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

Good morning, and welcome to everyone that has joined us today. I'm Susan Maklari, the Goldman Sachs' homebuilding and building products analyst. Joining me this morning is John Linker from JELD-WEN, JELD-WEN's CFO. For those of you who aren't familiar with JELD-WEN, the company is one of the world's largest manufacturers of doors and windows, operating 20 -- operating manufacturing facilities across 20 countries in North America, Europe and Australia. The company designs, produces and distributes an extensive range of interior and exterior doors, windows and related products for residential and nonresidential buildings. Today's session will be in the form of a fireside chat. Questions can be submitted to me through my email, [email protected], or through the webcast. Before we begin, we are required to make certain disclosures about public appearances on Goldman Sachs' relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We are prepared to read allowed disclosures for any issuer upon request. However, these disclosures are available in our most recent reports available to you as clients on our firm's portals. Disclosures and updates to those disclosures are also available by ticker on the firm's public website. Finally, the views that are stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. And with that, I'd like to welcome John. John, I'm going to turn it over to you to maybe give us a quick overview and an update on JELD-WEN, and then we can go into some questions.

Great. Thank you, Susan. Appreciate you hosting us, and a good introduction there for JELD-WEN. I'll add on just a little bit more. We're a little over $4 billion in revenue last year in 2020. About 60% of our revenue comes out of our North America segment and the remainder out of Europe and then the smallest piece out of our Australia market. Good track record of performance the last 5 years, about a 4.5% revenue CAGR and about 7.5% earnings CAGR, so driving both top line and bottom line improvement. And as we talked about on our earnings call last week and as we'll talk about more in our first Investor Day next week, we're driving a multifaceted strategy for growth on revenue growth as well as operational improvement programs to drive margin improvement and then a very disciplined capital allocation process, which we think will, over time, compound the benefits of the -- of that cash into additional shareholder value. So we've got a pretty exciting story that we're pleased to be able to share with you all. And then more recently, we did announce earnings on April 30 for our first quarter. Strong start to the year with 11.6% revenue growth. We did have a couple fewer shipping days in Q1 of this year than last year. So that if you were to extrapolate that out, it won't be more like mid-teens-type revenue growth in the first quarter on a days adjusted basis, and we grew adjusted EBITDA by 31% in the first quarter year-over-year. Cash flow also improved in the year. So we're excited in the quarter, and we're excited about the start to the year. I think it demonstrates good consistent performance in terms of top line and bottom line improvement, and we also took our outlook up for full year 2021 in conjunction with that earnings release last week or 2 weeks ago on April 30. So we're well positioned to take advantage of some favorable end-market demand dynamics, which we can dive into a little bit more as well as some of our internal initiatives, which we think will drive that organic growth as well as margin improvement. So I'll pause there, Susan, to see where you'd like to go with the Q&A.

Yes. Sure. So why don't we start? You mentioned that you obviously recently updated your outlook for the year. You guided to revenue growth of 8% to 11%. Can you talk to us a little bit about how you're thinking about that in terms of volumes versus price and mix, especially maybe in North America, but even in your other regions as well?

Sure. I mean if you take that 8% to 11% revenue guide and sort of parse it out by segment, maybe, first of all, certainly, North America, with the favorable housing dynamics that we've got going on here, would be sort of at or above the high end of that 8% to 11% range. So our strongest growth segment, and that's made up of both price and volume. And then Europe would be more sort of on an organic basis low single-digit-type growth. And then similarly, in Australia, on an organic basis, sort of low single-digit growth there. And then we've got a bit of a tailwind from FX and the guide as well. So as we think about the different moving pieces, I guess I'd start by saying that we're well positioned to deliver the revenue guide and perhaps outperform it. I think sitting here in May, there are still a few sort of uncertainties in the year in terms of just how the supply chains are working around the globe and how fast completions are going to happen on housing starts. If you follow sort of starts versus completions, completions have definitely lagged starts meaningfully, and we believe that's due to labor availability, supply chain availability. And so while we're very bullish on the U.S. housing market and North America demand, in general, what's a little bit less certain is how quickly all those homebuilder orders and starts are going to manifest into completions, and our revenue tracks with closer to completion. So I'll start by saying that we're well positioned to deliver, if not outperform, the 8% to 11%. But admittedly, we've been a little bit conservative with our guide on the revenue side, not knowing exactly how quickly the -- all the completion activity will flow through the market. But the demand dynamics are very strong from that standpoint. But embedded in the 8% to 11% guide, you've got low single-digit or low single-digit FX type of tailwind. You've got low to mid-single-digit price, and then low, mid-single-digit volume growth. Again, that's a blended number. The North American number would be higher than that, certainly, as you think about sort of the mix of our performance across our segments. So we're excited about the start to the year and hopefully in a position to outperform that revenue guide as the year progresses and we get more visibility into sort of how quickly the housing market can keep up with the demand that's out there.

