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

Good morning. Welcome to the second session of our, it's the second day of our 14th Annual JPMorgan Homebuilding and Building Products Conference. My name is Mike Rehaut. I'm the senior analyst covering the homebuilding and building product names for JPMorgan, been doing so for well over 15 years now and really excited to have with us JELD-WEN CEO Gary Michel. Gary, I apologize. I don't know if you have slides or this is a fireside chat. I'm prepared to do either. If you have slides, let me know, we can walk through those. If not, I'm prepared to bombard you with questions for the next 35 minutes.

Not a problem. I can probably start off with, I don't have any slides to present, but I can maybe do about a 2- or 3-minute overview here real quick and then let you bombard me anyway.

Sure.

If you're all right with that. It's been an exciting week for us. We had an Investor Day on Tuesday. On Monday, we launched our first ESG report. So a very exciting time for all of us at JELD-WEN as we are really telling a story that we all believe in and that we're all very excited about and rallying around. At the Investor Day, we talked about JELD-WEN being a compelling investment opportunity, highlighting how we have a multifaceted growth strategy, a proven strategy and business operating system that is driving everything that we do and that we have a world-class franchise in JELD-WEN that we believe has unmatched breadth and scale around the world. When we talk about our multifaceted growth strategy, we're really talking about kind of things we've been doing over the last several years around operational excellence, margin expansion, accelerating core organic growth, being disciplined around our capital allocation, built on the fact that we've been a good cash generator and we continue to, through our operating system deployment, being able to improve cash flow every period, which gives us a lot of flexibility, and we've been disciplined in allocation along the way. But most importantly, the building of a premier performing culture across JELD-WEN. And kind of the underpinnings of all of that is what we call JEM, our JELD-WEN Excellence Model or business operating system, which is, as we just described during the Investor Day, so much more than just a lean deployment, a set of tools in our operations. It's really the way we do business and the way we're focused on growth. We laid out a strategy for growth over the next several years around our focus on customer-driven innovation, really becoming a differentiated and superior customer experience within the building products space, but also solving the problems for channel partners and builders using high-performance materials and products that make a difference and add value in the space. I know there'll be a lot of questions here around that and around how we kind of turn the page a little bit from an operational story, a margin expansion story to one of growth. But what we've been able to demonstrate in the last several periods has been very, very exciting. And with that, Mike, I'll probably turn it over to you to ask your questions and also refer people to the Investor Day information, which is available on our website under Investor Relations.

Great. No. Thanks for that, Gary. Appreciate the intro. And the Investor Day, I think, is a great place to start. You laid out during that day the focus on growth, organic revenue CAGR target of 6% to 8% from 2021 to 2025, driven in part by low single-digit market growth, positive price of at least low single digits with the remainder driven by share gains and positive mix from different organic initiatives. I was hoping to drill down on the third portion of that because obviously people can make their assumptions on what the end market is going to grow, positive mix -- I'm sorry, prices is also an area that you've been successful in, and that can ebb and flow, though, along with just broader market demand trends to an extent. But would love to get some more detail in terms of how you're thinking about the third pocket of that, share gains and positive mix from organic initiatives. And if you could kind of highlight what are the bigger areas of opportunity in that regard across the different businesses, be it some new products, be it some areas of channel penetration or other initiatives that you feel will help you realize those goals in that category, in that area of growth?

