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

Good afternoon. Thanks for joining us. My name is Mike Rehaut. I'm the homebuilding and building products senior analyst for JPMorgan covering the sector -- actually going on 18 years now. And every year, something different, something new. This year, we have our first ever virtual conference, and we're closing out our 13th annual conference -- our 13th Annual Homebuilding and Building Products Conference in our new virtual format, and we're pleased to have with us CEO, Gary Michel from JELD-WEN. JELD-WEN is one of the leadings windows and doors manufacturers in the United States and more broadly around the world. This will be a fireside chat. We have a 35 minute session. And so primarily, it will -- I'll ask Gary a series of questions. We also have an ask-a-question function on our digital conference book. So for those dialed in, I'm happy to relay any questions from our virtual audience. Gary, before we dive into it, if you wanted to give a 1 or 2-minute, just a quick overview of JELD-WEN, who JELD-WEN is and your market positioning, and then we'll go right into the fireside.

Sure. Thanks, Mike, and thank you to everyone, for being here, showing interest in JELD-WEN today. As Mike pointed out, we are a global leader in windows and doors and associated products. Built over a 60-year history through acquisition, the company has expanded very, very well, growing both revenue and EBITDA over that period. Really began a transformation after the downturn, converting from a family business into private equity and then ultimately into a public company. During the family ownership, built a nice set of assets in the windows and door spaces, primarily globalizing the business, focusing on building the brand, JELD-WEN, building a quality expectation, a little bit of back-office work, but not a whole lot of consolidation over that period. As the transformation began really 6, 7 years ago, a lot of costs taken out, kind of the traditional restructuring efforts and synergies were sought. And then about 2 years ago, I joined the company as -- we named John Linker, the CFO. The 2 of us have really been working on the latest leg of our transformation, which is around operational excellence and building out our business operating system, which we call the JELD-WEN Excellence Model or JEM, and as well as a rationalization and modernization program. When you think about all the assets that we have, 125, 130 locations, operating locations around the world, plenty of opportunity for us to rationalize those as well as to add automation, modernization into those operations to drive better capacity, better quality as well as cost for the business. We've had a little bit of a tailwind over the last couple of -- last year coming into this COVID-19 response the last few months. As we've seen sequential improvement in our earnings, and we do feel that we're doing adequate here. We'll talk about that, I'm sure here, with Mike. But we also are positioning ourselves for what's next on continuing our operational deployment, our operational expansion and improvements. So with that, I'll turn it over to you Mike for some of your questions.

Great. Thank you, Gary. So why don't we start off. A lot of companies have kind of talked to perhaps the more recent sales backdrop, obviously, a tremendous amount of volatility in the marketplace over the last 2 months. On your last call, quarterly conference call, you guys talk to expectations for North America volumes in the second quarter to decline mid- to high teens and the potential for even a slightly greater decline in the second half due to a lag between the market and demand for your products. So any updates around your view for the second quarter or in the second half? Obviously, if you've been where some of the builders that have participated at the conference have talked to continued improvement in order trends in April and into May. We've had some other building products companies talk about a little bit more, also some improvement as the quarter has progressed.

Yes. Well, starting there, I mean, obviously, we're watching residential new sales and starts. I mean that'll determine where our lag is and where we pick up business where there might be a gap going forward and where we would pick up business going forward in that important piece of our business. I would say that since we reported and kind of looking quarter-to-date so far, we -- revenue is kind of coming in where we expected, but our price and cost actions are really taking hold and are probably performing better. So I would say that we're doing a little bit better than what we might call a soft outlook that we presented for the quarter. So we're -- so far, so good as far as that goes versus what we expected. But again, watching what happens in new construction for what comes later in the year. On the retail side, you continue to see some good volume there, primarily the difference there in the in the retail space has been about mix, where projects have been finished out, anything that was special ordered certainly being shipped and utilized through that channel. But we've seen a little bit more of a standard product or stock product ordering and mix shift in that channel, which makes a lot of sense. Anything that's out lead time will take a little bit more time to recover as projects move out into the next couple of months.

So just to recap that answer, make sure I understood it correctly. So since you've reported revenues kind of still coming in along your prior expectations, which again was down mid- to high teens for North America. Cost actions may be better than expected. And then the comments on retail. Is that fair to say?

Yes. I'd say that price has been holding, and yes, cost -- our cost action is coming in a little better than we expected.

