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

Good morning, everyone. My name is Arjun Chandar. I'm the homebuilding and building products analyst at JP Morgan. With us this morning, we're pleased to have CFO, John Linker of JELD-WEN. We're going to run this session as a fireside chat. I'm going to lead with a question for John around the company's recent earnings results, and then we'll walk through a series of Q&A. As a reminder, if anybody on the line has questions, please log into the event site at the [email protected], and we can answer your audience Q&A through that portal. With that, I'm going to turn it over to John to discuss recent numbers.

Thanks. Appreciate you having us. I actually just start with a very brief intro on JELD-WEN, for those who are less familiar. We're a global leader in windows and doors, about $4.2 billion in revenue. We actually just celebrated our 60th anniversary in business this past year. So a great long legacy of growth and over that time, we've built leading market positions in most of the markets that we serve, #1, #2, market positions in most of the markets that we're in. Our revenue breakdown is roughly 60% in North America, 28% Europe and the remainder in Australasia, which is really just Australia as our selling market there. So some nice global diversity around the world. We went public about 4 years ago and made some very nice progress towards our strategic growth drivers of delivering organic revenue growth, margin expansion, disciplined cash flow allocation and building a peer performing culture and really, all of this is underpinned by the JELD-WEN Excellence Model or JEM, which is our business operating system that's sort of pervasive throughout our business. And it's really all about eliminating waste and driving cycle time, which is one of our enablers to deliver productivity and continue to drive margin expansion. Pivoting to just our most recent results that you mentioned, we're very pleased with the strong fourth quarter total revenue growth of close to 8%. Margin expansion of 160 basis points or 190 basis points if we exclude FX on a core basis. So very pleased to drive that level of performance and what is still somewhat uncertain operating environment. While the demand picture in most of our markets is pretty healthy. The operating environment is certainly uncertain with COVID around the world. We also delivered a nice year on free cash flow over $250 million of free cash flow and now have leverage to -- net leverage down to 2.3x, which is the lowest point since the IPO. So overall, capping what was a very unusual year, we're happy to sort of exit the year with very strong performance. I'd say we even exited the fourth quarter with revenue sort of accelerating, even better than the number I quoted for the fourth quarter. We mentioned on our earnings call a few weeks ago that particularly in North America, we saw organic revenue really start to accelerate there in December towards the end of the quarter, with about 10% in the month of December and then starting early in the first quarter, we saw similar sort of trajectory, fewer shipping days in January. But if you normalize for that, we're in the same sort of trajectory. So I see a good demand tailwind heading into this year. We feel very good about our ability to deliver continued revenue growth and continued margin expansion here into 2021. And happy to kind of go deeper on any of those topics or markets that you'd like to discuss.

I want to start with the North American market. Obviously, our investor base is very familiar with the rapid rise in activity born by the pandemic, fueled by low rates and the desire for more space. Can you walk us through some of the underlying drivers for your business with regards to that North American growth that you alluded to in Q4?

Yes. So a little context. We're in North America, roughly 50-50 new construction and R&R. And our R&R revenue is really tied more to sort of heavy large-ticket renovation as opposed to sort of DIY-type R&R. So certainly, the tailwind of having the homebuilders start to report some nice order intake number, which will hopefully translate into starts will be a meaningful driver of our results as we move into 2021. We believe that given sort of labor constraints in the homebuilder side, supply chain, supply chain is probably not working quite as fluidly as it could. Not all of those orders that may actually result in completions in 2021, just given sort of the timing takes projects to complete. But I guess, our view is roughly around 10% new construction, single-family new construction completions, what will happen in 2021. And then R&R, hopefully in the kind of low single-digit range. So I think that those sorts of dynamics are what we saw in the fourth quarter for us, particularly as the quarter progressed to see nice balanced growth on new construction as well as R&R, working heavily with our retail partners. In terms of the R&R demand, you can see from some of the same-store sales that the retailers have been releasing in their results, they've had quite a nice level of demand, which has put pressure on us and other suppliers to sort of keep up with inventory demands at the retailers. And so in recent history, recent months, we've certainly seen strong demand from the retail channel as we're working with our retail partners to get their inventories up to targeted levels. And so that's certainly been one dynamic that's been underlying kind of the overall North America revenue picture for us is as we work to kind of complete that demand. But overall, I think quite positive about where we're heading in 2021 from a demand picture for doors and windows and building products in general.

