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

Good morning, everyone. I am Matt Bouley, Barclays U.S. Homebuilding and Building Products analyst. I just want to welcome everyone to our virtual Building and Building Products conference this year. Happy to kick off our 2-day conference with JELD-WEN. We have CEO, Gary Michel, joining us. For anyone listening, please feel free to e-mail me or Bloomberg message me questions for Gary, and I'll try to work those in. So Gary, thank you for joining us this morning. If you would perhaps begin with maybe an overview and update on JELD-WEN for anyone less familiar with the company, and then we'll just dive right into Q&A from there. So Gary, please go ahead, sir.

Good morning, Matt. Good morning, everyone. Thank you for joining us this morning and your interest in JELD-WEN. We are a window and door manufacturer, global in scope. Really our global footprint, what we've been talking about is our multifaceted growth strategy. We have world-class brands and building a premier performing culture here at JELD-WEN. We've been delivering consistent profitable growth and strong shareholder returns for the last several years. That strong -- that multifaceted growth strategy that we talk about is really focused on 4 pillars. Four pillars include core revenue growth on a global basis; operational excellence, which is delivering margin expansion; disciplined working capital management; disciplined deployment of our capital as well as this premier performing culture that we're building, which I think separates JELD-WEN really from the pack. The foundation of all this is our business operating system that we call JEM or the JELD-WEN Excellence Model. We've been steadily and deliberately deploying JEM across the enterprise, both on the manufacturing side as well as our functional and commercial sides as well, reducing cycle time, driving industry best manufacturing lead times in a number of our products, particularly in North America and our windows and door businesses. We've been focused on footprint rationalization to improve both our productivity, our throughput and add capacity to the building, to the -- add capacity to the business so that we can meet customer demands, which is particularly important right now with accelerated demand across most of our products and categories. I mean we've made strategic investments in capacity for profitable product lines. When you think about what we've been doing in multifamily, what we've been doing in exterior fiberglass doors and with our soon-to-be launched composite windows. Really in a great place. When we talk about JEM and the deployment, we've now kind of moved on in defining and starting to deploy what we call our model value stream transformation. So we've taken kind of JEM on steroids in a few of our locations. We've deployed 9 or 10 in the last quarter or in the last half of the year with an anticipation of bringing that to 14 by the end of the year. These are places where we're doubling down. We're spending a little more effort. These are our major value streams that deliver customer value. On the growth side, we sell windows and doors throughout the world and additional building materials using innovation to drive growth, both on the process side, product side and customer experience. We introduced some great products. Some samples of that include our elements collection in Australia, which is not only a beautiful collection of doors that meet design trends and the needs of designers and builders, but also as a sustainable product using the element products, using materials that are available and looking at life cycle -- the life cycle of the product category as well. So very exciting for our customers. We've also been expanding digital customer experience, making it easier to learn about our products, make it easier to configure our products, order them and then do after service performance as well. So JEM is kind of the underlying piece for all of that. It's a lean problem solving, continuous improvement environment, but it's in our innovation as well and has really driven our ability to add to growth there. Over the last several years, we've also been delivering strong operating performance, and we've seen great market momentum. We're in our 11th consecutive quarter of positive price mix, 6 consecutive quarters of gross margin expansion. We delivered another quarter of global core growth. We're seeing very supportive housing fundamentals in all 3 of our regions, North America, Europe and Australia. Seeing positive repair and remodel in North America; Europe, being led by repair and remodel as well, and strengthening housing recovery in Australia. So we like what we see from the supporting markets, and we've been delivering margin expansion and core growth on top of that. So again, strong cash flow on top of all of that. It's been allowing us to be disciplined in our capital deployment. We did some nice repurchases of shares year-to-date. We'll continue to look at that, but we do have a strong pipeline of high returning projects that we're investing in as well as looking at our M&A pipeline as well to continue to grow, expand our strategy, accelerate our strategy, grow the company and deliver financial returns. So with that, probably best to open up to your questions, and I'd love to share as much as I can about JELD-WEN this morning.