Yes. John, one thing that we've talked about in the last couple of quarters or so is inventory positions. Can you talk about, across your different channels, how the inventories are, especially maybe thinking about your retail versus your wholesale channel? And what that mix is looking like for you as we move through the year?

Sure. In North America, we've got the most visibility to inventories in our retail channel, which is about $1 billion of our North America segment. So it's meaningful for us. And throughout COVID, starting last summer and even here into the first quarter, what we've seen is very strong POS data through retail. And it's really outpaced -- throughout the last 3 or 4 quarters, it's really -- the POS data has outpaced our shipments into the retail channel. And inventories are still below sort of where they were on a prior year basis or even going back to 2019, I think inventories in the retail channel are still below as sort of suppliers are working to keep up with the demand. We're seeing more proactivity going through that R&R channel. It's definitely improved. I think we're starting to see much closer -- even from the time we ended the first quarter until now here in May a bit more stability in the inventory levels, in the channel and getting those stocking levels back where our retail partners would like to see them. And what that will enable is we'll start to see more special order activity, hopefully. And that's kind of been what's been lacking the last couple of quarters as we've seen a much greater mix of our revenue and unit volume going through retail and stock units, which is just -- it's a bit of a lower-margin product for us versus special order units, which would be a higher-margin profile and a potential mix tailwind. So we're not yet to the point yet where we're seeing the retailers run significant promos on special orders. When they start doing that, that will be a signal that we've got an opportunity to pick up some of that higher-margin mix shift in terms of the special orders. So for now, it's not yet a tailwind to us. It was certainly -- the mix headwind was a bit of a headwind in late 2020, and we're hoping that here we'll flip here in 2021. And now that we've kind of got inventories stock back to where the retail partners want them, and we can start realizing our normal mix of both stock units as well as special order units.

Yes. And John, one of the things that we've been hearing from a lot of the builders in the U.S. is the fact that windows are one of the things that have been perhaps most delayed or had impacts as we think about the supply chain. Can you talk about the opportunity that represents for JELD-WEN? Have you seen the ability to kind of incrementally gain some market share over the last couple of quarters as a result of that?

Sure. Yes, I've heard that anecdotally as well that windows is one of the harder things for the national homebuilders to get right now. And as we talked about on our earnings call on the 30th, one of the things that we're very pleased with right now is the position -- the service position of our North America windows business. We've invested quite a bit on operational improvements and the demand planning, labor planning side as well as some automation investments that we've been making in our windows business. And right now, depending on the product line and the region of the country that you're talking about, we believe we've got very strong lead times relative to competition, generally in the less than 6-weeks range, which is -- it's above historical averages, but still relative to competition, we think that's very well positioned. We've heard some other window suppliers that are out there that are 20 weeks or above in terms of windows lead times, which it's hard to build homes, if you kind of wait 20 weeks or more to -- for your windows. And so you're right, we have been well positioned to grow with customers who want to grow with us on the windows side. And and so having these strong lead times position has really given us the ability to think about where do we want to allocate that manufacturing capacity, and we're allocating that manufacturing capacity to high-margin customers that we believe will benefit the company in the long run, and we're seeing that flow through our results in the windows business. We demonstrated another quarter of margin improvement there. We've got some price, we've got some volume, and we've got some operational improvements. And so I think we're well positioned to continue that. We -- I mentioned some automation investments that we're making. Some of those are already online and some of them coming online later this year, which will add and expand our effective capacity, particularly in vinyl windows in North America, which will give us -- make us well positioned to hopefully continue to grow that business as the year progresses and into future years as well.