And on the cost side, that was one of the questions I had. In your call, you said that you expected about $15 million of cost savings in the second quarter to help offset that. Is that a number that we should be thinking that to your earlier comments that you've been able to exceed? And is that -- can we apply that 2Q run rate, whatever that might end up being into 3Q and 4Q?

So some of that austerity or cost programs is unique to the second quarter. Pushing costs out, looking at investment spending, things that we would do as we were expecting to come into a softer second quarter, utilize furloughs, for example. As we look at our demand picture for the rest of the year, obviously, making some of those permanent and stick require us to really look at where our demand comes in. We have some levers still to pull. We haven't taken them all by any stretch of imagination. There's -- the kind of interesting thing for us is the work that we've been doing in our rationalization and modernization programs are the kind of programs you would look at in a downturn to take fixed costs out of the business. So we kind of got a head start on that, if you think about what we've been working on and the pipeline of activity that we have around our rationalization and modernization program, so one of the things we have been looking at is that pipeline of projects, accelerating those that make sense. We're -- where there might be or are softer demand dynamics. And those might be places that we put some of our projects ahead of the line as opposed to maybe when they would have fallen otherwise. So we feel pretty good about our opportunities. And those are global projects. We have some in every single region, every segment of the business. So we continue to work those just as vigorously as we had before.

I appreciate that. And that was actually one of the questions that we had for you was around how this current environment has affected. The timelines or has or has not affected timelines of your JEM and footprint rationalization efforts. So what it sounds like is that, as you just said it, that you've been able to perhaps accelerate some of those projects. I know it might be a little too early, but each of those broad efforts have been framed as a roughly $100 million profit opportunity, I believe, through 2022. Has the last month or 2 done anything to change the time frame or the dollar amount features of those programs up or faster to be realized or a greater amount to be realized? Any initial thoughts around whether or not that, that kind of creates some upside there?

Yes. So we're absolutely -- I mean it's a great question. The 2 buckets, the $200 million together, the $100 million associated with our JEM deployment and productivity that we expect to get there, plus $100 million from our rationalization and modernization programs is still well in our sights. When you think about where we are on the productivity side, with deployment of JEM, which is really our business operating system, our lean deployment across the enterprise, you're looking at like $20 million, $25 million of productivity per year that we expect. We've got a nice pipeline of productivity projects in there. You start looking at -- some of those, obviously, are demand or revenue dependent, but you start looking at other projects that we can throw in there. And take cost out through productivity. Those are the types of things you want to do as things slow down. So we still feel pretty confident about that run rate. We look at the rationalization and modernization program When we set out this program, we had about -- last year, we had identified in action about 1/3 of that total program. Those projects are deployed or in flight and we expect to hit kind of that run rate of cost savings by the time we exit this year. Additionally, we've already announced that we had identified the next 1/3 of projects that are in some phase of planning or approval at this point, and we'll be continuing to deploy to take additional cost out. So as we look at -- maybe we lose a little bit of time on the modernization and rationalization piece of it, but we'll continue to try that lever. But -- when I talk about time, we're talking a quarter or 2 in certain projects, not years, months or even years beyond that. So I think we're pretty confident in the work that we've done to plan. This probably gives us a little time to restructure or reprioritize those programs, but we feel really good about them -- as good about them coming into this as we will going out.

That's great to hear. I guess you had mentioned also that price has been holding in the marketplace. Yes, this has been a big area of movement for yourself and Masonite since the beginning of the year with some of the big price increases that were set -- put in place. I was wondering if you can kind of drill down a little bit and review, to the extent possible, kind of give us an overview of what price increases you've announced from the beginning of the year? How they've differed by product segment or by channel? And again, any more granularity in terms of -- if they've all just would be kind of holding across the board? Or some of you've had greater success, some of you've had lesser success, and it kind of translates to an average realization of, I don't want to put a number in your mouth, but just give us a sense of the bigger picture, a little more granularity around pricing so far this year?

