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

Good morning. I am Matt Bouley, Barclays U.S. homebuilding and building products analyst. With me this morning, we have John Linker, CFO of JELD-WEN. Thank you for joining, John. So we're going to start out with an overview of the company provided by John, and he'll go into some of the recent trends as well. For anyone listening, feel free to ping me on the side if there's any questions you want asked. Otherwise, we'll just go right into Q&A. And so with that, I will turn the floor over to John.

Great. Thanks, Matt, and appreciate you guys having us, and good morning, everybody. Yes, I'll start with a brief overview of the company for those who are less familiar with the name, just the company profile. JELD-WEN is a global leader in windows and doors. We generate about 70% of our revenue from doors. The rest is from windows and ancillary products. We've got #1 market position in the vast majority of the markets that we serve, operating in 20 countries around the world. From a revenue standpoint, a little over half comes out of North America. The remainder comes out of Europe and Australasia. And the value creation thesis here, it really comes out of 2 things. I mean there's a self-help margin improvement story that we've got a lot of that in our control and visibility to how we're going to get there. And there's probably some upside from market tailwinds and some pricing dynamics as well that would drive some potential upside for the value creation as well. A little bit of background on the company. Founded in 1960 by the Wendt family. They did a great job growing through acquisition over the next 50 years. They did 40 acquisitions, consolidating a number of smaller businesses in windows and doors around the world. Business transferred to private equity in 2011. And then since 2014, we've been on an operational improvement transformation. And you can see that in the financials from 2013 to '19, the revenue, compound annual growth rate was around 4%, while the EBITDA compound annual growth rate over that same time period was around 18%. So some good financial progress on the margin side. Company went public in 2017, and then fast forward to mid-2018, just about 2 years ago, we got new leadership from Gary Michel, who joined us from a long career at Ingersoll Rand and Honeywell as our CEO, and then I moved into the CFO role shortly thereafter. And so it's a new leadership really trying to accelerate and transform the business. And then how are we doing that? Really 3 areas on the -- accelerating the transformation. One, on the top line. Clearly, we're focused on reinvigorating the top line growth through new products, innovation that we've got in a number of areas, share gain, targeted share gain as well, and then notably, a very disciplined approach to pricing and making sure that we earn a fair return for our invested capital from a pricing standpoint. And the piece of our story that's probably the most well known and well covered, it would be the margin improvement side. And all of that's really based off of a foundation of our business of operating system called JEM or the JELD-WEN Excellence Model. This is our standard work, our tools of how we go to business and how we operate every day and how we operate in our plants and in our offices. And through JEM, there's really 2 areas of savings that we're driving. One, I'll just describe as sort of organic productivity initiatives, so just getting lean in how we manufacture around material, labor, overhead, freight. Using the JEM tools to just drive year in, year out disciplined productivity in our operations. And in our results that we posted yesterday, we saw some nice progress in that area. The other area would be in our footprint rationalization and modernization program, which is something we sort of described to the investment community about 1.5 years ago for the first time, which is taking JELD-WEN's history of acquisition, which resulted in 130-some-odd manufacturing facilities around the world and looking how to lean out the number of rooftops that we have. And it's not just about reducing the number of rooftops. It's also about modernizing our production processes along the way, looking for the best-known way across our platform, the best-known technology for making doors or windows as the case may be, and then implementing that into our facilities as we also consolidate the amount of square footage that we have. That's a $100 million savings program that we talked about for the first time about 1.5 years ago, as I said. We've actually known about 1/3 of the square footage that we need to drive towards that target. And as this year progresses, we're starting to see really the benefit of that. And we're moving into the -- sort of the next phases of our footprint rationalization program, which will drive the savings over the next few years. And then the last piece of the transformation is on the capital deployment side. We've got a good track record of the M&A here. Since 2015, we did 14 bolt-ons, pretty attractive valuations. Collectively, those acquisitions are delivering ROIC in excess of our cost of capital, and they are very strategic as well, helped us with some new products in certain markets. And that's something that as we get through this COVID disruption and we see leverage come down a little bit, certainly, M&A would be an area of capital deployment that we hope to go back to, although it's been a little quieter here since the last year. And then also a very disciplined approach to share repurchases. We look at returns-focused evaluation of repurchasing our own stock versus risk-adjusted return of M&A. We've got authorization of around $170 million right now. In the very short term, though, our leverage is slightly above 3x, and we're focused on sort of working down leverage into the mid-2s before there's a whole lot of capital deployment for either M&A or repurchases. So that's a bit about our story and the transformation. Recently, we announced earnings yesterday and came through sort of the COVID disruption fairly well. Certainly, the top line was challenged in the quarter, and we can dig into that a little bit by region in Matt's questions. But overall, the top line was down about 11%. But over the same quarter, we were able to generate 130 basis points of margin expansion. And it wasn't just sort of a onetime take a much of cost out to avoid the COVID top line impact. It was a result of sort of multiple years -- or multiple quarters of work of pricing, productivity and kind of seeing that all to come together even in an environment that was pretty challenged from a top line standpoint. So with that, I will hand it over to Matt to go through some Q&A.

