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

Good morning. Thanks for joining us. We're continuing our morning session of our 15th Annual JPMorgan Homebuilding and Building Products Conference. My name is Mike Rehaut. I'm the senior analyst covering the space. And with me, we have CEO, Gary Michel of JELD-WEN. Gary, thanks for joining us. Really appreciate your time. And I'll kick it off. This is going to be a fireside chat. We have several questions that I'll be asking, but also for those that have dialed in, please feel free to click on the Ask a Question button or Submit a Question button on the digital conference book, and I can happily convey those questions to Gary later in the session. This is a 35-minute session. We might be done a little early, we'll see. But that's what we have slotted for today.

So I'm going to kick it off, like I said, ask a few questions. The first just being we came off of the earnings call. And in terms of guidance, there are a lot of, obviously, risks, concerns, uncertainties. We see that in the stock prices today. What are the biggest risks that you see currently, Gary, in terms of achieving your '22 guidance of 7% to 10% top line growth, margin expansion of 50 to 90 bps? How do you see those risks currently and perhaps potentially playing out over the next couple of quarters?

First of all, thanks, Mike, for having us today. Really appreciate being here and to have the opportunity to talk with you about JELD-WEN. We reaffirmed our guidance on our last call, which is the guidance we came into the year with really because what we're seeing is the same fundamentals, the same things that are within our control, being able to deliver those this year. They're really based on, number one, where we see residential new construction, the housing -- underlying housing markets around the world. Our work on continuing to deliver on our rationalization modernization programs, which are on the cost side. Obviously, what we're seeing in price and inflation, but also some unique drivers for JELD-WEN around growth. A number of new product categories that we're launching, which are significant and accretive to the business as well as a number of capacity expansions which come online in products that we've been growing really double-digit paces over the last year or so. So we see all of that really combining to continue to show that top line growth as well as that margin expansion that we've committed to for the year. Nothing's changed as far as our execution of all of that. The only real change we saw at the beginning of the year was additional inflation and a little bit of volume -- I'll call it a little bit of volume uncertainty that came out of some weather event, the flooding in Australia as well as the uncertainty around the Ukraine war, which affected some north -- some of our Northern European businesses, particularly our projects business, which pushed out some business there. And then the subsequent inflation that came out of some of the Russian sanctions, particularly around energy-related input costs in some metals. So if I were to look at -- the opportunity is still there. If anything, we'll expect that price to come through that we've put in for the first quarter -- in the first quarter, which is now in place to offset that additional inflation. We expect that to come through. But all of the things that we have under our control as far as growth initiatives will continue and -- as well as those other cost pieces.

Great. Thank you. I think just on you talk -- mentioned about volume uncertainty in Australia or Australasia, Northern Europe. Obviously, a lot of people are also concerned about visibility for demand here in the U.S., concerns around housing cycle, the economic cycle. How do you see growth for the back half of this year in North America? And with any potential slowdown in the new res market, how would that might impact your ability to achieve your guidance this year?

Yes. First of all, let me just -- the only uncertainty we saw in Australasian market was due to flooding in the first quarter. They're coming off of a 2.5-year housing recession. And last year, housing -- new housing orders were a record for them. And there's plenty of backlog. Really, the issue there for us is not an issue. It's -- we see pretty robust growth as people are going back to work, as the COVID lockdowns have been lifted and that flooding has gone now, we see that housing market as being fairly robust. It's really down to contractors and builders being able to get labor into position to call off the materials. So we feel pretty good about the Australian market right now. I mean North America, I think it's important to look at what's the underlying growth -- what's driving the underlying growth in residential construction. And while it may not be an opening price point or a starter market, kind of what we're seeing and hearing is it kind of relates to really 3 elements. People are moving from higher to -- high-cost areas to low-cost areas. So they've got money in their pocket, a lot of equity in their houses, they got jobs and they're moving from higher to lower cost areas, which means that they're able to, for the same payment or maybe a little bit more, get a different house, a better house and move up. If they can find that house, they're doing that. There's this move-up market, which, again, same people looking to move up with pretty good equity and pretty good values on their homes. Again, if they can find a house, they're able to sell their house pretty quickly and move that again into a move-up situation. If they can't find that house, which is happening in a lot of markets, then they're deciding to do repair and remodel, and this is high ticket repair and remodel, it's either additions or significant renovations, which again is really good for our business. Kind of the third piece that's driving residential new construction in North America is there's high rental rates now. This whole generation now is starting to finally go and buy houses because the math still works. With very high and accelerating rental rates, they're looking to buy homes. And again, save money, have good jobs, they're buying these homes. And they're not necessarily starter homes. They're almost a category now created in between kind of starter homes and move-up because they're used to the amenities that they're getting in their rentals or dare I say, even in their parents' homes, and they're looking to find those in those starter homes that they're buying. So we think the demographics and the -- and those pieces that are driving residential new construction will continue -- plus a short stock, right, are going to continue to drive the fundamentals of residential new construction for quite some time now, and we feel that, that's a pretty good setup for our business.