Sure. So first of all, our goal is always to ensure that price more than offsets our inflation year in, year out. It's certainly what we set out as our standard work and our aspiration. We're on 6 quarters, I think, at least, positive price cost, and we expect that to continue as a business. Each region is in a little different phase. Probably the biggest and most talked about price increase has been in the molded interior door piece of our business in North American doors, and that seems to be holding. Most of that price was announced and ultimately hit probably in the March time frame for sure. And -- so all the new business that we're getting is at that new price level, and that's in really every channel in North America. North American windows also increased pricing this year. Not quite as dramatically as we did in the molded door business, but it seems to be holding. And kind of the work that we've done in North America with customer segmentation, and has really helped with ensuring that we manage price effectively with our best customers and customers that supply all of our products. In Europe, we -- more of a traditional annual price increase environment. Most of that's been deployed at this point or I think all of it's been employed at this point. We expect that to carry through for the rest of the year. Australia is probably the place where they've been -- for different reasons, with the residential new construction market being soft for the last 12 to 18 months, it's really kind of been an ongoing story of softer markets. Been able to hold some pricing there, but maybe a little bit of get back that we think we'll be able to get back in the rest of the summer as we're announcing new price increases here coming up in the next couple of months.

Okay. That's great. Just writing this all down.

Okay.

Maybe just switching gears, you've mentioned windows. One of our questions, when you look back in 2019, there -- you had some inefficiencies in your windows business. As of your most recent quarter, you reported improvement versus 4Q, but still some lingering inefficiencies in that business. Just trying to get a sense of what the margin drag was as a result of that business still lingering with some of those efficiencies? And where you are in terms of kind of turning the chapter and closing out this period and getting back to a fully normalized state of operations.

Yes. So we had some issues last year with our ability to operationalize or perform operationally in the windows business in North America. We had some erratic order patterns that we talked about. Mostly what had happened was we had to throw some extra cost into labor to overcome those inefficiencies. I mean those costs carried through -- really through the third quarter. We saw some -- we have seen sequential improvement in the operations of the business. We've kind of ironed out all those issues on what happened. It was really -- it came down to some issues in how we dealt with resets and stocking up for the season and then an inability to catch back up last year. All that's been ironed out. We've had a lot of conversations with customers. We've got a more stable demand environment, which has helped for sure. But we spent a lot of time on the operational side, deploying our JEM tools effectively and making sure that we're improving our margin quarter in, quarter out. So we've seen a couple of quarters of margin improvement, our lead times and on-time shipments are as best as I've seen them in -- since I've been with the company in terms of windows. We're really open for business there, and now it just comes down to ensuring that we get the demand on top of that, and we'll start to see that productivity flow through.

Okay. So fair to say then that those inefficiencies are more or less behind you at this point?

They are, and if you think about when they really hit us last year, it was really in the -- by the late third -- second, early third quarter is really when they hit us. So first and second quarter last year didn't really show up yet as the issues really kind of hit us as the season came. So yes, the problems are behind us as well as the lap, if you will. We'll start lapping it here coming forward.

And any sense of what that represented in 2019 as far as a margin drag or a profit hit?

I know we've said something publicly. I don't have off the top of my head, Mike. Sorry about that.

Okay. That's no problem. Well, we can circle back on that.

Yes. I'll get that for you.

Maybe shifting gears to -- I just have a few questions left. And again, for those listening, happy to take questions through the virtual question board here, if anyone would like, feel free to hit the ask-a-question function, and we can pass it along. Just shifting gears back to -- for a moment to U.S. retail. I think one of the big moving pieces across many different product categories has been some inventory destocking that occurred. It's impacted some of our companies. That as -- in some instances, strong retail POS has to allow that destocking to, in some instances, reverse. I was just hoping for you to kind of give us a sense of how inventory has trended at retail over the last 6, 8 weeks? Has there -- have you seen similar patterns of destocking? And relative to how POS has trended, where would you say inventory levels are today?

Yes. I'd say for the most part, our actual demand has been fairly good and stable in the retail environment. To your point, some destocking occurred as there was some worry about what would be flowing through. And we are seeing that being picked up now. So we feel pretty good about that. Probably the only -- the only color there in the retail space, as I said earlier, is we're seeing a little bit of a mix shift at this point where it is stock type of SKUs that -- and products that are being picked up. What you see on the aisle as opposed to the special order. So a little bit of a mix down on the earnings side, but the demand piece seems to be in pretty good shape. We would expect to see that -- the special orders SKUs pick up probably as projects pick up. So that'll be something that's still opportunity for us going forward.

Yes. Maybe next shifting gears a little bit, again, to overseas. Europe has been pretty highly challenged over the last couple of months as well, in some sense, perhaps more than what we've seen here in the U.S. in different industries, different verticals, different countries. So as we look towards Europe, France is starting to restart, the U.K. perhaps a little bit slower, but maybe started -- expected to reopen soon. How are you preparing your operations there in those different countries across the continent? And do you expect any challenges in terms of unanticipated costs or demand volatility?

