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

Good afternoon, everyone. I am Matt Bouley, Barclays U.S. Homebuilding and Building Products Analyst. Thank you all for being here in person. Just very excited to do it. I've said it in every fireside today, but glad to have you all back in person after 2 long years and very glad to have JELD-WEN joining us in person as well. So we have Gary Michel, Chair, President and CEO joining us here from JELD-WEN. [Operator Instructions] Gary is going to give some opening remarks here in just a second. I'm going to dive into Q&A, and then I'm going to check with all of you guys through the process if anyone wants to ask any questions. And as I just said out, you can ask questions virtually as well. So I'm now going to keep an eye on that. I might have missed it for anyone in the last meeting. So that's enough for me. Gary, thank you very much for being here. Please go ahead, sir, with your intro, gentlemen.

Well, thanks, Matt, for having us, and thank you all for joining us and showing interest in JELD-WEN. We -- I guess a great place to start is when I think about the transformation that we've been under for the last 3 years or so. We made a lot of great progress. And 2021 shared the inflation items that we talked about, and I know we'll dive into really demonstrated where we've been on an operational and commercial transformation of the company. JELD-WEN has always been a good company, but we've had, over the last several years, a very keen focus on improving our operations, not only stabilizing them and making them a reliable asset for the company, but moving them into the category of a competitive advantage. A lot of that has been demonstrated through where we stand today on commercial lead times. Many of our product categories enjoy industry-leading lead times. Some of our lead times have returned to pre-pandemic levels. Some are, while not there, are certainly competitively advantaged and allowing us the opportunity to serve our customers and attract new customers and gain share. Likewise, on the commercial side, we made some rationalization and changes, particularly in low-margin product categories, changing some of our customer approaches as well as product approaches. A lot of that is behind us now. And while that's given us some capacity as we've taken a low-margin business out of the company, it's given us some capacity. That, coupled with the operational excellence piece, has given us the ability to go out and gain higher margin business for the same product categories. We saw, obviously, like everybody else, a lot of inflation last year. We did show sequential growth all year in our core business across all 3 of our segments. But -- and we were able to, on a dollar-for-dollar basis, cover the inflation with price through 2021. However, due to timing of when the inflation hit later in the year, we were unable to get that margin rate expansion, which we will see into 2022. We're really excited for the setup for 2022, as we talked about yesterday on our call. We not only see the market as still being very strong for us in residential new construction as well as in the R&R space, but we also have some unique growth drivers, particularly to JELD-WEN in all 3 of our segments, which we can certainly cover off today. But those are some new innovative products as well as capacity expansions that we've been investing in. And I view 2022 as sort of a payout year for that in terms of growth and margin expansion for the company. So very, very excited about that. All of this combines to support the strength of our commitments to our 2025 long-term commitments that we made last year during our Investor Day. We're still adamantly committed to those, and we've made great progress certainly on the top line approach last year and into this year. And on the margin expansion side, we see clear direction still to our long-range targets. So with that, I'll open it up to you, Matt, and to any questions you might have.

Wonderful. Well, thank you for those remarks, plenty of topics to hit on there. I actually want to hit on one of the last things you mentioned, which are some of the growth initiatives, because I think in the conference call, was that yesterday? At this point, it might have been a few weeks ago. You really seemed like you kind of progressed in some of the growth messaging around volumes and capacity in these new products. So I'm curious if you can expand a little bit, whether maybe we just take North America to begin with fiberglass doors, BPI. What are some of the kind of incremental growth vectors that we should look out for here over the next couple of years with this innovation and capacity?