Great. Great. Thank you, Gary. You mentioned before some of the growth drivers that are in place for your own particular business. And this is a theme on your first quarter earnings call. Several top line growth drivers, including your Auraline Composite windows that will begin shipping in the second quarter, windows and patio doors, exterior fiberglass doors, VPI Windows. Can you give us a sense -- you kind of said, I believe, just alluded to double-digit growth, but what impact these new product lines and segments could potentially have on consolidated sales growth this year or next?

So we -- thank you for the question. We've got some really -- a really nice setup for some growth initiatives within JELD-WEN. You've mentioned a number of them. A couple of -- they're all capacity and margin accretive, quite frankly. One of them, if we talk about each one a little bit, a couple of years ago, we weren't even really a player in the kind of the entry door business. We really looked at our fiberglass business, talked with customers, talked with channel partners and came up with a solution, how can we be a player in this market space. And we looked at revamping the product line, but we also asked our customers and channel partners, what problems are they trying to solve, not necessarily related to doors, but what are the problems that they have in running their businesses and how can we help solve those. A lot of that had to do with the availability and type of labor that they were able to get in order to complete projects. So when we looked at revamping our fiberglass entry door business, we really looked at how can we look at making them easier to install, making them easier to deliver and easier to select. We came up with a much more modernized product line, but we also applied -- we put them into door systems, which are much easier to transport and much easier to install. You're basically installing a rectangular product in one piece, leveling, shimming and putting it in is a lot easier, uses a different skill set and has really been a pleaser for our customers. We've seen significant growth in that, so much so we're adding capacity. We've added just recently some capacity on the East Coast. We're adding additional capacity on the West Coast, and all of that will continue to drive double-digit growth. In our VPI Windows business, we bought the business about 2 years ago. The express strategy of that was to nationalize the product line for our multifamily space. We've added capacity through a new factory on the East Coast in Statesville, North Carolina. We've already sold out our first line there, and we will be adding up to 3 more lines in the next 12 months, which will continue to allow us to grow there. And then the introduction of our Auraline Composite Window business, window and patio door business, in North America is really exciting. That's a new product innovation, allows us to expand our capacity, compete in what's a very lucrative and growing market space that allows us to provide a product that looks and feels like wood, but has a lot of the great properties of vinyl. It's a 40% reuse, recycle product in that composite. And we're very, very excited. That's -- we've started taking orders for that, and we're now commercially shipping that product and we expect to see that accelerate as well. All of these are not just this year-type product -- projects. They are -- they've got long tails on them for growth for many years to come, and they're all margin accretive to the business, which is really fantastic.

Great. And any sense -- I mean all these initiatives sound obviously very exciting, and you're striking a chord in the marketplace. Any way to think about the contribution of these initiatives to your consolidated sales growth? Or is it too early to really put a number on that?

Well, I mean, I think what we've said is if you take those 3 alone, they contribute to probably something like around $100 million this year. And again, that's a multiyear tails on those. So you think about any one of those, they are in growing and exciting spaces for us. Take Auraline, for example, it's a $1 billion market today. Essentially, it continues to grow, but essentially underserved, right? There's a lot of people that would like to be able to carry and use a composite product but can't today, and we're able to fill that space. So I think that pie is going to grow, and the market is going to continue to grow as well. So that's pretty exciting. The multifamily space continues to be a great opportunity for us to grow with our customers and grow where our customers are. So again, multiyear faceted growth levers and ones that are really taking off for us and will show results in the second half of this year.