And do you seek to maintain that 50-50 mix between repair/remodel and new construction? Or would you rather be tilted towards one market versus the other?

I'd say in North America, I mean, certainly, we'd like to expand our presence in R&R. I think that would be helpful for us in terms of continuing to build out that revenue base, which typically goes through the cycle. I'd say for us, growth opportunities were in North America, we think less about whether it's R&R and new construction, but more aware what are the macro drivers driving demand? And then how can we leverage our capabilities to play and really grow. And so a couple of growth opportunities for us in North America on the door side. Our fiberglass door program is really fantastic for entry doors. We've got a full system solution for an entire entry way of the home that can be sold into sort of renovation-type revenue or new construction. That's a product area that we're investing in heavily right now in terms of some capacity expansions and really help to grow that business substantially as we move forward. In our window business, we've got a nice presence in wood and vinyl windows, and we're in the process of launching a composite window product, which is really more of a material substitution play of a window that we think will really take some share in that marketplace. And again, that's something that could be a renovation product or it could go into new construction and well, depending on the price point. And so that has an opportunity to be a high-growth area for us and also very attractive margins. And then honestly also, I'd say, we did an acquisition about 2 years ago of VPI Windows, which is a business that sells vinyl windows into mid-rise multifamily projects, sort of 5 to 10 stories. We're really thrilled with the progress of this business, high margins, well above company average, high growth rate, well above company average. It's still relatively small, less than $100 million of revenue today. But that business is largely concentrated on the West Coast of the U.S. today, mostly new construction for that multifamily market. But that's a business that we think we could really use as a platform and grow and take -- and grow revenues as we look into other parts of the country and replicate that business model. So a few examples there. I wouldn't say we're fully beholden to just saying it's R&R and new construction, but looking for those niches of where we can play, where we can have differentiated growth at attractive margins, and that's where we're putting our investments for growth at this point in North America.

To that last point, on the recent acquisition, what kind of exposure do you have to multifamily within your residential footprint in North America? Because obviously, there's been a deviation in trends between multifamily and single family. So just curious to hear that exposure.

Yes. I'd say multifamily is still relatively small as a portion of our total North America segment. Excluding the VPI revenue and acquisition that I mentioned, the core sort of JELD-WEN product base typically would be sold into either single-family or multifamily and 3 stories or less would be sort of our core market. And so I think -- but still, I think the multifamily side of our revenue in North America is still a minority. We're probably more exposed to -- into the single-family new construction, single-family renovation projects.

Great. And then moving on to Europe. Curious to hear your thoughts on the evolution of that market, whether COVID has impacted European residential similarly or differently from what we've seen in North America. I'm curious to hear your thoughts there.

Yes, we're really pleased with the performance of our Europe business. We're -- just as context, we're roughly about 1/3 resi new construction, 1/3 resi R&R and a 1/3 non-resi in that market, and we operate in from Scandinavia, down to Germany, Austria, Switzerland and U.K. and France, really not in Southern Europe. Our business performed fantastic in the back half of 2020. We had sort of mid single-digit organic revenue growth in Q3, 8% organic revenue growth in Q4. This is driven by a heavy demand for DIY and R&R demand, particularly in Scandinavia and Central Europe. So really strong performance. And I'd say the new construction side, still seems to be a bit muted in Europe, maybe because of the COVID type of impacts and some of the lockdowns. But overall, I've seen a significant investment in people and investing in their homes and that sort of R&R and DIY sector business has been really strong. Our service levels have been good, which has allowed us to probably take up more than our entitlement of revenue in those markets at least grow faster than the markets have been growing. But overall, quite happy with our Europe business. We just finished, I guess, 6 quarters in a row of margin expansion over there in a market that's not growing overly fast. It's still economic conditions in Europe, as you probably know, are not -- I wouldn't say are super strong from a GDP or interest rate standpoint, but for us to be able to put up those sorts of results and against that backdrop, we're quite pleased with.

And then shifting gears to Australia. Obviously, they've been a little bit more aggressive in the way that they've handled the pandemic. How has that impacted demand in your footprint there?