Wonderful. Well, thank you for that, Gary. So plenty of areas to kind of jump off there. Just going to ask a couple sort of near-term questions before we take a step back and talk more about some of the strategic initiatives you've highlighted. So you mentioned market momentum is strong right now. I'm just curious if you could speak a bit about sort of the volume environment, maybe focusing on North America. Just how you're thinking about kind of the cadence of volumes in the second half? And maybe just based on what you're hearing from customers and seeing out there, if you have any visibility into '22 at this point?

Yes. I think that what I just said about strong markets, you asked specifically about North America. We're seeing strong housing numbers. We have seen strong repair and remodel over the last year, 18 months. Our backlogs are very, very strong. Really, the limiting factor at this point is not demand, which we see very strong in North America in both residential new construction and R&R. It's really just been our ability to meet that demand. We've been doing that fairly well. On the door side, we've continued our rationalization, modernization programs, which have given us pretty good lead times for the most part, although we've suffered like most people with some outages here and there and labor availability. But the backlog and demand picture is very, very strong for us and our ability to deliver there. The other great example of JEM in North America is our windows business where we actually are -- even though we don't like the lead times and they're not what the industry is used to at 8 to 10 weeks on vinyl windows, that is industry leading at this point by a long shot where a lot of vinyl window manufacturers are quoting 20, 22 weeks or longer. So we've been able to use JEM to take advantage of that, gain some share, but it's still a very strong demand picture. And the combination of builders being able to close because of their labor needs, get other materials is part of the limiting factor. The other piece being just our ability to keep up with that demand given the picture on labor.

Got it. So you also mentioned that the top 11 consecutive quarters, I believe you said positive price over cost. And clearly, pricing has been a big part of the story for JELD-WEN. So I'm just curious there's been several price increase announcements this year, both doors and windows in North America. How are you thinking about the second half when it comes to pricing? There's clearly still inflation in freight and materials. Are you starting to get any pushback from customers on the multiple price increases? Just how should we think about the pricing phasing in over the next, call it, few quarters?

So we have been deploying price for actually quite some time. The value -- the price and value equation primarily for doors has been a little upside down in the last several years. So we've been able to get price that matches the value of the products that we sell, and that's been great. You put on inflation this year, and that's driven a few more price increases that we've had to deploy. And so far, the market has taken those because, for the most part, the inflation has hit just about every corner of building products. So, so far, we have been able to pass those along and continue to deliver that favorable price mix. And price has offset inflation. That's one of the things that we set out when we do our planning anyway, and we've been able to do that pretty consecutively and pretty consistently here across all our products and across all our regions. So we do have some pricing going into effect now in the regions that will continue to offset that inflation, and we expect those to stick as well.

Great. So then the follow on to that would be, as we think about the guide implied in the second half, and you guys gave some commentary on the prior call around the cadence of margins, just curious if you could maybe elaborate a little bit around cadence of margins, Q3, Q4. You've got pricing coming through, but clearly, supply chain and freight are still difficult. So just any additional color on the second half around that margin cadence.

Sure, Matt. As you kind of pointed out, on our call last week, we do expect our full year revenue to grow 12% to 14% and our full year EBITDA to be in the range of $510 million to $535 million. But similar to the results in the first half of the year, we also expect gross margin expansion versus last year, both Q3 and Q4. The magnitude of that gross margin expansion will probably be greater in the fourth quarter than in the third. As we start to get the full quarter benefit of some of the latest round of that pricing, we just talked about hitting in all regions kind of end of third quarter into fourth quarter. Additionally, we look at -- in addition to the pricing, we're looking at the -- some of the COVID-related cost savings that we saw last year really were in the third quarter, so it's a slight headwind to us in the third quarter as we lap that. And then we would expect also to get the full benefit as markets open up or as some of the temporary COVID-related shutdowns open up, particularly like in Australia where we're seeing those. So we're expecting those to loosen in the third quarter. Taking all that into account, I would expect that we'd see Q3 EBITDA margin to decline slightly versus last year, and we'd expect a really nice expansion in the fourth quarter versus the prior year.

Got it. Okay. That's helpful and makes sense. So maybe now, as I said, we'll step back and talk about some of the more strategic initiatives you've got going on. So I wanted to ask about the accelerated growth model. And in particular, with JEM, because over the years, we've always thought of it as more of the cost-out driver, lean manufacturing, driving efficiencies and things like that. But it really sounds like what you're doing with JEM is also in turn accelerating -- or meant to accelerate organic growth. You've talked about windows and fiberglass doors and things like that. So can you just expand a little on what you're doing with JEM specifically to actually drive growth and that profitable share gain you've spoken to.