Yes. Okay. And then with the guide, John, you left the EBIT margin at the midpoint of about 11% -- at least the EBITDA margin about 11% or so. And I think one of the factors that everyone's been talking about is obviously inflation and the price cost that's coming through this year. Can you talk a little bit about how you're seeing the cost structure and how you're thinking about offsetting that?

Sure. So in our original outlook that we gave in February, you're right, at the midpoint, it was around 11.2%. I think EBITDA margins for the full year when we updated our outlook on the last -- on the 30th at the midpoint, the margin was similar in that sort of low 11% range. And so even though we took up the top line, we didn't take up the margin rate. Really 2 drivers to that. One driver is FX. We've got an FX hedging program in place, so to the extent that we pick up a point or 2 of top line growth from FX, we would not expect that to flow through at a high EBITDA rate, just given our FX hedging program that sort of will wash out some of the translation benefit there. So that would be a little bit margin dilutive if we see a big tailwind from FX. And then on the other side is inflation, as we mentioned. It is significant. It's a challenge right now, both on material as well as freight. And just from the time we made our initial outlook in February to our updated outlook at the end of April, we added about $40 million of inflation to our guide -- to the midpoint of our guide, and that's significant. We've got price to offset that. We believe we've put through another round of pricing in North America. We've got some pricing coming online in Europe and Australasia as well as the second quarter progresses. So it's certainly nice to have that additional price in place, but likely won't necessarily be much of a tailwind to margins beyond what we had originally included in our original guide, which was a price-cost tailwind, but we need this additional price that we've put through to offset the inflation that we're seeing coming at us at this point in the year. So that's the reason that the margin rate didn't move up from the sort of initial guide to the second update on that. But there's an opportunity depending on how much price we do realize and how the inflation pans out, there's an opportunity for us to outperform that.

Yes. Okay. And can you talk about some of the key areas where you're seeing some of this inflation? What are some of the inputs that are moving more than perhaps some of the others?

Yes. It's a -- it does vary quite a bit by market. But in North America, one of the bigger challenges right now is on the millwork side, which is wood components that we're primarily getting out of Asia and, in some cases, South America. This is millwork that's going into our door business. We're also seeing inflation in logs. We have our own sawmills in North America and Europe. So typically, we're buying logs and producing some cut stock ourselves, and we're seeing some inflation in logs. Vinyl, for our vinyl window business, has also been an inflationary issue. And then steel is a challenge for us. We did -- we do have some strategies in place that were -- allowed us to offset a lot of the inflation that the market is seeing in 2021 on steel, but now that seems to be sort of continuing to inflate and be more of a headwind looking into the back half of the year in North America and Europe. So, so far, we've been able to, we believe, sort of outperform the market on the amount of steel inflation that we've been realizing, but we're now seeing that as a potential incremental headwind in the second half of the year. So on the materials side, those would be the ones I would highlight. And then certainly, freight continues to be an inflationary item as well, which I think the whole market is seeing. And again, we've expected this coming. That's why we went out with additional price increase in all of our markets to make sure we stay ahead of this, and we can continue to deliver overall price-cost tailwind for the full year. So while I'm talking about headwinds on some of these commodities, these are all baked into our guide. And again, we've got pricing that's been actioned to offset this as we look into the rest of the year.

Yes. Okay. It sounds like you're staying ahead of the curve there or trying to, at least, which is good.

Yes.

The other thing that you've been working on is some new product introductions. You've been slowly rolling out like your composites windows products and some of those lines. Can you just give us an update on where you are with some of those initiatives? And how we should be thinking about maybe them flowing through as we move through the next couple of quarters?