Yes. So the Australian housing market, we're largely exposed to single-family detach, new construction. We don't do a ton of multifamily, and we don't do a ton of R&R. It's mostly that single-family new construction. That market has been in decline for the last 2 years, starting in late 2018, the government put in some credit tightening standards to sort of slow down price appreciation in some of the single-family growth that was happening, which resulted in a fairly significant contraction in starts over the last couple of years, which has been made a challenging market, and we've had to take some pretty aggressive cost action to rightsize our business there. In 2020, to your point, that overall weak housing market was compounded with some pretty aggressive COVID strategies where they shut the border to immigration, which typically, on average, there's a couple of hundred thousand people who immigrated into Australia every year, which drives -- certainly drives some of the housing growth and housing demand in that market. And so that's made 2020 even more challenging to not have that influx of demand for housing. What we did see late in the year was the government put in some stimulus programs around new construction and R&R for some credits for end consumers. And it worked really well. We actually pivoted to volume growth in the fourth quarter for the first time in 2 years as really as a result of that stimulus. And we're seeing similar sort of dynamics here in Q1 of this year. The stimulus, the current round of stimulus does run out at the end of March. And so we're waiting to see sort of that the government extends that to kind of continue to kickstart the housing market, and we're also waiting to see when they reopen the border because that will certainly drive some of the overall housing demand. So it's interesting. The underlying economy in Australia is quite strong, good GDP, good economic conditions, but they're sort of the self-created housing contraction that's taking place. And so we believe we're sort of at that inflection point. We're ready to start growing that business again. Happy with the performance we had in the fourth quarter, both revenue growth and margin expansion there after what was a fairly challenging first half of 2020 in that market.

Great. And then you're just thinking about future investment across all those markets, where do you see the best opportunities in the near term? Is it in Australia with some of that potential reopening pent-up demand that may be coming to the housing market there? Or is it more in the North America and Europe side?

I think in the very short term, our strongest market certainly will be in North America in terms of where we choose to put investment dollars going forward in terms of new product innovation or capital investment. I mean we want to grow all of our businesses. We think they're all fantastic platforms. I'd say for us, it's really -- I mean, we balance everything. I get through a lens of ROIC, and we look at where -- what will drive the best returns for shareholders in terms of putting our investment dollars and how will that return on capital for the company. And so I'd say in the short term, probably North America and Europe are best positioned for some of those capital investments. We've made some big investments in Australia over the last few years, brought on a new facility in Cirebon, Indonesia, which was a great and low-cost manufacturing site for us to supply door components into Australia, into Europe and the U.S. And so we've been investing in Australia, but I'd say in the near term, probably a little bit more weighted towards North America and Europe and focusing on just driving the best ROICs that we can.

We've got a question from the audience on the balance sheet. So I'm going to pivot there, and then we'll get back to operations. So how do you see the split between secured and unsecured debt going forward? And as you have unsecureds potentially available for refinancing. How do you -- do you have a view on refinancing near-term debt?

Yes. So we -- I guess, 2017 is when we did the majority of our current capital structure, which is a mix of term loan B and then a couple of tranches of unsecured that you referred to. And that makes up the majority of our funded debt, which is about $800 million of unsecureds and then last May or end of April, when the high-yield market reopened, we did do a secured notes issuance, not necessarily because we were seeking to use our secured capacity just because that's where the best execution was available at the time when sort of the high-yield market reopened. But certainly, as we think about the balance sheet and the capital structure, there's a couple of things we want to optimize. One is liquidity. We've -- we intentionally built up a fair amount of liquidity over the last 12 to 18 months to ensure we had plenty of liquidity to survive whatever liquidity -- whatever COVID threw at us. And I think we're in a good position there and probably don't necessarily need the full amount of liquidity we've got today, and we can start to think about how to optimize that either through deploying capital or through refinancing alternatives. And then we're looking at optimizing our overall cost of capital and our maturity structure. Currently, we do have a fair -- a few maturities bunched up in that 2025 range that we'll have to address as we look at sort of refinancing alternatives. But I'd say as a general rule, if we can lock in sort of longer-term unsecured debt and retain that secured capacity for more opportunistic-type financing, maybe financing an M&A event that kind of comes up that would be the structure. So with our ABL on the top and then the smaller term loan and then the majority of the funded debt and senior unsecureds that still leaves us a fair amount of secured debt capacity that we could deploy opportunistically and sort of a M&A type of situation if the opportunity presented itself. So I guess that's kind of holistically how we're thinking about the balance sheet and refinancing alternatives over time.

That's good color. And just sticking on that theme of liability management, you mentioned your net leverage is at the lowest level since the IPO, 2.3x. You have a stated leverage target out there. How do you think about capital allocation priorities in the context of all of the recent work you've done managing liabilities?