Well, thank you for that question. It's something we're very, very excited about. As we've been working on our operations and working on our commercial excellence piece, we have been investing in innovation and new product development. So a couple of those categories that you mentioned, let's start first with BPI. Our BPI business, we acquired about 2 years ago, exactly 2 years ago. And the stated part of our strategy was to grow geographically with that business, it being a Pacific Northwest type of focus. We just announced and recently opened our East Coast facility in North Carolina, and we're taking -- have been taking orders, we're already producing out of that plant. Effectively, that expansion alone will help us double the size of that business. And 2022 is the year that we'll benefit from the start of that, so we'll see growth in our multifamily BPI business. About 12, 18 months ago, we launched a totally revamped fiberglass exterior door business. We were, to be polite, under-indexed in that category. We spoke with our customers, talked to channel partners, what would they like to see in that product category. We launched a new, more modern entry door, fiberglass lineup, and we focused on making contractors and builders lives easier by offering systems that were easy to install that changed the type of labor that was required to make that the installations. And it's been a winner. We've been gaining share in entry doors, and we've now installed new capacity to keep up with that growth. And that's coming online and will be a growth vector for us as well in 2022. And then the third area is we're launching our Auraline composite window and patio door line up, which has been a long process to develop and launch. But we are launching that now, and that will be a significant growth driver for us as we start to offer a product that competes in the composite space. It's not only a very pleasing product with the looks and the feel of wood, all of the characteristics from longevity, installability, et cetera, for vinyl with a price point in between accretive to margins for us. But also a sustainable type of product category that will be very exciting for our customers and for us. Additionally, we got a couple of new product launches in Europe, one around technical doors, acoustic security and fire doors that we currently make in Central Europe. We're taking those into the U.K., which will drive growth. And then some connected product -- connected products that we are launching in Europe as well, which will also eventually reach the rest of the world. In Australia, with the move towards ENERGY STAR for really the first time in that marketplace. We're getting ahead of that with our new launch of ENERGY STAR products that will serve that market as well as an entry into some commercial space. So when you think about 2022, it sounds like a lot going on, but we've been working on this for a while. And each one of these is really targeted to a specific need in the marketplace and will drive growth beginning here in 2022 and beyond.

Yes. No, that's fantastic color. I think you gave a number on the call yesterday of about $100 million as sort of the addition to capacity in 2022 and correct me if I'm not -- if I'm misstating that. Just kind of zooming into the guide here, I think the guide embedded roughly low- to mid-single-digit volume growth in 2022. And I don't want to put words in your mouth, but -- so how -- what are we thinking between sort of market growth, JELD-WEN's ability to deliver on market growth, given extended lead times and all that? And what portion of that is -- of the volume guide for this year is basically coming from that new capacity?

Okay. I'm not sure if I got the fidelity to quite bridge it the way you want it, Matt. But if you think about our guide on growth, a portion of that is certainly related to markets. So this low single-digit market growth across all the segments, they'll all be favorable. It's one of the first times I've been -- since I've been at JELD-WEN where they're all moving in the right direction, which is great. And so we'll definitely benefit from that. And I think we've demonstrated, certainly in 2021, that we're able to grow not only at market, but beyond market with our -- the capacity of our operations. So coming into 2022, very healthy operations. We'll continue to be able to meet that. These growth initiatives that I talked to you about, which are kind of JELD-WEN specific, probably the interesting thing of all of that is it's not really sucking up any of that existing capacity. When you think about -- we've installed a new factory for BPI, all the new capacity there. We're adding capacity in lines for the fiberglass business and then the Auraline, whole new factory operation for that as well. So that's kind of interesting. The -- it will be new facilities for the energy-efficient stuff and in Australasia, of course, and then there'll probably be a ramp-up of capacity using our lean tools for the technical doors. So pretty good shape operationally there. I think the other piece that you might want to consider as well is we'll probably see some favorable mix, which will lead from retail continuing to get healthy when we look from a stock to special order business and then the mix between the outperformance in the traditional channels and builder channels versus retail. So that mix is a little more favorable as well. So kind of a double mix benefit.

Got it. Okay. No, very helpful. So it's all of the above, if I'm hearing that correctly. So shifting to, I guess, the pricing side. I mean clearly, you're carrying significant price across the portfolio into 2022. I guess my question is more on the elasticity side, just given this level of price increases that have been out there, and frankly, you've been raising prices on the door side before COVID. Are you finding any customer pushback, whether it's builders, retail? Just to what degree is the market continuing to accept this level of price?

