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

Okay. Good morning, everyone. Thanks for coming to day 2 of our 40th Annual Barclays Industrial Select Conference. I'm Matt Bouley, Barclays U.S. homebuilding and products analyst. Very pleased to have with us the team from JELD-WEN this morning, new CEO, Bill Christensen; and new CFO, Julie Albrecht. And so before we get into the questions, we're going to start. As many of you who were here yesterday, we're going to do the audience response questions first. We'll run through those quickly, and then we'll get into the good stuff. So team, if you wouldn't mind, let's start with the first question, please. From the audience, do you currently own the stock? Overweight, market weight, underweight or no. Okay. New investors today. Next question, please. General bias towards JELD-WEN right now, positive, negative or neutral? Okay. Right now, weighted towards negative.

Lots of opportunity.

All right. Next question, please. Through cycle EPS growth for JELD-WEN will be above, in line with or below peers? Weighted towards below peers or in line with. Okay. Next question, please. Which should JELD-WEN do with excess cash, bolt-on M&A, larger M&A, share repo, dividends, debt paydown or internal investment? Weighted towards debt paydown and both internal investment and share repo. No M&A, though. Okay. From the audience. Next question, please. What multiple of '23 earnings should JELD-WEN trade? Less than 10, higher than 21, and everything in between? Okay. A lot of opportunity in this audience, less than 10. Next question, please. The most significant share price headwind facing JELD-WEN, growth, margins, capital deployment or execution strategy? Growth margins and execution. Okay. And last question, please. How does ESG play a role in your JELD-WEN investment decision? Positive, negative, it doesn't, or it doesn't, but will in the future? Right now, the audience is not using ESG. Okay. So Julie, Bill, thank you for being here.

Absolutely. Thank you.

Pleasure.

So we'll sort of start with a high-level question being the incoming management team of JELD-WEN, what do you see as kind of the low-hanging fruit? And kind of what are your initial priorities on sort of writing the direction of the business?

So I would have -- probably on one of the last questions said that we need to get the execution right, and I think that's what we're really focused around in the short term. There's strengthening the foundation. So there's 3 key areas that we're working through right now. Clearly, it's taking cost out of the business, making sure we're rightsizing for the market reality, but also, we're getting ourselves more competitive from a cost standpoint. Second is, we need really to focus on conversion of our free cash flow or conversion of cash flow to invest in internal projects. We see a lot of very attractive projects to take additional cost out of the business, optimize our supply chain and improve our effectiveness. And the third point is, clearly, we need to delever. So we're above 3x today, which we don't see as something that we want to continue in the future, we need more flexibility. And so those 3 areas cost, generating more cash, and delevering. And maybe one of the low-hanging fruit is execution. I said this initially, we need to become better at delivering results and executing. And I've been with the company since April of last year, started by running the European business, moved into the CEO role in December. And we put together value creation plans in Europe. We're doing the same thing in North America, where we have a very clear view on cost measures, improvement measures, cost to achieve benefit we think we're going to get and the resources behind it. So we're able to plan and hold ourselves accountable, because I think it was one of the areas probably that wasn't as well managed in the past as it could have been.

You also highlighted on the call yesterday some kind of a clear bifurcation between some short-term priorities and some long-term priorities. Curious if you can kind of elaborate a little bit on that, what first things you're going to do versus how you're thinking about the longer term?

Yes. So clearly, strengthening the foundation is saying that we need to do. I mean this is housekeeping our homework that it belongs to a well-run organization. Yes, one of my reflections when I joined JELD-WEN is that I'd say we're probably overregulated and undermanaged. There's a lot of homemade complexity that Julie and I are working hard to take out of the system, push accountability down and make it very clear who's responsible for what, and what is the delivery that they're signing up to and what kind of resources they need to do that. So when and if we get that area stabilized and we move into the longer term, which is more about profitable growth, so that's really driving the innovation pipeline and making sure that we have the right portfolio ingredients to unlock the long-term value, which we clearly see exists. We have 3 different regional setups. We'll probably come back to some of those discussions here in the next 15, 20 minutes. So those are kind of the longer-term areas that we're really focused on sharing more with the capital markets in the second half of the year once we're able to deliver some of the short-term measures that are required.

The other thing I would add to that is we have a couple of important, call it, strategic -- 1 strategic, 1 court-ordered actions, activities that are going on, first with our Australasia segment. We had announced last fall a strategic review of business. So that's a very active ongoing process. So we're hoping to bring that to closure in the coming months, and then the kind of long-discussed Towanda court-ordered divestiture. So those were a couple of things as well that Bill and I, with the team, are looking to bring to closure, hopefully, this year, which also kind of cleans the slate for some of this updated ongoing strategy.