Great. No, that's helpful. I guess shifting to margins for a moment. About -- we're 1 year, I believe, about 1 year after your Investor Day, you hosted it around this time last year. How do you think about the achievability of the 15% to 17% EBITDA margin target by 2025 as basically you, along with many other companies, by the way, have more or less lost a couple of years of progress due to price/cost and the inflation that you've seen over the last couple of years? So can you just review the drivers of this target? And again, given the fact that maybe you're a little bit not where you thought you would have been a year ago in terms of this progression, the achievability of these targets.

So I think it is exactly that. It's a long-range target. So there's obviously some built -- there's some variability built into the model to begin with, right? We expect ups and downs through that period. And I would tell you that the only change between what we said a year ago at Investor Day and when we made those commitments and today is really the price-inflation mix. We saw way more inflation in the second half of last year and into this year, but we've gotten price as well. So as long as our price -- price-to-inflation margin projection continues to be accretive, that will flow through, and that's a shorter period of time. So we're probably just building up the element of price and cost a little bit. The rest, all the things that are in our control, the things that we just talked about, the delivery of our new growth opportunities and how those will play out, those are right on track. In fact, they're working very, very well for us. And we expect those to continue to deliver. We have a nice pipeline of innovation and new product categories to still launch within that long-range plan. And we continue to work our rationalization and modernization, our deployment of our business operating system around JEM that takes cost out, adds capacity. And those were all parts of the -- and levers of getting towards that long-range plan. We are still very excited about that trajectory, and we're still very committed to it based on all the things that we set out to do.

Okay. Great. I just wanted to shift gears also to Towanda. Actually, I have about 3 more questions left. We're coming in about halfway through on the session. And I'll just remind people that if they'd like to ask a question that I can convey to Gary, just hit the Submit a Question button, and I'll be happy to relay it. Just kind of hitting on the Towanda plant, you gave a little bit of an update during the earnings call. Obviously, it's appreciated. It's a tough element from a variability standpoint. People are trying to model. Could you just review again the current financial contribution of Towanda sales and margins to the -- to JELD-WEN as it stands today? And how would a sale impact your production capacity and also to the extent that this is eventually sold, how you'd deploy the proceeds from that sale?

Listen, without getting into too many specifics on that, what I would tell you is at this point, we're at the mercy of the court, to use that phrase, who's really running the process at this point. It's been a little bit slower than we would have liked it to have been. But that being said, I would expect from your modeling standpoint, the numbers will remain in our business for the -- probably for the remainder of the year at this point, although we do expect the process to continue. There's a lot of interest in Towanda. It's a very valuable property. And we believe that once the court keeps the process moving, it will move. But I would suggest that from a modeling standpoint, just consider it in our numbers for the remainder of the year. If anything, it would be the end of the year that anything might change at this point. But the -- we've often said that we're prepared for a number of eventualities with that business. And as far as use of proceeds, you go back to the Investor Day that we talked about last year, it's really a full capital deployment discussion of continuing to have great projects internally to invest in. We continue to opportunistically look at share buybacks, particularly at our share price today and with all the trajectory that we put out there, we really believe that's a great investment. And the third piece is looking at M&A that we have suggested in that same work up where we're very interested in improving our position in North America windows as well as looking at geographic expansion and capability expansions in our European business.

Great. No, that actually kind of leads into my next question, which is North America windows versus doors. And if it's possible, love to get a sense of the split in North America between those 2 product categories, windows and doors, and if those businesses are different from a margin perspective.