Thank you, Mike. That's a great question and really kind of at the crux of what differentiates the plan that we've put out here. The underlying organic revenue growth story is really one about growing above market. So plug end market, as you said, a couple of points or whatever over the period. The rest does come from price and mix as well as these initiatives. For us, growth initiatives come in, in a couple of different flavors. One is, as we continue to improve our capabilities operationally in building materials and building products, the one thing in my career that I've learned is, being able to provide products on time is a winner in the space, right? It's almost always the first thing. So our operational capabilities, our cycle time improvements and the things that we've been doing with our business operating system to improve lead times and become more attuned to demand fluctuation is part of it, right? That gives us a competitive advantage that allows us to gain share, become repeatable and reliable in that space. On the innovation side, though, it's really about customer-driven innovation. It's around what problems can we solve for or what opportunities can we meet for our customers, understanding what they need the products to do, how they need them to do them. It's not just about style. It's about performance, ensuring that we have the right type of engineered products around fire and security, around noise attenuation, around energy efficiency. If we can solve the problems on a differentiated customer experience and have the type of products that meet their specifications and needs, we're going to win every time. The other part of the strategy that we laid out is also solving our channel partners and quite frankly, builder and contractor issues as well around labor efficiencies, et cetera. If we can make our products do more, make them easier to install and solve some logistic problems for them, again, we're going to win in the channel as well. So really pulling the products all the way through the channel, but winning in the channel is important too. We talked about some of the areas that we would grow. You think about door systems, for example, not just a slab business, but selling our entire door system is something that we're doing very effectively today and gaining share of the exterior door, entry door market. It's really making a difference in applying our value-added capabilities across the door market. In windows, it's around energy efficiency, ease of installation, new product categories, like composite windows, which we'll be launching, which will be a significant grower for us in new product innovation. In Europe, we talked about our ability to have a pan-European approach to the markets, selling products we already make in various markets into other markets that we already sell in. That's a relatively easy growth strategy to understand and one that's relatively easy to execute. But in addition, even though we're #1 in Europe in doors, we have an opportunity to expand our market reach there. There are other markets that buy the same products that are serviced the same way that we service the other markets today. So moving into a geographic expansion mode in Europe as well. And then the other piece of growth, too, is Australia has been a headwind in terms of markets for the last several years. And we're seeing that turn and we'll see that continue to grow back as the market expands, primarily in residential new construction, but also in the repair and remodel business, and we're well positioned to do that.

Great. Great. I mean, I think the natural next question off of some of the organic growth initiatives is inorganic opportunities as well. And certainly, yourselves and Masonite have been active over the years with bolt-ons and different opportunities in the market from a consolidation standpoint, but also a product expansion and expansion standpoint. I think you recently talked about having a robust M&A pipeline. And I was hoping if you could just kind of review some of the areas where you see the most opportunity either by geography or product line or both?

So clearly, we've been a pretty disciplined deployer of capital over our history. We built the company through acquisition as well. And even in the last few years, while it's been a little bit slower the last 1.5 years or so since the acquisition of VPI, which has been a great addition to our family, we've been very focused on operational, investing in ourselves and in high-returning projects for ourselves and share buyback, quite frankly. But yes, there's some great opportunities as we laid out with our strategy going forward. When we think about M&A, we think about how do we add capabilities to the company that we either don't have or we accelerate the strategy that we have set out. So that's really what we're looking for. We're looking for businesses or opportunities that are immediately accretive to us, both in margin and in earnings. And we've been pretty disciplined in our ability to do that. We see some opportunities to bolster some of the businesses that we're in today, as we've done in the past. There's still plenty of opportunity, particularly, you can look around the windows business. There's some opportunities. I just talked about the opportunities we have in Europe around geography. So adding product capabilities, technical capabilities and markets is really what we would be focused on. And only, again, they have to be accretive and they really need to be part of the strategy that we've laid out.

Great. Great. By the way, I just want to also make it known to the people dialed in or viewing the webcast that there is the ability to submit questions that I can relay to Gary through the Ask a Question function or button on the dashboard. So please feel free to submit your question through that mechanism and it will come up on my screen, and I'm happy to pass that along. With that, I'd like to shift gears a little bit to some of the areas of the different headwinds per se or challenges this year. Obviously, everyone is benefiting from a great demand backdrop, but at the same time, managing a lot of material inflation. So I was just hoping if you could, I believe for your full year, you raised the outlook to about 2.5% of sales, net of procurement and sourcing improvements versus your prior outlook for 1.5%. I was hoping if you'd just give us a rough sense of how that inflation breaks down and again the different areas that you're doing to offset that?