Great. Thank you, John, for that overview. Plenty of areas in that to dig into a little bit deeper, but maybe we'll start out kind of jumping right into some of those near-term trends that are kind of hot off the presses from yesterday. Clearly, strong margin results, and there's a lot of pricing flowing through that. And we'll touch on that separately as well. But you've got about 300 basis points of price that flowed through in the quarter. You also said, I think, that revenues were up slightly in July. And that was in North America and Europe, not necessarily in Australia. But I'd be curious, just given you've got some price in that as well, if you could talk a little bit about where volumes are going, kind of how volumes trended from April in doors and windows and curious if there's any sort of weak points on the volume side that have yet to really pick up yet.

Sure. Yes. So overall, for the quarter, volume mix, as we reported, which has the impact of volume and average unit price in it, was down about 13%. And then we had about 3% of real price, as you alluded to, to kind of get us to an organic revenue decline of 10%. So as you think about how the quarter progressed, clearly, April was very challenged. We had -- in Europe, for example, we had our facilities in the U.K. and France that were completely shut down for April and the first half of May. And so for the quarter, those -- that business was challenged heavily by that. And then we had similar circumstances but maybe not quite to say extreme as kind of rolling across U.S. and in Australia as well during the quarter. As things progressed, certainly, we saw a couple of -- I guess a couple of dynamics. Our -- the customer base that was probably the most resilient, and North America was our retail customer base, where for the quarter, revenues were only down sort of low single digit, North America, our retail. Some of that is an average unit price impact because there was a significant mix shift towards stock units as the retailers were really focused on trying to keep their stock units on the shelves and as opposed to special orders. So there is a volume and a mix element at play there. But even that sort of improved as the quarter progressed. And then in our other channels in North America, we talked a little bit about this on the earnings call yesterday, our traditional wholesale channel in North America, certainly some different dynamics, depending on which product line and which geographic area of the country you're talking about, that the Northeast was challenged in the quarter given the most restrictive COVID shutdowns and some of the New England and New York, New Jersey states. But then we had markets in the south and west in the traditional wholesale that were just kind of plowed right through all the disruption. And now they're the ones facing more of the virus impact. And within that, we saw a better performance out of our doors business in our traditional wholesale channel. We actually saw some revenue growth there. And so if you strip out the pricing, certainly, that would imply volumes are probably still flat to maybe slightly negative. And our windows business volumes were down more significantly in the quarter given a lot of our traditional wholesale window business is going to be tied to more of an architect-driven type of transaction, where it's a project-based work. And a lot of -- those were the types of projects that were probably most impacted or most pushed out during the second quarter. But as the quarter progressed and we got to June and we did see positive revenue growth out of -- slight positive revenue growth out of both North America and Europe. Volumes were still negative kind of given that. I'd say our -- again, our doors business in June was probably up more than our windows business. So doors probably slightly positive, windows still negative year-over-year in North America. And then inflecting into July, sort of a similar dynamic where we saw top line growth in North America and Europe. Australia is still challenged, and that's an area we should talk about a little bit. There's an area of risk going forward where revenues were down overall. But yes, I would say, certainly, the biggest strength we're seeing right now, to sort of summarize your question, would be North America door business, either the stock business and retail or the traditional wholesale channel. Windows is still a little slow to come back. I think, some of that, again, we attribute to sort of the project-based nature of how that business works and the lead times that are involved in windows. And clearly, the recent homebuilder order news should be good news for our window business as we start to look out a quarter or 2 as that flows through the system. So we feel optimistic about where it's going. But here in the short term, it's still a bit of a revenue headwind. And then Europe has been pretty resilient. There's certain markets in Europe that -- and when I say resilient, I'm saying on a relative basis, it's not a hugely -- huge area of growth. But there were areas of Europe that never really had much of a stay-at-home order, particularly in Scandinavia. And so we saw those markets remain fairly resilient, and we've got about 1/3 of our business in Europe that's nonresidential, and that kind of non-resi construction has stayed pretty resilient through the quarter.