Sure. There are a number of investments we've been making in all of our markets around new product introductions. You saw in the earnings release that we had, we highlighted the elements door collection in Australia. That's a nice revenue adder that's coming online here in 2021. We've also got a pipeline of some other future products that we'll talk a little bit about in our Investor Day next week, some energy-efficient windows to meet up with energy codes in Australia that are changing in the future and some commercial window product lines that will flow through really more in 2022 and beyond. You mentioned composite window, which is a really more of a North America-specific product that we've been preparing to commercialize and launch here in the U.S. We did have to slow down the commercialization efforts in 2020 just due to COVID. We felt like the timing was not right to do a full-scale product launch right in the middle of a pandemic and supply chains that were challenged. So that has slowed a little bit, but we're in the middle of ramping up our commercialization efforts on the composite window line and really making sure that we have the full suite of all the designs and SKUs and colors that we want to have. So when that comes to market, we can meet the full needs of our builder customers and not just sort of launch with a limited array of SKUs. And again, the composite window, for those who are less familiar, this is a window that sort of sits in the market in between wood and vinyl. So there's material benefits in that the composite material is -- structurally, it's stronger than vinyl and in terms of being able to have larger openings and things like that. So similar to wood, it's got that strength. But it has the durability of vinyl, and then there's no rotting, you don't have to paint it, things like that. And so we're very excited about this composite window line, probably not much of a benefit to 2021 revenue, but will be certainly one of the go-forward drivers for 2022 and beyond, that will, again, deep -- go a little bit deeper on next week in our Investor Day.

All right. That sounds exciting. We look forward to that. And I guess not to get too far ahead of ourselves on the Investor Day, but you also talked on the call about some of the initiatives that you've put through in your various markets in the U.S. as well as Europe and even in Australia, and it allowed you to see a really nice increase in your productivity and your throughput and your inventory. Can you talk a little bit about those efforts and how they're helping to position you?

Sure. So when we talk productivity, a lot of times, you'll hear us also talk about our JELD-WEN Excellence Model, or JEM, which is our business operating system, which is kind of the toolkit and the lean manufacturing mindset that we bring to all aspects of our operations, both our manufacturing operations as well as our functional teams and our offices. And this is really all about -- JEM is really all about improving cycle time and eliminating waste. And that's using very proven lean manufacturing tools that have worked in many other industries, and we're seeing good progress from that. We did deliver productivity last year in 2020, even in the face of the COVID pandemic and all the challenges we had, we saw year-over-year manufacturing productivity in our operations and we're well on our way this year to delivering positive manufacturing productivity in 2021 as well. In the first quarter, we saw positive productivity in all 3 of our segments year-over-year. So this program is driving -- like I said, driving waste out, which helps our margins on material usage, labor usage, scrap, quality, warranty, things like that. So the day-to-day manufacturing side of things. In addition, we do have a pipeline of sort of longer-term projects that are really more focused on fixed costs. So this is our footprint rationalization and modernization program, which is really looking to eliminate some of the square footage that we have around the world in our manufacturing operations. And in doing so, not only reduce fixed costs, but modernize some of the production technologies that we use and really, hopefully, as we make those investments, we'd also be improving cycle time and improving throughput as well. And so we're about 1/3 of the way through that footprint rationalization program. That was a $100 million target that we put out a few years ago. We've got visibility to the initiatives and the projects that make up the next 2/3 of that program. And so I guess to take a step back to your question, we feel quite positive about our ability to sort of deliver year in, year out cost savings, whether it's through sort of the organic JEM initiatives that are hitting all of our facilities and driving out waste and improving cycle time or whether it's the initiatives that are more targeted business to certain facilities where we're looking to eliminate square footage or the number of rooftops we have. And that will be one of the margin drivers that will enable us to continue margin expansion as we look into the future.

Yes. And would you say, John, that there's one region that's maybe slightly further along with this process or a region that maybe has lagged a bit, especially over the last year, given everything that's gone on? How should we think about kind of the way that this will flow through across your different regions?

Yes. I'd say on just the manufacturing productivity side, it's a global program. All regions are active and have adopted JEM and are using the tools, and it's something we're focused on everywhere. And I'd say, like I said, in the first quarter, we saw manufacturing productivity in all 3 segments. On the footprint rationalization program, a lot of the early work we did since we announced that program in late 2018 was in Australia. That business went through a bit of a housing correction. There the market was a bit overheated on the new construction side. And in order for us to weather the storm, we did close about 8 to 9 facilities in Australia during that downturn as part of the footprint rationalization program. And we did that, and we're able to really hold margins pretty nicely despite the market dropping to historic lows on new construction side, which were mostly exposed to new construction there. You're seeing that now as in the first quarter, in Australia, volumes were up about 2% or about 5% on a days adjusted basis, but that flowed through at a really nice operating leverage, about 200 basis points of margin expansion in Australia in the first quarter. So sort of demonstrating that the work we did during the downturn in 2019 and '20 there as the housing market was correcting, we've now got a fixed cost structure in place that as we can grow now, coming up of that housing correction, I would expect incremental margins to be quite strong there in that business, given the work we've done. And now we're working away in North America as well. In the footprint program, we've got some early successes there, and we've got visibility to the projects will drive some of the future savings. And then Europe, I'd say it's a little bit further out on the footprint projects. It's a lot -- it's more costly to close facilities there. And we've done a couple of cost structure adjustments in Europe, but I'd say that's a little bit further out.