Sure. Inflation is one of those unpredictables right now. We seem to have pretty good vision, but there are a lot of moving pieces there. We've seen inflation hit kind of the main categories around millwork, vinyl, logs to a certain extent and freight. We took our forecast up a little bit in the last earnings around. Certainly, we'll update that as the year goes on. What we've been able to see is particularly on, let's start with the wood side. We've been able to move production around. We see the inflation in certainly North America hasn't been as much around logs. It's been around mill capacity. So one of the benefits of having mills and being fairly vertically integrated on millwork, we've been able to mitigate some of that internally as well as through kind of re-sourcing and reutilizing here in North America. But keep in mind, too, we were ahead of this on price. We've also got some good strong pricing out there to offset inflation. And we see that price/cost being a favorable for the remainder of the year, even as some of these other items are moving. Again, as we look around the world, we're seeing inflation on those same materials. And again, using price in every single market to offset that as well as kind of the strength of our sourcing organization, our vertical integration in order to offset and substitute, in some cases, where inflation, we can get a benefit for offsetting that inflation.

That's great. And I believe also in your plans going forward, as part of your margin walk, correct me if I'm wrong, you're expecting on a go-forward basis that price will, you're planning to be in excess of inflation on an annual basis. So kind of a positive price/cost goal over the next few years.

Yes. So that's been our strategy really the last several years has always been to have price offset or more than offset inflation. As we set our plans, that's one of the primary tenets of what we do is ensure that we're not arbitraging that inflation, that we do get a fair price for that. And we've been able to get value as well in our pricing. So we feel pretty confident that, that will continue moving forward.

Great. One of the other areas that have come up recently in some of your results have been mix, a mix headwind related to retail inventory restocking and higher sales of lower-priced stock products versus special orders. Know that's improving last quarter, although still being slightly negative to EBITDA. So I just wanted to understand, how do you think about that mix? Where we are in that trend? Is it still expected to be a headwind or negative? Or how do you think about that mix playing out for the rest of this year, perhaps into next year?

Mike, so the anomaly there is primarily in the retail channels where stock, the mix of stock product versus special orders and then kind of the amount of retail versus kind of traditional channel business are kind of the 2 mix components there. We are seeing still strength and growth at point-of-sale in retail, and we've been kind of keeping up with those stock orders there over the period of time. We are starting to take some bites out of that and getting inventories in retail on the aisle up to where they should be. Typically, by this time of the year, we would have spent a slower first quarter filling up the aisles, getting all the stock units into place for the season and then selling through stock and specials. That's probably a little bit delayed because of the strong growth, but it's certainly improving. We would expect that mix tailwind, which is improving, to continue to be a tailwind for the rest of this year and something that we would see picking up as well as improvements in the mix between retail, not just retail and specials, but also retail and our traditional channels as RNC continues to be strong.

Okay. Great. Maybe also if you could give us, another topic that we wanted to hit on was just some of the antidumping duties. If you could just provide us a little bit of detail for those who aren't as familiar with the background of where that is, some of the antidumping tariffs on wood components from China that were recently implemented. And how you're positioned relative to that, how that's impacted you? And if to the extent that there might be any changes in that front over the near to medium term?

So what you're referring to is the tariffs associated with imported millwork, primarily from China and Brazil, which we certainly participate in the import of that millwork. The flexibility for us has come, again, as I talked about earlier, our ability to move to our own mills and qualifying additional sources of supply from other countries, which we have been doing. Fairly minimal effect on impact certainly last year, and we've been able to offset quite a bit of that going forward. We haven't called out a particular number. It's built into that inflation number that we've already talked about. And so obviously, offset by price and the like. But we will continue to either in-source or re-source to mitigate that. And where we can't, obviously, that shows up in our pricing offsets.

Okay. I actually do have one question from the audience. And again, if anyone wants to ask a question, feel free to hit the Ask a Question button on the dashboard. The question was around the Towanda litigation. And I guess, a twofold question as I see it here. Number one, if you'd just give an update on the timing regarding the time line of upcoming events around that litigation. And number two, if you were forced to ultimately divest the CraftMaster facility, what type of impact would that have on the income statement?