So right now, surety of supply has been trumping price. We've been able to take a number of price changes related to inflation -- material and freight inflation for sure over the last -- actually, since the middle of last year into this year. So we feel pretty comfortable about those sticking in all channels. Right now, it seems if you've got the ability to meet the customers' needs, that trumps anything at this point, and we did -- able to keep price there. We're obviously going to monitor what goes on with input materials, what's going on with freight and what goes on with labor. I think that freight and labor inputs are probably here to stay, and those are priced in as well. But the material, we'll see what happens as that moderates. I think you mentioned, particularly in the door space, but we had been moving price on windows as well. There had been a lag since the last downturn of getting the value for our products in certain channels. And I think we've been -- well, we have been trying to catch up on that. We probably reached that parity through those price increases before and then now the ability to get price. So I think there's a value equation there as well. But then it comes down to supply and demand. I mean the doors and windows continue to be pacing items in most builders' conversations today.

Got it. That was very helpful. And a question on the quarter itself, but what I'm trying to get at is thinking about visibility to 2022 and the guide you've given. I think when you guided in early November, relative to that pricing and the top line, I think, came in a little better. I think the margin percentage was probably under a little more pressure. I think we can kind of guess what happened over the last 2 months of the quarter for what might cause such a thing. But again, just trying to think about your own visibility, the cost and price, so as we think about kind of your guide for 2022 and bracketing the high end to the low end, what are some of the kind of swing factors that might bridge us one way or the other?

I think we've all become a lot better at looking at inflationary movements in our space. When you have relative stability or one commodity or another changing, it's a lot easier to see and a lot easier to deal with than you see this broad-based inflation that we've seen. And a lot of this inflation, quite frankly, relates to -- in every industry is people related to a certain extent, right? So that's played a lot. So we've gotten a lot better at seeing and looking at all of our commodities and all our input costs. Yes, as we came into the fourth quarter last year, we had a pretty high inflation number. We had already taken a lot of price actions that we thought would make that a favorable outcome. As it turned out, we were at parity because we saw some inflation, as you point out, in the latter part of the quarter, which we just didn't -- we ran out of time for price, right? But the good news is we covered it regardless at a dollar rate, not at a margin rate. A lot of that came from utility changes in Europe, quite frankly, was a big piece of that as well in freight. As we look into this year, we're well positioned. We've already got price -- our price actions out there that some of them are still staged to happen. But they will happen and we expect to be, again, on a dollar-for-dollar basis at parity within the quarter. And you'll start to see that be a headwind in the second quarter and probably see the margin rate begin to expand as we get into second and third quarter.

Got it. Understood. So you mentioned labor just now. And I think on the call yesterday, John termed it more of an investment than just inflation. So are you -- where you need to be from a labor perspective? I mean think about windows and doors, manufacturing, there's labor intensity and there's a shortage of manufacturing labor in this country, I would say. So what else do you need to do from a labor perspective to be able to deliver on your backlog here in '22?

Yes. So we do -- John is right. We do view it as an investment. And we took -- when we went through the Delta wave, I guess, you would call it kind of late summer, really opened our eyes. That's when it really first hit us that we needed to take a look at this a little differently. And frankly, we use the same tools we use in our operations, our JEM tools around problem solving. We used -- we spoke with our associates, with our own people, and we tried to decide what was the best way to make sure that we were attracting, retaining the right people in the organization and what do we need to do. Certainly, cost was part of it. But we also looked at our shift structures and some of the things that people were telling us were important to them beyond money. And one of the very easy to solve problem is really start times and finish times. When you actually run shifts was one thing. So in a number of our locations, we just changed the shift times. And then the most telling one and probably the most prevalent thing that we've done is move to these 4-day, 3-day weeks, right, where in a 7-day period, we found a lot of our folks were asking us for longer days but fewer days. And more surety that those were the days they were going to work that week. So where if you're working on a normal 5-day week with normal shift, someday at times, you might have to pick up a Saturday. They would rather work 4 days for 10 and know that's it, right? And then if you've got a 3-day week in there as well. So anyway, those are the types of things we did, and we've installed those at the request of our associates. So yes, there's a cost associated with wages, but there's also changing the work rules and really being a little more flexible around that, which has made a big difference for us. So we kind of feel other than what we saw with some Omicron actual illness and having to work around that kind of late in the year or early in January, we feel like that's behind us. We still have absenteeism to worry about, but we're now in a better position, I think, to handle that, and we've got all of our associates pulling for us to do better at it because we've involved them in the solution.