Okay. Yes. And we'll touch on that as well when we get to some of the balance sheet questions. But just one more around sort of the high level. Bill, you sort of talked about interesting anecdotes around what you've -- you're experienced in heading Europe, particularly around kind of layers of management, right? And just obviously, Europe is very complicated and sounded like there were some challenges with things being perhaps a little bit too centralized. And I'm paraphrasing, but how are you thinking about the sort of layers of management as you kind of look down the complexity of the business? Where do you feel like you want to kind of move the layers of responsibility for it?

So we're looking at a number of different areas to simplify the business. And one of the things that we've done in Europe, there were too many decisions being sucked up to the headquarters, and we pushed that back down to country-level management teams, and we're holding them accountable. So basically, they are developing plans, how are they going to get from where they are today to where they want to be in the future? What's the cost to achieve? What are the measures? And then we bolted on transformation office in Europe, setting up the same thing in North America to really track the value streams and make sure we're very clear on the execution, any leakage and corrective measures. So I think we've made a lot of progress on creating more accountability in the organization. So it's less of removing layers. It's more of pushing down, setting up clear plans, bolting on the transformation office to monitor and correct, if necessary. In North America, clearly, we said that the HQ is too heavy. We need to lean out our headquarters, and we need to push the resource down into the units, or we need to push the resources out if we don't think that there's a value that they're adding to the organization. So that's one area. So leaning out the HQ. Second is really working with the North American team to really understand within our region, how do we really want to run, manage and measure the business? So what are the line of businesses that we want to drive on an annual basis? I have a very clear view on who needs what resources, what are the goals that we want to achieve. And those organizations are starting to step into place to really take ownership of the plans, which I think will be a big step forward for us and allow more visibility, but also more accountability in the organization.

That's helpful. And so the prior management team had some rather discrete goals around footprint, rationalization and modernization. As you've kind of taken the reins, what needs to change versus what was being done prior around some of those efforts? And where are we at longer-term rationalization process?

So clearly, footprint is one of the key factors that we're working through. We need to make sure that we're well positioned to serve our customers and that the cost to serve is balanced. And my observations are that the large number of assets that we currently have need to be strategically reviewed and optimized. So we need less sites, but we need to invest more in fewer sites to make sure that the automation is there, that the supply chain excellence is there. And we're doing a lot of the things well. We just need to focus on fewer assets. So we've taken 5 production sites offline in '22. We announced the Atlanta closure in January. We announced a sawmill closure in Europe in January. So we're continuing to optimize the asset base. So that's one area. It's basically reducing, streamlining, but overinvesting in the remaining sites to improve our operating efficiency. And second area is really to challenge ourselves on the cost base. Are we in the right areas from a cost standpoint to serve our customers and meet their expectations on cost and delivery performance? So there's ongoing discussions, and there are clearly more activities this year focused around a better balancing of where we operate and cost to serve.

Got it. So maybe we'll move into some of the fundamentals and guidance and all that, maybe just starting with the top line. You gave a guide for -- or at least you kind of spoke to, reflected in housing permits in the U.S., right, kind of down 20 to 30, and I think you talked about mid-single-digit declines in repair and remodel, and sort of rolled up into a low double-digit volume decline for North America. And correct me if I'm wrong, but how do you kind of think about the cadence of that playing out? Obviously, you were kind of flattish on volumes in Q4. So the question is, is it kind of happening quickly? Or is it a little more evenly spread through the year?

Yes, when you look at like the year-over-year, so obviously, Q1 of this year is going to be lower volumes than Q1 of last year, right? So -- and sequentially, this is a little bit of a weaker time in the kind of seasonality in the [ West ]. But yes, so I'd say, really, throughout the year, we would expect kind of lower volumes just year-over-year in general. And then I think that's probably a little bit pronounced in the first half of the year, just again because of the comp when you look at the first half of '22. And nonetheless, generally speaking, on that top line, when we look just high level across the quarters, we see that kind of 4% to 10% lower sales really pretty consistently. And so it's all relative to the prior year's quarter. But yes -- but definitely, volumes are -- they're lower as we start this year than they were a year ago.

Understood. I think you had also mentioned some of the customer inventories and destocking maybe, and again, I'm paraphrasing, but I think you were alluding to it being closer to finished. So how are you kind of thinking where customer inventories are, and sort of what's the risk that there might be some additional destocking going forward?