So really, take the last part first, there's no fundamental reason. There's no systemic reason why both can't earn -- have the same earning potential. In fact, I've often kind of done the hand swipe here where, over time, one's been more profitable than the other, depending on the issues going on. As we've been deploying JEM, improving our operations and looking at margin expansion more diligently over the last few years, we're seeing them move in the right direction, both at the same time. And there's really no systemic reason why one should be a better earner than the other. They both have great profiles, and we sell to the same customers. They go into the same processes. And other than some of the cost pieces to them, we are now starting to also see pricing and the value in pricing kind of equate out, which is work we've been doing over the last several years. So as far as we're concerned, there's really no reason why both. The correlation between having windows and doors in your selling portfolio is very high. We tend to do very well in -- with customers when we sell both products. We do well one or the other. But together, there's a high correlation to why we would own both. And when you look at our position, clearly a strong leader in doors, but an opportunity for us to improve our position in North America, in particular, in windows, we're going to continue to take that and continue to grow them.

So on that, I mean, how do you see -- you mentioned that there's perhaps a greater M&A opportunity in North American windows than doors. Are there any other differences that you see in terms of the long-term opportunities between the 2 product segments in terms of either organic growth also or margin improvement?

Well, listen, one of the biggest opportunities for us in windows has been -- is the launch of our Auraline Composite Window and Patio Door business. It's a category that there's really only one other player in. They've built a really nice market size for themselves. We think that, that market is much bigger. It's a growing market and it's an opportunity for us to offer a product to customers that has a more modern look, has a very appealing characteristics to it. It uses 40% of reuse or recycled product in the composite. It's a great product category that is accretive, not only in margin, but also accretive to our capacity. We've added a factory to do that. We believe that that's the kind of organic growth that we can do in windows that can really help, let alone some of the other categories and pieces around windows that we've added over the last several years. We still think there's a great opportunity within the windows space for us to grow. In doors, we continue to look at value-added services, new styles, new capacity. And again, like we solve the problem on exterior doors, continuing to do the same thing through operational advances, logistics advances and trying to help solve the labor issues for our channel partners as well. Great opportunities for us to organically grow that business as well. And as you've seen us do in the past, opportunistically, look, if there's M&A opportunities there, we will clearly consider those as well.

Great. Great. Last one for me, and again, if people want to submit a question, feel free to do so through the digital conference book, hitting the Submit a Question button. Just looking at Europe and Australasia, these have been regions that you've operated in for a long time. At the same time, you might have seen other building products companies, this past earnings season even, making some announcements or changes relative to their business portfolios across growth products and regions. How do you look at Europe and Australasia in terms of being core to JELD-WEN long term? And how do you evaluate the ongoing strategic importance in these regions?

So we look at all of our businesses that way. It's a healthy view to understand what's important, what's core, what's accretive, what can we grow, and what are we the best owners of, right? We've made some small changes over the last few years, kind of maybe in the marginal side of places, but we've gotten in and out of places where that makes sense. We look at all of our businesses that way. We like our businesses in Australasia and in Europe. As I mentioned earlier, a big part of our strategy is to build on our Pan-European approach of that business to add geographic expansion and capabilities in Europe. We think that's a really exciting thing for us. A little bit of uncertainty right now in parts of Europe, but there's some really vibrant markets in Europe that we still love and are growing and business is really continuing to boom in, and we're going to continue to support that. In Australasia, coming off of this recession, great opportunity to grow that business over the next several years. The housing dynamics there are very good, and we've been investing in growing our R&R business. We've been a little more indexed -- a lot more indexed towards residential new construction in Australia historically. And while that hurt us on the downturn, it's going to help us on the upturn, but we have been investing in improving our R&R business there. So I feel that, that's going to be something that, over the long term, will be valuable to that business as well.

Great. Well, that does it for me in terms of the questions, really, in my view, and these are the questions that we get from investors a lot as well. So perhaps I was -- I preempted some of the potential ones on the digital side, on the submitting side. But that really does it for me. So we're going to cut it off here. We're going to cap it here. I want to thank you again, Gary, for your time. It's great having you and appreciate your participation in the conference. For those on board, still, we're going to continue after a break at 10:55 with Fortune Brands, followed by Green Brick. In the afternoon today, we'll have Taylor Morrison, Whirlpool, Beacon Roofing and PGT Innovations. So thanks again for joining, and we'll see you in a little bit.