Right. No, that's great color. So I guess on a similar topic, you mentioned yesterday, the site transformation efforts and the 14 value streams, which had a seemingly tangible impact on labor productivity and capacity. I think if I recall to the Investor Day, I mean, you're pretty much right on schedule, right, despite all the challenges of 2021. So kind of looking forward, what's sort of the next leg of these transformation efforts that we can look to? How much further can you expand the support across your global operations?

Yes. So if you think back to when we really started this transformation, the first wave of JEM for us, JELD-WEN Excellence Model, which is our business operating system was really around getting awareness out to our entire enterprise and making sure that we had a problem-solving culture, that we understood and knew what continuous improvement looked like. And then we started thinking about value streams across the company. This wave that we've now launched on the 14 model value streams is going a little deeper on 14 critical value streams within the company, but going from end to end on that value stream, understanding the product life cycles as well as the manufacturing focus, and we're going deep there. We're doing a lot -- particularly in the operations side, we're doing a lot of rapid improvement events within the business, and we are accelerating that. We'll probably do 3 or 4x the number of RIEs in those 14 value streams just this year, now that they're deployed. But the other thing is we're able to look across those 14, and they were selected for a reason, the standard work and the things that we're learning within those 14 value streams are definitely applicable across other operations and more of the company. And we'll be taking that -- those learnings and the expansion of the number of value streams under transformation over the next several years.

Got it. No, that's very helpful color. So maybe going back to the inflation side, because it just remains a wildcard, curious if you can kind of, I guess, just educate us on sort of the big buckets of inflation. Where have you been getting hit the most? And are there any areas where there are any signs of relief whatsoever as we think about the next couple of quarters?

The last part I probably don't want to take a risk in putting anything on marker out there. But hopefully, we're stabilizing even at a higher level. For us, metals and chemicals and freight have been the kind of 3 biggest things. And to a certain extent, in particular, parts of our operation, feeding our mills with logs. That's kind of hit us. We -- as I said earlier, I think on the material side, we're able to manage through price. And if we see some moderation in materials, that will be helpful, certainly in the year coming. Freight is one that I'm a little concerned we're not going to see moderate any time soon. Again, I said earlier, it's people issues. Freight is definitely related to people and number of vehicles certainly on land that are moving with drivers. And then you've got the international sea freight piece, which is just quite a bit as well. We've been trying to moderate that through resourcing and in-sourcing. But those are -- the freight piece just has to get passed on. Hopefully, there will be some readjustment in the frame markets. But right now, those have been pretty highly accelerated and that's a place we worry about. On the -- some of the other materials, resourcing, in-sourcing and substitution as well as VAVE have been some of the tools that we've been using. We've been able to, in the chemical space, use different agents, different chemicals wherever we need to in terms of foam, different types of foam. And because of our historical vertical integration, moving things in and out has been very, very helpful. On the lumber side, we were somewhat protected because we do operate our own mills. But anything millwork related that we've been getting externally certainly carries that inflation as well.

Okay. Understood. So what about on the mix side? And maybe we'll talk North America first. So channel mix, I think it sounded like distribution or traditional distribution is improving relative to what had been clearly a strong retail mix over the past year. Then even within retail, I think you said that special order might be starting to show signs of improvement, which I think is among the higher margin portions of your mix. So can you kind of just lay out 2022 maybe whether it's within the guide or just kind of how you're thinking about the mix components in North America between the higher margin versus kind of the in-stock retail?