So I really prefer not to talk about ongoing litigation. But to simply address it, we continue to evaluate all of our opportunities here. We still have appeal opportunities available to us. And we continue to evaluate those for the best interest of the company, the markets and obviously, our stakeholders. That being said, the second part of your question, we don't sit still. I mean, we make sure that we have the ability and have plans for any eventuality to make sure that it does not affect our ongoing commercial business, the ability for us to serve our customers and certainly our profitability. It's a good investment for us to make that acquisition. It's been a successful acquisition for us, and it's a very valuable asset to us. And if we were forced to divest it, it would be a valuable asset to somebody else, I'm sure. But nonetheless, we have minimized the risk effect of that within the company. And really, without getting into strategy or where we are on the legal front, probably leave it at that.

Okay. No, fair enough. I appreciate it. I know it's tough to talk to, but still an area that we do get questions on and off. So maybe shifting gears a little bit to the backdrop and the current demand backdrop. There's obviously been a big focus around capacity around the industry, not just your industry but many industries in terms of kind of satisfying the level of demand that's out there today through all different parts of the supply chain. But as you think of your own capacity within this cycle and satisfying the levels of demand, you certainly in parts of your Analyst Day focused on different areas of throughput improvement and manufacturing improvements. Maybe you could just kind of review for us where you are today from a capacity standpoint. Going forward, do you see the need to make any significant additions or is this more of an ongoing area of continuous improvement? And I think you've highlighted a lot of different areas within the Analyst Day over the next couple of years.

Yes. So I would tell you that we've made great progress in the last several years, and yet we have so much more to go. I mean, it's one of those great things about deploying what we call the JELD-WEN Excellence Model or JEM. It's our lean deployment. But it's also so much more than that. It's a business operating system of how we operate the enterprise, how we look at growth and how we look at our operations. The rationalization and modernization program as well has been about adding capacity and cycle time improvements. And we're seeing that play out for us in several areas. Our vinyl windows business, for example, in North America, great. What was once considered a problem in terms of operations a number of years ago where we had an inability to keep up with demand, we have actually turned that into a competitive advantage where today we have orders of magnitude competitive advantage in lead times. We're offering significantly shorter lead times to customers today than anybody else in that space in North America, and that's turning into share gain for us. And that's all a result of deploying the tools that we have outlined in JEM, improving our operations, and adding capabilities around planning and demand creation and demand handling so that we are able to gain share in that part of the business very effectively. Likewise, in our door businesses in North America and around the world, frankly, we've been able to apply those same tools around planning and around throughput and cycle time in our plants so an order, again, have better lead times, better match towards our customers' needs and turn that into share gain as well. It's also how we configure and value add our products that's making a difference as well. So we'll be able to provide more value-added capabilities to our channel partners and to customers, which helps them improve their productivity and their ability to deliver for their customers, which, again, by taking care of the problems that are associated in the construction channels, we've been able to pick up share by adding more value to the products as well.

I think along with capacity and improvement in throughput, another area of focus is your footprint rationalization program. You gave an update at your Analyst Day that roughly 50% of that $100 million opportunity is either completed or in progress. And I assume by in progress, we'd be expecting to see the benefits of those over the next 12 months perhaps. How should we think of the remaining 50%, I guess, over '22, '23, '24, '25? Is it something that's going to be more ratable or maybe give us any sense of how we should be expecting around the realization of that remainder?

Yes. So it's a great question. We've been reporting out on rationalization and modernization pretty much every quarter in the last couple of years, and we've been making great progress. The ability to look at our process. At the core of it is looking at our processes, how can we create standard work that is the best known way to make our products most efficiently and match the demand patterns or even opportunities for additional demand creation that we could supply. So we've been consolidating factories. We've been adding modernization, automation to our processes in a very disciplined way. And it's been somewhat ratable up to now in getting to those cost savings and the part that's probably not, that's not recorded in that cost savings is the growth, right, that it allows. As we look forward, the projects in kind of that next half are really related to, they're bigger and bigger swings and will probably come a little more digitally than ratably, but we will definitely highlight when they're coming and when they go online. Those will be part of that savings that we're portraying in the future numbers. But while they're bigger and bigger swings and maybe a little higher fruit to pick, the benefits of having done what we've done so far on rationalization and modernization really takes a lot of the risk out of it. With the growth that we've had and the demand patterns we've had, some of that just has slowed down a little bit only to make sure that we don't upset the apple cart when we're taking care of customer needs as well. So we're going to see that over the time period. It's built into our guidance that we gave the other day. And we're just still pretty excited about how much opportunity there really is. The more we look, the more we find, which is great, and that's part of this premier performing culture that we're trying to build.