Yes. We're really pleased to get leverage down to 2.3x, lowest point since the IPO and was within our stated range of 2 to 2.5x. So that's a good spot to be in. I'd say for the last 2 years, capital allocation has been heavily weighted on internal projects. We see great investment opportunities with high returns on investment potential. And so CapEx has kind of been stepping up a little bit to fund some of those projects, and we guided towards a step-up in CapEx this year and our 2021 outlook as we see some nice high-returning internal projects. Beyond that, I'd say M&A is an area of success that the company has had in the past. We did 15 bolt-ons from 2015 to 2019 that are all returning very attractive ROICs sort of in the low teens type of percentage range. So it's well in excess of our WACC. And so we've proven that we can be a disciplined acquirer and drive value that way. And so I think as we look at capital allocation in the near term, the M&A market in our sector is certainly starting to get more active after taking the first half of last year off. And so thinking about strategic bolt-ons that would make sense in terms of filling a gap in our portfolio or helping us grow our business, but also financially assisting us with growth or returns, that's of interest. And then share repurchase is something that we have used in the past. We'll continue to use. We actually bought back 800,000 shares earlier this week. Our largest shareholder, did a secondary offering. And in conjunction with that, we repurchased 800,000 shares and which we felt like was a really good use of capital, and we've got a little less than $150 million remaining on the current authorization that we've got for current share repurchase. And so for us, capital allocation really comes down to looking at where can we get the best returns, whether it's internal project, M&A or the IRR on buying back our own stock. We look at that sort of deployment and trying to drive the best value. And from a leverage standpoint, where we're comfortable where we are in the low 2s. We'd like to keep it in that range. I'd say, in general, we're very committed to maintaining a current conservative leverage profile for the right opportunity on acquisition, would we stretch on the balance sheet a little bit to secure a really strategic acquisition with -- as long as we had good visibility to delever. I think that's something we would consider if we had very good visibility to delevering, like we've shown that we can do in the last year or 2. But for the most part, we're committed to keeping leverage in that sort of low-2s range, given the cyclical nature of housing that we're in, we think that's a prudent and conservative place to be.

Turning back to products. So curious to hear if there's any -- is there any difference in demand for doors versus windows. And then as a follow-up, pre-pandemic, we heard a lot about housing shifting to open floor plans, the demand for interior doors declining as a result of that. Have you potentially seen a shift in the paradigm back to more doors, more privacy within the home? Curious to hear your thoughts on that.

Yes. I can't say I've seen a huge divergence in sort of unit demand for doors versus windows. I think what we have seen more is more of a focus on value-add and mix opportunities. So we've seen strong demand for, for example, on our interior door business, some of the more contemporary door designs in North America for interior doors. Strong demand for some of those, which that typically comes at a higher average selling price for us, which would be favorable to revenue. So I can't say that I've seen more open floor plans driving fewer units or fewer revenue. I'd say also, an emerging area would be this sector of wall systems. We bought a business called LaCantina a few years back, which makes -- kind of has turned the traditional sliding patio door into a full wall of windows that opens indoor/outdoor living. And so that's an area where we kind of turned what was a wall with maybe a 3-panel sliding door into an opportunity for us to create revenue by creating that whole wall of windows, which creates more revenue opportunity for us. Similarly, on windows, bigger glass openings, which typically we can mix up as well on the revenue side and more features as well. So I think the overall pandemic situation of people being in their homes and investing in their homes and outfitting for school from home or work from home, certainly has been a net positive, but some of those macro more design features in terms of how people want to see their homes designed is probably equally an important driver for us to drive revenue growth going forward.

And then thinking about the product mix, your earlier comments around bolt-on M&As, potentially more transformative M&A. Do you see that more on the door side, on the windows side, combination of both?

I would say that we're certainly open in terms of where we go. The window market is certainly more fragmented today. So there's probably more consolidation opportunities just given that the nature of how fragmented the market is. And so we've seen a fair amount of consolidation in windows the last couple of years, anticipate that will probably continue. And so there's probably going to be more opportunities there. And then as we look at doors, certainly, we'd like to grow our door business to the extent that we can or adding on components to our door business that makes sense. And then in Europe, looking at that market, we're mostly just interior doors today. We do a little bit of windows in the U.K. and some exterior doors. But for the most part, it's just interior doors. And so as we think about growing that portfolio, there's an opportunity, I think, beyond interior doors. There's an opportunity to think, look at some additional geographic adjacencies there that might make sense. So in the near term, I would think our M&A strategy would be fairly close to the core, building around the door and window platform, similar products, adjacencies, geographies and that would be the priority. I think longer term, as we make progress towards our margin targets. And as we make progress, demonstrating that we can continue to manage leverage and generate strong free cash flow. We feel very strongly that JELD-WEN can be more than doors and windows. We think it will be very much a premier building products company. And so aspirationally down the road, we think there's some opportunities to look at synergistic M&A that might be outside that current core. But that, like I said, that's probably a little bit further down the road for us.