Yes. I'd say that demand actually, even globally, other than perhaps in Australia that we've already talked about, has actually been pretty good. It's just been about when locations have been open or not, either because of governmental mandates when there have been some short closures, even in North America or building has been shut down for a period of time. Those -- that's really all that we've seen. Otherwise, demand has actually been reasonably good. In Europe, similarly, kind of an interesting story there. U.K. and France have been shut -- were shut down and have now been -- we're now in the process of reopening. We've reopened about a week ago in both of those markets. The interesting thing is that in Germany and in kind of Scandinavian markets, we actually saw an increase in demand during the rest of the slow period. So it's kind of been an offsetting -- a little bit of an offsetting dynamic there. So we do expect that as markets -- as we're able to produce again and markets open up in France and the U.K., the demand side of the equation is still relatively good. So it's really a matter of how fast and how well can we do. Keep in mind, we're -- we've modified -- in order to keep most of our factories open around the world through all of this, we've modified our work practices, the health and safety of our associates is first and foremost. So we spent a lot of time on making sure that we are able to stay open where necessary. We've got rules and using social distancing, checking health, that type of thing, to make sure that we're operating entirely safely. So as we reopen in the markets that we were closed, obviously adopting those work practices, keeping in mind that the safety and health of our associates is primary.

Great. Great. Thanks. I mean that's encouraging. Certainly, that maybe not as disruptive as you might have thought. I guess lastly, and this is maybe more of a -- difficult to talk about, but still, it's a key topic of interest among investors, and I'm referring to the Steves & Sons litigation. Obviously, you can't talk about maybe the particulars of the case as it's ongoing, and you're in the middle of appeals process. But at the same point, the question here and just -- maybe just to give you the opportunity because it is, again, something that investors are aware of and consider. If there are any points or views that you want to communicate to investors that you think it's important to understand as it relates to this litigation, be it timelines, updated timelines around the appeals process, maybe just the ultimate downside scenarios as you may -- as I'm sure you've probably kind of thought through at the corporate level. And even to the extent that you're unsuccessful in your ultimate appeal, it's -- you've kind of talked to -- if you've talked to in the past, what that lost revenue and profit might be if you ultimately were required to divest CraftMaster's.

Well, question is a really good one. But probably more deep and more involved than I would talk about ongoing litigation. What I will say is when you think about the Steves' case, which is really 2 cases. The first case, which is the anti-trust case that you're mostly referring to, which in the appeals process, the appeals have been briefed. We're waiting oral arguments, which, due to COVID-19, have been pushed out a little bit. We expect them probably in the next month or so. And once the arguments, the oral arguments are made, we'll be awaiting the determination of the appeals score and there are a number of outcomes that could happen. We feel really good about our case there. There are a lot of reasons why we feel good about the case. I'm not going to get into those arguments here, but we do feel pretty good about that. And I can assure you, we're well-positioned for numerous outcomes that could happen there. None of them are -- yes. I'd just rather not get into handicapping them at this point in this environment. On the second case, which is the more recent case, it's really a contract case relating to the contract that underlines our relationship with Steves & Sons. We -- it has to do with the allocation of door skins. When there was a demand spike late last year, we needed to go on allocation. Steves disagreed with our methodology. I will tell you that we are now operating under a negotiated commercial agreement. So other than the fact that, that is still scheduled for trial in terms of how we're dealing with that, that's currently well managed.

Okay. Appreciate it. And thank you for answering it in any regard. I know it's a difficult topic, but it still is as part of my job to ask the questions that the investors are interested in. Appreciate it.

Absolutely. I appreciate it.

Well, that actually does it for me. We had a pretty decent-sized list of questions, and I don't see any questions coming in for the virtual audience. So we're about 30 minutes in. So 90% or so, 85%, 90% through the 35 minutes. So I think we'll call it here, about a good half an hour discussion on JELD-WEN and a good business update. So I appreciate it very much, Gary. You dialing in and participating in the conference and JELD-WEN's participation overall. It's a pleasure to have you and look forward to having you again next year. And with that, that is the last session of the conference of our -- over our last 2 days, we had 15 homebuilding and building product companies join us. And I appreciate, again, Gary, you closing out the day and having you on board. So thanks very much. Thanks for joining us. All of you who have dialed in. I look forward to seeing you again next year, either virtually again or in person. So thanks, and have a great rest of the day.

Thank you, Mike.