Yes. So I think we've -- we are expecting to see the restocking that we saw in real estate with retail first. The restocking in retail has taken time as things have been flying off the shelf and contractors have been taking -- and customers have been taking whatever they could get that was available. So we continue to work that through. This is typically time of the year that we work on building up those stocks. So maybe we're reaching a little bit more normalcy in the cycle for this year in what we're building for restocking. But we did see an acceleration in special orders through retail last year, which is a great sign for us. Hopefully, we'll get back to promoting that on a more regular basis. And those are great for us in terms of margin expansion, but it's also good for the customer if they get to pick things that are not necessarily on the aisle, but things that they really like from a style or use structure. But the other piece for mix for us is as we -- as retail, even though it continues to grow and R&R continues to be very strong, as we're starting to see the traditional channels, the builder channels pick up with more starts and more work, that's great, too, and definitely margin accretive in that term of mix. But as that accelerates, it's better for us. The mix of products is better and the margins really are as well.

Right. Got it. And then so same topic of mix, but on the European side, I think. In the quarter, maybe one of the deltas versus the original guide was, and correct me if I'm wrong, but I think perhaps some of that project business might have been -- didn't quite come back as much as you thought it would. So just kind of curious if you could elaborate on that. What's kind of going on with these higher-margin projects, perhaps on the commercial side in Europe? And just kind of what's the outlook for some of that coming back in 2022?

Well, we -- yes, we expect it to come back a little quicker towards the end of last year, and we still had some of the more retail -- more retail-ish, more residential business favored in the last part of last year. Yes, we're seeing the commercial business pick up. The tenders are starting to be offered, but we need -- we do need to see that move as well. So that's certainly an upside positive for us as mix changes in Europe. We do -- it's more by region for us as well. We have a nice business in Northern and Central Europe in our commercial business there, and that's really where we'd like to see that pick up a little bit faster.

Got it. Very helpful. So I have a few more, but while we're here, does anyone in the audience want to ask Gary any questions? One in the back here. Yes sir?

Question for me is also the industry. It seems that -- and probably because when I look at a lot of the industry and look at the current balance sheets from the reporting season that just sort of flows, there -- paradoxically, the inventories have come up, I would say based on what we've heard about supply chain and so forth. But also what's interesting is a lot of the AR has gone up. And for me, being kind of an accounting geek, a lot of times a lot are going up at a more rapid pace than sales that at least makes you think about what's really going on in the channel. And it's not just for you, it's across the board. And I quite -- I can't square the circle. And I know this is a very, very different unique time because we're coming out of the pandemic, which we haven't experienced in the 100 years, I get it. But do you have any thoughts on what might be going on when you sort of look at the accounting numbers and the overlaying what we hear every day about supply chain?

So on the inventory side, just think about all that inflation really costing the inventory, really not a huge inventory problem as much as it is. We have a new cost position in our inventory that we've got to work through. And it's the spread, once price is out, and we get this stuff through, it will be a higher level because of a higher rate. But we need to start from a different level from a dollar standpoint. It may not necessarily be a unit problem. It's something that we've had to look at a little bit differently to make sure that we're -- we continue to be in control. They're -- in certain instances, there are places where we are stocking. We might have a little bit of stock build on a unit basis, either because we can't get all the components at the right time or we're beefing up our own internal supply chain to make sure that we don't have outages. I will say this, we have not had any customer issues based on supply chain issues. We've been able to manage through that, either through substitution or resourcing. So we've been fairly good at doing that. But on the inventory side, the valuation there. On the accounts receivable side, I don't want to take a swag at it without really looking at it, but I can assure you we do not have a collections problem and there's not a payment structure. There's no structural problem in the industry that I'm aware of on the payment side. It's purely higher -- I think it's just higher invoices at this point flowing through.

Okay. Well, with that, we did a very quick 30 minutes, as always, right, surprising. So Gary Michel, thank you, sir, for joining us.

Thank you for having us.

Yes, absolutely. So -- and thank you all out there for coming in and being here in person. Great to see you all again. So thanks, and good luck with the rest of the meetings.