Got it. Okay. So a couple of points in that. Particularly, you alluded to the mix issue in the U.S. with strength in retail and even within retail, a little better volumes out of the stock side versus special order, which in a way is more encouraging, considering you still expanded margins in the quarter despite these negative mix issues. So when we think about the U.S. new construction environment improving so much and you guys having a little more exposure there via traditional distribution, how should we think about that mix impact, the 200 basis points you called out yesterday, mix impact in the quarter? Where can that get to in the second half, assuming some of these dislocations that we experienced somewhat normalize?

Sure. Yes. So there's a couple of aspects at play in the North American mix impact in the quarter that you're alluding to. One was sort of the stock special element at retail where we saw in both doors and windows that the sort of -- both the POS data as well as the orders and our shipments to retail were much more heavily impacted in the special order area than they were in the stock SKUs. And so that has an average unit price impact on us and a corresponding margin profile impact. And we attribute that largely not to consumers or homeowners sort of trading down to a lower-priced product, we really attribute that more to contractors that are out. They had open projects going on. When this COVID stuff came up, they're trying to get the project completed so they can get paid, and so you see they're just kind of using what product they can get off the shelves at the retail channels as opposed to taking the risk of waiting for lead times for a couple of weeks on a special order. So I think -- and then there's some other mix elements at play I've just -- as you alluded to, retail versus traditional and the profitability of those channels that impacted us as well. So how does this play out from here? I would say, as we think about the very near term and the data we're seeing POS from retail, we think the mix headwind will still be there in the third quarter, probably a little less severe than it was in the second quarter. But it's still going to be a headwind. And then as I think -- as we start to think a little bit further out than the third quarter, maybe fourth quarter and then early next year, certainly, all of this newbuild on the home -- new orders on the home -- new construction side, and just once the inventories get caught up at retail, the combination of those 2 things should bode pretty well for this mix headwind going away. And I'd like to think it becomes a tailwind to margins as opposed to not just being a headwind. But at least in the very short term, it's still going to be a challenge for us on the margin line here over the next quarter, we think, but has opportunity to improve from there.

Got it. Okay. That's helpful. And so on the pricing side, just thinking about like-for-like prices, obviously, there's -- you took some pretty meaningful actions earlier in this year, which showed through in the quarter. And certainly, there's some mix impacts as well. But would you say that kind of during the peak of the disruption, was there any slippage on the price side at all? Or did we kind of get through this sort of unscathed and can kind of look at these price increases that are currently flowing through as being relatively consistent for the balance of this year?

Yes. I mean, as we report our price and our earnings reports, it's a true sort of like-for-like sort of stripping out the impact of average unit price as best we can. And I would say, we did see a sequential improvement in pricing from the first quarter to the second quarter as we expected, as we got sort of a full quarter of the North America price increases that went into effect sort of rolling through the first quarter. And so from where we sit today, that price has been deployed, and we're getting sort of what we expected to get. And as we think about the second half of the year, I don't see anything that would indicate any slippage in that in terms of pricing for the North America segment. And then we're approaching the time of the year where on the traditional side of our business, typically in the fall is when we would announce price increases that would take effect either in the beginning of the year or next building season. And so we'll be, over the next couple of months, making decisions about what we're going to do there to kind of continue to drive pricing going forward. In terms of the overall portfolio, I'd say the only areas of slippage on pricing that we saw at all was a little bit of challenges in Europe, just given the U.K. and France markets being so closed and being so fragmented and then in Australasia where the market has been pretty weak now for a couple of quarters. That's become a somewhat competitive market for price. And you can see that in the numbers we announced yesterday, not materially, but we're not getting positive price in Australasia right now. So I would say the North America pricing story as it relates to sort of what you saw in the second quarter being a decent proxy for what we would hope to deliver in Q3 and Q4 should be sort of status quo based off of what we know today.