We think that's pretty balanced, I'd say, in the different regions that we operate in. We've seen a pretty strong rebalancing impact in Europe in the fourth quarter and also in North America. So we think that kind of the push and the pull are relatively balanced right now. There's a high level of uncertainty. And so clearly, it could change. But right now, we feel that the market reality is coming through the channel to us on a pretty even basis, and we don't expect any major shocks to the system, especially what we're seeing kind of on how we're starting the year, we're close to our own expectations. So no red flags have kind of popped up through January and the mid part of February.

Got you. And I think within the guide, you spoke to pricing, it's largely carryover pricing. I think we've seen some price increases from JELD-WEN, maybe in very specific categories, I think wood windows might be one of them, which is not, I guess, huge for you guys. But curious, kind of where may you have the opportunity to take incremental price versus what do you think about kind of the pricing strategy along the rest of the portfolio?

So pricing in '23, we feel, will be pretty balanced with costs. There's clearly a market reality that I think we managed pretty well in '22 of kind of balancing price and the cost inflation. Cost inflation was significant. I think it was over $600 million in '22, which is unheard of. And we're still expecting inflation in '23. So clearly, we're not out of this yet as a supply base. I think one of the problems that it's just going to create in general is additional affordability questions on housing for end users because what's happening is we're expecting, there's still obviously a roll forward price, and clearly, we're watching closely the inputs. We don't see any deflation coming, but that's going to be pushed through to the end users. And we think a lot of people maybe on the sidelines are reconsidering, what do I want to do? But the flip side of that is when things start settling and stabilizing, we expect a pretty solid rebound. And this is across all regions that we're working in. So we feel well balanced in '23, and we're expecting a pretty positive upturn when everything starts to settle out.

And so on that topic of material inflation, I think you said you're expecting a further 8% to 10% inflation this year. I mean, some materials, perhaps on the energy side, it seemed like you're seeing a little bit more relief. How are you guys thinking about, especially in Europe, right, the natural gas? How are you thinking about kind of some of these potential tailwinds emerging and if and when some of that, especially energy costs, may actually benefit JELD-WEN? How do you think about the timing of that?

Yes. I guess kind of to be clear, there are very limited areas of deflation. So you might say the rate of inflation absolutely has slowed, but there still is inflation. So -- and obviously, that's just part of what we're managing. So I think we're -- again, I think we need to be really clear that, okay, pockets of ocean freight or logs and lumber in Europe, I mean, there are little pieces, where you'd say, are lower cost. Otherwise, costs are up, right? It's just again, as you just mentioned, look at this year as more kind of high single-digit inflation versus last year's 20% to 25%. So -- and again, we're managing through that, right? So again, how do we properly manage price and the cost. So -- but still, it's not -- again, even costs are generally in line with our expectations, but...

No, perfect clarification. So then just kind of zooming into the guide on an EBITDA basis, I think you spoke to get in the weeds, kind of that $40 million of nonrecurring benefit, right? And so when you strip that out, you're sort of effectively talking to flattish EBITDA, right, with down volume, positive productivity. Maybe you can kind of help the audience understand the ability for productivity to truly offset this volume decline you've guided to and kind of what else needs to be done in terms of these discrete cost outs to manage that margin?

Absolutely. I mean, as we've talked about, the demand weakness this year, I mean, I'd say it's material, right? So when you're talking about $500 million-plus perhaps of lower sales, right, from just volume, that drop-through is $100 million to $150 million, depending on kind of the range we're using for the margin and put that amount of volume potentially down. So it is a kind of volume hit. Frankly, we're talking very broadly across the organization about this. So we're very transparent. I think that's another thing we're having externally, transparency, accountability, et cetera. So literally, we've had global town halls, Bill, me, our [ SLT ] Tuesday night, yesterday morning, to cover the globe of our footprint, talking about the reality of the market, and then how do we go through this as a company, right, which is, again, how do we prevent more sales decline, but then more importantly, how are we reducing costs? And so one of the point there is that we're not kidding ourselves, right? And we're not kidding our organization about importance of cost reduction. I guess on that note, there are a couple of buckets there. Obviously, we're focused on productivity. We always are when you think about continuous improvement, ops excellence, that type of thing. We always [indiscernible] there. And I guess very specifically, as the new business should, as volumes are down, we're [indiscernible] operations, we need to shorten workweek hours, we need to [indiscernible] and that type of thing. Obviously, that's the way to help manage less headwind to the bottom line. And then it's a lot about [indiscernible], which we talked about a lot on the call, Tuesday, on our earnings call, but we view that opportunity this year as it should be plus or minus around $100 million, right? And then we've got additional productivity [indiscernible] over and above that, that would drop through as well. So again, going forward actions of cost savings from actions we took in '22 that still benefit '23, call it, within that $40-ish million range. And then we've got the list of things for this year that we're already active on. Some are public, some are not at this point, but we're very active with planning and implementing cost reduction [indiscernible] that will benefit this year. And then that obviously continues It's pretty -- again, in the spirit of transparency, internally and externally, this is [indiscernible] here as we could, right, headwinds. And then JELD-WEN needs to do better. We're well aware of where our markets are competitively with peers, and it's not where we should be and can be. So it's really not just about growing the top line over time, but it really is focused on the cost [indiscernible]. So that's a top priority for us.