Great. Great. And I guess, just when you think about that remainder, you kind of said higher fruit to pick and maybe some bigger swings. Is it still correct though to think about the remaining $50 million or so over the next, from '22 to '25 time frame or is it something where it might be more in the '22 to '23 time frame?

Yes. I think we're in the shorter cycle on it. I mean, we've been working at this for quite some time. We've laid out where we want to go and what we want to do, but we're going to do it at a pace that makes the most sense so that we bring the capacity online that we need. We've been very thoughtful about bringing on new capacity before we take old capacity out. We've been real thoughtful about ensuring that even as we're continuously improving the processes that we've installed, the value stream processes that we've installed, we're still continuously improving them, right? So when we get to the newer locations, the latest and greatest iteration is what we're putting in. So the savings become more automatic and more immediate. The other thing, too, is we did talk about at the Investor Day our 14 model value streams, which are really the most critical value streams, the most important value streams that make a difference within our company. And as we're deploying those model value streams and really taking them to the next level, that becomes part of where we spend our time rationalizing our footprint because that's really the most important places for us. We get the best productivity, the best customer satisfaction, the best opportunity to grow.

Great. Great. I think we have time for one more question. And so maybe I'll just close it off with maybe a kind of a bigger picture, trying to sum it up. Obviously, we've hit on a lot of different topics during this session in terms of top line and organic growth or share gain opportunities. A lot of the efforts that you're doing around manufacturing capacity. We just talked about footprint rationalization, even M&A. What are the 2 couple of areas of focus that you're devoting most of your time this year, I mean, from a bigger picture standpoint, from an opportunity standpoint? Obviously, you have a great team underneath you and they might take the lead on certain areas. But as you kind of go in day-to-day to your job, what preoccupies you the most in terms of these different opportunities?

Well, thank you for pointing out the team as well. I think we have a great team that we've assembled here who really, really at the core of what we're trying to build here at JELD-WEN is, as I said, a multifaceted growth platform. And it starts with the people. It starts with our leaders and the people in the organization buying into the strategy, developing that strategy, taking care of our customers, being a place where people want to buy, being a great place to work and being a great investment for our shareholders. It's also a company that does the right thing in our communities, for the world and for people. That is who we are, and that's really the message we're trying to portray. When I wake up in the morning, I look at that multifaceted growth platform that we have, focusing on core growth. How do we do better for our customers? What are the type of customer-driven innovations that will help them meet the objectives they have in buying our products and using them? How can we help our channel partners be more productive? And how can we be the choice supplier for them because that's how we're going to grow the business. I continue to focus on operational excellence and margin expansion. How do we make sure that JEM is the operating tool, the operating system for the business? How do we make sure everybody is engaged there? That we're developing people, we're developing skills and we're continuously improving. If we're a little bit better today than we were yesterday, that's a good day. And that's going to show up. Deploying JEM, doing the operational work and the customer-driven innovation, it's about growing. It's about growing the business, leveraging that growth on an ever-improving and more productive platform. And for me, that is what is satisfying. That's what's going to drive the value of the company. And that's what's going to make us great.

Great. Well, that's perfect, a good way to end. Thank you, Gary, for your time, really appreciate you participating in the conference. We are going to be heading into a short break as we then pivot to a couple of homebuilders for the second half of our morning. We'll be joined by D.R. Horton at 10:55 and Taylor Morrison at 11:40, followed by later this afternoon, Masco, TopBuild, Installed Building Products and Green Brick. So again, Gary and the JELD-WEN team, thank you again for your participation, and we'll see you again soon.

Thanks, Mike.