Got it. And so this came up a little on the call yesterday, but I'd be curious to hear any additional details just -- regarding windows because we've had such a sharp V-shape to all this on the new construction side. And a lot of companies have talked about difficulty attracting labor in this environment in general, just labor being tight, and then obviously, what's going on with unemployment benefits and people sort of thinking about whether or not they're willing to come back to work or not as a result. So when you kind of layer those 2 together and what we've seen with windows in the past around labor shortages when demand swings around, it's something that investors have a question about. So I'd be curious, any additional details on how you're seeing that labor environment involve -- evolve with windows manufacturing?

Yes. So as we think about our windows business, I mean, clearly, with volumes being off year-over-year pretty meaningfully in the traditional channel, we did have to adjust labor to some extent to withstand that. But we did use that downtime to continue to build stock where we can, which is really more -- something we were able to do on the vinyl window business. We've got a stock build plan that we've been working on all through the sort of winter and spring. And so I'd say we've -- to the extent that new orders were slower, we were able to sort of level load some of that demand snapback by building stock during the downtime. And so on our vinyl window business, that's something we've been very focused on. And then I would say, on the wood window side, a little bit harder to build a lot of stock on wood windows. Typically, those are going to be more of a custom type of a product. And so that's an area where we will have to be careful as demand comes back to not disrupt our operations. I'll just tell you that our windows, while we did have some operational challenges in the third and fourth quarter of last year in our North America windows businesses, which were mostly tied to labor, as you suggested and sort of balancing labor demand, I would say, really, this whole year, we've been very healthy -- happy with the health of our windows operations from kind of a on-time delivery, lead time and all that. I think the risk areas are around absenteeism in the plants, and that's probably an issue not just for windows but doors as a whole. I mean the demand is probably there, but if we have virus impact in a certain region or a country or our associates don't feel comfortable coming to work for a couple of weeks, clearly, there is a risk for us. And we're working very hard to implement social distancing and everything we need to do to create a safe working environment for our employees. So I'd say in the near term, I'm probably less concerned about ramping up -- given the stock build program that we did, I'm a little less concerned about ramping up on labor to meet demand than I am about just the risk of sort of a second wave and a flare-up and what does that do to our capacity constraint in a very acute period of time. But we've got really good operational leadership looking out for our windows business now, and we demonstrated some sequential margin expansion and some year-over-year margin expansion, even though volumes were quite a bit lower there. And so for -- I think, for the investment community, obviously, we got some more -- we need to prove it for a couple more quarters that the business is healthy, but it's certainly on the right trajectory. And the circumstances that led to the challenges we've had in the second half of last year are not going to recur this year in terms of kind of the specific lead up to sort of operational challenges that we had last year. We don't foresee any of that happening again this year.

Got it. Okay. That's helpful. The productivity side, I think yesterday, you mentioned that the quarter saw about 100 basis points of benefit. And presumably, that would be split between the rationalization initiatives beginning to kick in as well as the ongoing JEM initiatives. So as the rationalization, in particular, ramps, curious if you could talk a little bit about that, where that 100 basis points can go. Should we expect to see that productivity becomes a bigger piece of the margin benefit as we move through the back half?