Got you. Okay. And we also saw that you recently put out a press release talking about an $8 million or so investment in some facilities in North Carolina I think they are. Can you talk about how that kind of fits into this program that you've been rolling through in this initiative that you're kind of trying to get through?

Sure. So that really is really more about growth. So we bought VPI Windows in 2019, a little over 2 years ago, which is a mid-rise multifamily vinyl window manufacturer headquartered in Washington state. Great business. It was a founder-owned business that we acquired and brought into the family and really gave us a foothold in that mid-rise vinyl window market, which we previously didn't have. We had sort of vinyl windows and 3 stories or below, but nothing in that mid-rise sector, which in certain geographic markets is doing quite well. That acquisition has performed nicely. It's grown sort of above company-level growth rates. The margins are above company-level margins. And we've got -- we see a great opportunity to take the successes of the VPI team that they've done on the West Coast of the U.S., out of that Washington state facility, and sort of replicate that playbook on the East Coast. And so the announcement that you're referring to was the announcement of a new VPI multifamily window site in North Carolina, which we believe will drive some fairly nice market share gains on the East Coast as we sort of take that same playbook and successes that we've had on the West Coast and drive it on the East Coast. And so that's just -- it's one of example of one of the growth initiatives that will hopefully allow us to perform at above-market growth rates going forward as we take those successes and roll it out on the East Coast.

Yes. I guess, John, when we think about it, we're obviously seeing a nice ramp in volume coming through and hopefully, a continued ramp in volume as we kind of move through this year and even into next year. As that kind of takes a step up, what role does that have in how you can kind of implement some of these initiatives? Or how this actually can come through, right? Because I would imagine that you're getting a pretty decent incremental margin on some of this that's just inherently giving you a nice increase there.

Yes. I think -- so the JEM initiatives that we're working on, they do improve cycle time and, over time, with our variable cost structure, will really enable us to have even more variability in our cost structure, which will allow the incremental margins to flow through. So an example would be labor as a percent of COGS. We've had some really nice reductions over the last few years of direct labor as a percent of COGS or as a percent of sales, whichever way you want to look at it as from the benefits of JEM. And so that basically positions us to -- as we think about revenue growth in the future, 2, 3 years out, if we can continue on the successes of getting more lean on our manufacturing cost structure, I would anticipate that the incremental margins that we get from some of these growth initiatives will continue to be more attractive in the future than they are today.

Got you. Okay. And I guess that kind of leads us to some conversation on cash flow and the balance sheet in there. Obviously, you've done some work over the last couple of years on that to position yourselves. Can you talk about how you're thinking about your leverage position? And what some of your key goals are in terms of the balance sheet?

Sure. Yes, our cash flow story, we think, is pretty strong. We had a very nice free cash flow year last year, good cash flow conversion, and we're off to a good start this year as well in terms of year-over-year improvements in cash flow. And as you mentioned, on the balance sheet, we're now below 2.5x, which is sort of the lowest point since our IPO in 2017. That is our target level to maintain leverage -- net leverage below that 2.5x target and hopefully, work it down even further than that. But given our strong liquidity position that we've got as well as our balance sheet, we've got visibility to deploying capital over the next few years, either through M&A or share repurchases. Just this week, we repurchased 1 million shares of stock in conjunction with the block trade from one of our shareholders and demonstrated our willingness to step in and purchase our own shares, which we'll continue to do opportunistically. And we also see good opportunity for us to deploy capital through M&A. We've got a great success track record there in the past. We did 14 acquisitions from 2015 to 2019, took a bit of a pause for 2 years to sort of digest and integrate what we bought and then also navigate through some of the COVID challenges. We've been rebuilding that M&A pipeline and now see some really good opportunities out there to deploy capital through M&A that is strategic in terms of the products and offerings that it would give us, but also financially would look nice as well from a sort of financial profile of being immediately accretive and nice paybacks as well. So more to come there, but I think disciplined capital deployment and how we use that cash balance and our ongoing cash flow improvements will be one of the most compelling aspects of our shareholder value creation over the next few years.

