings we will get anyway regardless of the volume environment. And like I said, those are projects we need to be doing anyway. Some of the savings are more related to throughput, so getting efficiencies, manufacturing efficiencies on the throughput of production in these newer modernized plants, and that does require volume to see those savings. So to the extent that there's an air pocket in volume for some period of time as a result of COVID-related disruptions, that may delay seeing some of the savings. But I think there's still good projects to do and stand on their own as a result of the overhead reductions. And if we get the -- if the volume efficiency gains get pushed out a little bit, I think you're talking about a slight pushout as opposed to not getting the savings or anything like that.

Okay. And so would you say that it's fair to think then that the 15% EBITDA margin goal that you established, I guess, maybe 1.5 years or 2 years ago now, that still holds and we should just think about maybe the timing of that being changed given the environment but not the fundamentals of where the business can eventually operate.

I think that's fair. As you'll recall, when we rolled -- when Gary and I refreshed our glide path to 15%, we gave a scenario with flat volumes, pricing just enough to offset inflation and then the rest of the margin gap is closed with the cost savings programs. So the cost savings are still very much on track. Maybe they get pushed out a little bit, but they're on track. Obviously, the volume adds a new surprise that maybe impacts the timing a little bit if there's a decline in volumes here in the short-term because that wasn't part of our original framework, but we're also probably a bit more successful right now on pricing than we had put into that original framework. And so nothing has changed from our standpoint around confidence in the ability to achieve the 15% margin target in any way.

Okay. And speaking of confidence, the -- your CEO, Gary, recently purchased about $120,000 worth of stock. Should we take that as a sign of his confidence in this business and your ability to weather this recession?

I think you've read it correctly. I mean we just kind of came out of a -- after earnings kind of came out of a company -- a self-imposed blackout on the stock. And given where the valuation sits and what we see in the future, Gary believed that the stock represented a significant investment or a good investment. And so in addition to any sort of incentive programs or things like that, company-sponsored, this is Gary making a personal investment in the company. And I think you've read it correctly in terms of his confidence and where we're heading.

Okay. And another area that you've made significant improvement over the last few quarters is your working capital. Can you talk to how we should think about working capital in this kind of an environment? Maybe within that, the inventories, where those levels sit across the channels. And any risk to receivables and how you're thinking about the health of maybe some of your smaller local distributors.

Yes. I'd say we're watching working capital very closely. AR, as you know, we've got a great credit and collections program that monitors credit limits and the health of our customers. And to date, I would say nothing material has come up in terms of significant credit risk, but certainly something we're watching closely. Accounts payable was a big area of tailwind for us last year as we were able to work with our supplier base to extend payment terms. And we would look to do that again this year with other suppliers who would partner with us to help us there. And so I think the variable is on the inventory. We believe that, ultimately, this COVID situation is a disruption and not a long-term change in demand in our industry. And so we're going to make strategic investments and carrying the right amount of inventory in the right location so that we can win share in the recovery and grow with customers who want to grow with us. And so certainly, if revenues decline, there may be some working capital tailwind from that. But I guess the -- we're also viewing this as an opportunity to make some strategic investments on inventory so that we're ready to, as I said, win with customers who want to grow with us coming off the backside of this disruption.

Okay. And something that you've been working on is some new product introductions and slowly rolling those out. How do we think about the trajectory of those new products? Maybe your willingness to invest in some of those and kind of accept some of the near-term pressures that, that could represent for the longer term kind of health and the trajectory of the business over time.

Yes. Certainly, investing in new products is a key element of keeping our customer relationships strong. Service quality, new products and nothing about this disruption is changing our views on willingness to invest in new products. And we had a number of projects in flight, and those are continuing to be funded and continuing to pursue innovation. And I'd say we're -- for products that we have recently deployed, for example, we've refreshed our fiberglass door line, which we showed at IBS this past year. We're seeing some nice success there. And for projects that are a little bit earlier stage or more mid-stage, we're continuing to fund those. And we're fully committed to new product development during this disruption.

Okay. And we have another question around CapEx spend for this year. How are you thinking about allocating that capital? How much can you reduce your CapEx this year? And how should we think about that?

Yes. So I mean when we gave guidance back in February, we had talked about -- I believe, at the midpoint, it was around $140 million of CapEx, and that was the CapEx we felt like we needed to fund all of our productivity initiatives, all the safety and business continuity initiatives as well as our footprint rationalization program and our IT -- some IT investments. There's certainly some ability to time those capital investments and/or defer them. We -- for the last 2 months, we've definitely slow -- been more selective around our capital investments just given the uncertainty around COVID and really only been funding safety and business continuity. New products as we continue to fund existing projects that were already in the work stream when we entered the COVID disruption. So what we've said publicly is that we could probably pull that $140 million if we needed to. If the demand conditions required, we could probably pull that down by 30-plus percent. And so that gets you down to sort of $80 million, $90 million. If we needed to do that for a short period of time to rightsize to the demand environment, we could do that without meaningfully changing the trajectory of some of our key initiatives and key projects. But obviously, we'll evaluate those on an ongoing basis and make selective investments as it makes sense.

Okay. And then I guess, lastly, you've obviously have taken a much more defensive approach to your capital allocation. But as you kind of look out, what are the opportunities that you're maybe looking for? What are some of the things that you think could present themselves in this kind of an environment that could kind of change JELD-WEN perhaps or make for an interesting opportunity to think about the business as we emerge from this recession?

Sure. Yes. In the very short term, we've taken a very defensive approach and have suspended near-term share repurchases. And we're certainly still looking at M&A but not actively pursuing any new acquisitions. We've got a lot on our plate operationally already. In terms of some of the projects that we're working on, so we're careful to balance not only the financial returns but also the operational risk of looking at M&A or other investments in an environment where our team is already working very hard to deliver cost savings and facility closures and things like that. So yes, I would say as we get visibility to sort of the length of any downturn that may come out of this COVID situation, we will certainly feel more confident about capital deployment other than just cash and liquidity preservation and debt reduction. I'd say that we look at everything through a returns-focused lens. And so we'll look at acquisition opportunities that come up and weigh that against investments in our own stock. We've got $175 million authorization that was authorized late last year that's still got the vast majority of that amount authorized on it and sort of weigh the returns of an acquisition against the returns that we could get of investing in ourselves and then weighing that against the operational risk. And so we're certainly open to looking at acquisitions and think there'll probably be some interesting opportunities coming out of this, but we do want to weigh that against sort of the -- all the commitments that we've already made on the core side of our business and making sure that we are able to deliver those and demonstrate the trajectory of the margin improvement commitments that we've already made.

Okay. Well, John, I think that we've approached our time here. I want to thank you for going through the questions with us and giving us the time today. I really appreciate it, and hope that you have a good rest of your day.

Great. Thank you, Sue. Appreciate it. Bye.