Yes. So there's a couple of elements at play. In our productivity number we talked about yesterday, the 100 basis points came from a couple of different areas. One would be the -- just the productivity initiatives, JEM initiatives in our plants, sort of just material and labor efficiency. Also, good work by our sourcing team, our global sourcing team to kind of continue to drive sourcing productivity, and we saw some benefits there as well. And then, yes, as you alluded to, we are starting to see sort of the benefits roll through of our footprint program, rationalization program. So sites that we consolidated maybe late last year, and we now have that redundant or secondary capacity off-line. We're starting to see the benefit of that. So all that came together for about 100 basis points of margin in the second quarter, which -- in an environment where volumes were lower, I think it's notable. I mean it's tough to drive positive labor productivity when volumes are challenged. So where can we go with that? I think as we approach the second half, we got a couple of things at play. First, in North America, we do have some favorable comps. We had some operational challenges in our North America window business last year. And so just from a comparability standpoint, if we just deliver productivity, we should pick up some nice margin benefit in the North America segment from just lapping what happened in the second half of last year. And then we've got a strong pipeline of projects that we expect to sort of drive more productivity in the quarters and the months ahead. And as we exit the year, really starting to see -- probably by the fourth quarter, starting to see even more of an acceleration from some of the benefits of the footprint rationalization program. So I'm not going to -- at this point, probably won't put any basis points around the third and fourth quarter in terms of where it can go, but other than to say we'd be disappointed if we're unable to deliver more than what we did in the second quarter based off sort of the visibility that we've got sitting here today and the opportunities we've got in front of us. So I think we've got a good opportunity to continue the margin improvement in the second half. And a lot of that's going to be driven more out of the North America segment.

Got it. Okay. That's helpful. And so I guess the last piece, the margin side. We discussed the obvious volume impact and then productivity and mix and pricing. There was obviously some fairly large savings on the SG&A side in the quarter. Certainly, you would -- previewed those with your Q1 release. I think the numbers ended up coming in a little stronger than the $15 million you had talked about at that time. But just curious as we think about the second half as we're kind of rolling up our thoughts around margins here, what kind of costs are going to come back into the system on the SG&A side? And should it still be a tailwind year-over-year? Or I guess how is that part going to flow through?

Sure. So in the second quarter, we did have some temporary cost actions that took place, furloughs, leave, salary reductions, and that drove a lot of the savings. And we needed to do that to offset the volume weakness. There was also some more permanent actions that we took that will drive savings in future quarters. But as you think about sort of the second half of the year, at this point in time, we're generally not thinking about those same extreme measures of furloughs and leave and salary reductions based off the demand picture we're seeing. We do expect to see some savings from having our people not traveling as much and discretionary spend being down and rolling through some of the other more permanent headcount actions that we took. Order of magnitude, if the second quarter was $20 million of savings, I certainly would not expect to see that every quarter for the rest of the year, probably looking more in the $5 million-ish range year-over-year in each quarter, the second half of the year as we see those savings roll through. And as we get more visibility to demand being strong and no risk of COVID resurgence, obviously, we want to continue to invest in the business. And if we feel good about demand and where the volumes are coming in, we may lean back into the SG&A a little bit more, but you'd have the benefit of volume to offset it. So -- but we're ready. We got the levers to pull if volume does fall off of a cliff due to COVID in a certain region or market. We're ready to pull levers if we need to on the SG&A side. But at this point, I would say the benefit in the back half is going to be more moderated than what you saw in the second quarter.

Sure. Okay. Got it. And as we're getting down to a couple of minutes left here, since you brought it up in the opening remarks, you talked about M&A a little bit, which is something that's been obviously a little quieter for you guys over the past year. I'm just curious since you brought that up, is it something that's kind of coming back to the forefront, I guess? And maybe in a post-COVID world, are you finding that the pipeline is becoming more active?

It's a muscle that we've developed that we don't want to lose the muscle memory on in terms of the integration, the sourcing, the cultivation. And so while we haven't been actively announcing any new deals, certainly, we're monitoring the market and cultivating relationships where it makes sense. So if there's a property that strategically is a high priority and then financially is a no-brainer, that's something we would be ready to act on. I'd say we're -- in the very near term, we got a lot on our plate operationally. We're really focused on the footprint projects that we've got going on, driving the productivity and getting leverage down. And so I think anything in the very short term has got a very high bar on it in terms of M&A just because of the operational risk of trying to layer that on to everything else we've got going on and then making sure that we've got leverage coming down. But going forward, as we start to see leverage come down, and particularly into next year, we like our platform, and we like -- we think the leadership team is capable of really using M&A as a tool to drive some outsized growth. And there is some -- certainly some product lines and verticals where we think that would make a lot of sense that we're monitoring and looking for good opportunities, and we'll continue to do so as we move forward.

Got it. Okay. Well, with that, I think we're right at 10 of 12 here. So we can wrap it up there. So John, really appreciate you joining.