And I think you also went out guiding to about $130 million to $140 million of CapEx for this year. I know we talked a little bit about some of the initiatives that you have going on, obviously, more recently. But tell us, are there certain kind of larger projects that fall within that scope? How should we think about what you're trying to do this year?

Yes. I'd say, over a longer period of time, for us, 2.5% of sales is a pretty good assumption for capital needs, and that generally would be structured half and half between what I would call maintenance and sustaining investments and then the other half being more productivity or efficiency growth-type initiatives. The capital that we've guided to this year, that's a similar mix where we've got -- certainly a chunk of that is more maintenance sustaining infrastructure-type investments. But there's also some very targeted growth investments as well that we're making. So the VPI project that you called out a few minutes ago, we've got some other investment that we're making on exterior doors in North America, the vinyl window expansion as well in North America. So it's a mix of investments that will drive either nice productivity savings going forward or be an enabler to grow through sort of targeted expansion and product lines where we see visibility to drive margin-accretive profitable growth.

One of the things that we've seen from the business over the last couple of years is that as your working capital has improved, you're just incrementally generating much better free cash flows. Can you talk to where you are in terms of driving some of those initiatives specifically? And how we should think about -- in a bigger-picture sense, what is the cash generation potential of this business? How much can you throw off here?

Sure. So one of the benefits of JEM is that it's enabled us to eliminate waste not only in our margins but in our working capital. And so we've seen a nice reduction in net working capital as a percent of sales over the last few years. We had a chart in our earnings presentation another week on that, showing about 160 basis points of reduction in working capital last few years. A lot of that was really on the accounts payable, accounts receivable side as we've sort of worked with supply base to -- on payment terms and optimizing that. We think there's a lot of room to run yet on the inventory side. As we lean out our operations, get smarter on demand planning, labor planning, we can really continue to see more working capital improvements by leaning out our inventory levels. Additionally, we're making some investments on IT systems and ERP investments, which will give us greater visibility into that. So you think about sort of longer term for JELD-WEN, we are -- we've made some nice progress on working capital, which is one of the enablers to good cash flow conversion, and we see more visibility to that going forward. Additionally, on taxes, we've got some tax attributes. It will drive a nice cash tax versus book tax relationship for the next couple of years as well. So we'll talk next week in the earnings call about sort of more specifics around how to quantify that opportunity on cash flow conversion over the long term. But certainly, we've got visibility to the initiatives that will help us continue an attractive free cash profile position.

Got you. And you mentioned you bought back 1 million shares of the stock this week with the secondary that came through. Can you talk about your appetite to do more share repurchases and the potential for that as we look out?

Sure. So we've got a share repurchase authorization that's in place from our Board, which prior to this week had about $150 million outstanding on it, and so now that would be closer to $130 million outstanding on it. It's an evergreen share repurchase authorization and something that we're committed to continuing investing in ourselves. This year, we've bought back 1.8 million shares. Both of those happened to be in block trade-type situations where we were able to buy a nice amount of scale. I guess we think about it really in terms of risk-adjusted returns. What are the opportunities for us to deploy capital, if it's M&A, and we see a really nice risk-adjusted return based off of the purchase price that's available, we may lean in there. If we see a dislocation in our share price and look at the risk-adjusted return of buying our own shares based off of where the share price is, we'll lean in there. But we're -- certainly, you can see from this year already 1.8 million shares we repurchased, and I think that speaks to what we think is the value of the enterprise going forward relative to current valuation.

Got you. Okay. Well, John, I think we've kind of come up to our time here. So I will end it there. Thank you for joining us. I appreciate you participating, and thank you to everyone that joined us as well to listen.

Great. Well, thanks for hosting us again. We appreciate it.

Yes. Thank you.

Bye.

Bye.