Yes. Absolutely. Great question. When we think of JEM, we think of that as our business operating system. It really kind of defines our standard work for everything that we do within the company. And we line everything up with the strategy that we detailed at our Investor Day earlier this year, which is focused on growth and margin expansion. The idea of how we deploy JEM in strategy deployment -- strategy development and deployment is really critical. We've got standard work that we -- we call it JELD-WEN Accelerated Growth, but it's just a part of our JEM business operating system, so it's all-encompassing. We focus on how -- just kind of the critical few things that will really move the needle to grow the company, expand here. These are big ideas that solve customer problems. So if you think about the strategy in general, what can we do to create a differentiated superior customer experience, something that is -- makes us easy to do business with, but also the right products that do the right things for customers where they need them and when they need them add value, right? So that's part of the strategy. The other piece is solving problems in our channels and for our customers. So things around logistics, labor availability. If we can make our products get there on time, but be easier to install, take out skilled labor and replace that with easier to get less skilled labor, those are great value drivers for our channel partners, for builders and contractors. So we're trying to work through all of that. But all of that gets laid out into our standard work. We think about our cycle time, how our factories, how our operations and how our functions all operate together in order to get that growth going. It's really around cycle time reduction, meeting needs, solving problems and all of that is really the essence of what JEM is.

Got it. That's really helpful. So as I think about some of the longer-term margin targets you've laid out back at the Investor Day. I'm just curious if you kind of split out JEM and then, I guess, call it, more discrete savings with the footprint rationalization and modernization program. How is that -- how are those 2 factors kind of playing from here into that longer-term margin guide you laid out?

Yes. So I mean, they're all part of how we get there. When we started talking about the -- kind of the relationship between JEM and rationalization and modernization programs a few years ago, really, we talked to kind of 2 different programs but they were interrelated. Really, where we're at today is we've matured quite a bit where rationalization and modernization, we're probably 2/3 of the way through that program or certainly more than half in driving the benefit of footprint rationalization, modernizing our operations, driving standard work, improving cycle time, all of that, which sounds an awful lot like JEM too, right? But JEM also drives that daily, consistent improvement. We drive to improve every single day. We're driving to improve cycle time. Cycle time turns into our ability to grow. And growth on top of all of that helps us expand margin as we leverage those factories and those capabilities. So I kind of look at them as there's still too -- the modernization, rationalization program is still a program that drives savings and throughput. It takes latent square footage out of our operations. It makes it easier for us to do business in fewer locations with bigger investments. But at the same time, JEM is that day in and day out, consistently improving our operations at all levels to drive growth primarily.

Got it. And so 2/3 of the way through the rationalization and modernization program, that's helpful color. I'm curious, if anything, about that program has changed at all in this environment. Just thinking about rationalizing capacity but then balancing that with -- demand is obviously strong and you need to serve your customers. So as you've kind of moved through that program, has anything changed? And how do you kind of think about that balance between the 2?

What's really interesting is we've used this to do 2 things, right? Take out the rooftops, right, which we have so many through all the acquisitions over all the years of our history that there's a real opportunity to consolidate square footage and to build more modern operating facilities to meet our customers' needs. The intent was never to take capacity out. It was quite frankly to increase capacity through modernization, automization and rationalization, which is what we were doing all along. When we were looking at sort of the beginning of last year and in some markets that softened like Australia, through their housing downturn over the last few years. Those are great opportunities for us to make those changes, adding capacity in new facility, but rationalizing how many facilities we actually had. So I think that was one thing, accelerating that program where we could. But the other piece is identifying these value streams that I talked about at the top that are really focused on -- these are the critical value streams, critical sites to meeting customer demand, particularly as it accelerates right now. And how do we continue to add cycle time, be able to add capacity and throughput without adding additional rooftops. We've obviously added -- we have invested in additional capacity where we need it in particular products and areas. But primarily, what we're doing is using throughput, using cycle time reduction in order to grow and it's paid off. You can see it in our lead times. You can see it in our share gains.