And then on the cost side, obviously, I think the entire industry, including yourselves, have benefited from significant margin expansion over the last several quarters. Are there any other idiosyncratic cost-cutting opportunities that you see to further accelerate that margin momentum?

Yes. So about 2 -- a little over 2 years ago, we put a framework in place for our self-help margin improvement plans, which is a $100 million savings target through JEM, JELD-WEN Excellence Model, just the organic productivity of improving cycle time and improving labor utilization and then another $100 million target related to our global footprint -- operational footprint. And reducing the number of rooftops and modernizing the rooftops that we've got, modernizing the equipment and the technology that we've got in our facilities. We're making solid progress against both programs. JEM is delivering productivity benefits year in, year out. We're seeing labor as a percent of COGS has definitely come down meaningfully the last few years, and we think there's more room to run. So we would definitely say that JEM is working and delivering productivity there. And then on the fixed cost side, we've made some nice progress against that $100 million target for the facility rooftop program. We've said that publicly that we've completed about 1/3 of that $100 million target. And so by the end of 2021 compared to that 2018 base year, you'd expect to see 1/3 of that savings running through the P&L. And that means there's a lot more to go. A lot of the early work was in Australia, where we closed 10 rooftops starting since 2019 to really offset the market headwinds that we talked about earlier. That's helped us hold margins there quite nicely. Now much more of the focus is in North America around the facility modernization program. And then down the road, there's probably some opportunities to look on Europe. So in terms of our ability to continue to drive margin improvement, I think the answer is solidly yes, between sort of our productivity initiatives. That will be ongoing and never really stop and as well as these kind of more structural fixed cost reductions that we're working on, we see room to run on the margin expansion story for the foreseeable future.

And then we've heard over the last several months in the housing industry, a lot of concern around lead times and supply chain disruption. Curious to hear what you've seen with regards to your business and its involvement in the new construction market, have there been delays in lead times and being able to execute on your business, so to speak?

Yes. I'd say that right now, our lead times are quite competitive and very strong. Certainly, earlier in Q4 as California went into earlier -- another round of lockdowns related to COVID. That gave us some temporary constraints on just how quickly we could respond to customer demand and making sure we had the right labor in our facilities. But sitting here today in Q1, I think our door lead times are very competitive with the whole industry. And then I'd say on the window side, our lead times, we believe that we're actually better positioned than our competition and our wood and vinyl lead times are averaging anywhere from 3 to 6 weeks, depending on which product line you're talking about. And my understanding is that the vast majority of our competition is above that level. And so we think we're well positioned to grow with the market this year with having those attractive lead times in our North America business.

And then finally for me, just a couple of cash flow housekeeping items. Curious what are the internal kind of capital needs and CapEx projections for your business moving forward in 2021? And then any seasonality that we should be wary of with regards to working capital?

Yes. So on working capital, we absolutely build working capital typically from January until July, which is sort of our seasonal build cycle, given the nature of seasonality of our products in the markets that we operate in, and we generate the majority of our cash flow from August until December from a working capital standpoint. And so as we grow organic volumes, there will certainly be an investment in working capital this year to support that. But I think JEM, our business operating system will help us be able to lean out inventories over time and really have working capital via another driver of cash flow performance going forward. But on CapEx, we guided to $135 million to $145 million for 2021. I think over a longer period of time, you should think about sort of 2% to 2.5% of revenue as being a good guidepost for CapEx for us, which is roughly half maintenance and sustaining and half sort of growth and growth and efficiency-type CapEx. But clearly, in 2021, given some of the large projects and cost reduction initiatives we got going on, it's stepped up a little bit here in the short term, but longer term -- and these are -- and if we're spending those dollars, these are attractive paybacks with high-return projects. So we feel good about making the decision to invest that level of spend.

Great. That concludes my set of questions and the questions that we received from the audience. So thank you very much, John. Really appreciate your time.

Great. Thanks for having us.