That's very helpful. I mean, it sounds like this was very discrete cost actions, right? Because sometimes, we think about productivity as sort of a catfall, right? And if you're -- it tends to kind of reflect where volumes are going, right? Better decrementals or worse decrementals, depending on the environment. So my question is, we're talking about these discrete items, and so you have a clear line of sight to them. How do you think about just what's been going on with JEM, for example, right? What's the kind of ability to sort of if and when volumes recover, how do you think about the ability to kind of continue to just generally take cost out of the business?

So JEM is the JELD-WEN Excellence Model, which for people who are not aware of that, just think of it about continuous improvement, new manufacturing and really doing things right on a daily basis, taking costs out of the business and always questioning how can we eliminate waste. We've been doing this for a number of years with different levels of success. Clearly, one of the things when we're reducing our footprint, we really want to focus more on better balancing the investments going into the sites that we're keeping to make sure that the cost advantage that we can create for ourselves is evident. On the other side, we're also asking questions. We invested a lot of money and time in our Atlanta facility, which unfortunately never got to the levels that we felt that it should. So that was also one that decisions that we are now making, saying, well, if it's not going to chin the bar there, then we're going to have to look at how can we either change it, and we weren't able to change it, so we've made a decision to close it and roll that into other sites without, we feel, significant sales leakage because we can absorb the volume based on things that we've been doing with JEM to improve our productivity across the network. So that's working well. We do have different levels of [indiscernible] with this across the different regions. And one of the things that we did leaning out the headquarters is we've taken the JEM team and we've pushed down into the regions where it belongs. It's their responsibility, obviously, to drive the continuous improvement. Our contribution to that at the HQ level is to remove complexity and waste that we've created through unnecessary bureaucracy and rules and procedures that were just not adding value.

Okay. That's very helpful. So the Windows business, it's not unique to JELD-WEN, but lead times have been very extended over the past year. I'm curious to kind of update us on that piece and where are we on [indiscernible] and kind of what are the implications if lead times come down? Is that like the thing where you can get some destock in customers, right, as you do get lead times under control. How do you kind of think about just that business?

So we have a pretty complex Windows portfolio. We service a lot of different materials, so vinyl, composite, wood. We're in residential, retail, also homebuilder segment. We do also supply multifamily. From a segment standpoint, we have a very robust backlog, around 6 months, in our multifamily business. Excellent business. There's long lead times. So we're probably 1.5 years, 2 years out on the project acquisition side. So that was one of the bolt-on acquisitions that has been going very well. So multifamily for us remains very robust. I'd say, regular windows area of our business, our lead times are balancing back out kind of 4 to 6 weeks. Wood is a little bit longer at 8. Nothing out of the ordinary. So we feel that we're kind of back into the sweet spot. There's clearly, and there will continue to be, additional capacity in the market. And we're doing whatever we can to take cost out of the business. One of the questions we're going to be asking ourselves in the second half here really is what's the winning strategy for us in the long term, what segments do we want to participate in, where do we think we can deliver the EBITDA that we know JELD-WEN can create and deliver? So there's going to be some discussions with the different line of business owners, really, about what's your plan, where do you think you can get to, does that meet our expectations and what additional measures do we need, whether it's bolt-on acquisitions or different reflections on how we need to set up our business models? So short term, stabilized from a lead time standpoint, and we're kind of looking at the second half of the year really to the strategic road forward, what are going to be the implications for us.

And then -- so on the door side, maybe sticking with interior doors in North America. There's obviously been some material price increases in recent years. In my words, this is the year that's more difficult to achieve price, and so we haven't seen a price increase. But how do you think about kind of longer-term pricing strategy in that business? And as we kind of get past this end market of this year, what type of annual price should we look for in the doors business?

So that's always a tricky question. If you ask someone 5 years ago, what's the average annual price increase to offset inflation, they'd say maybe it's 2%. If you ask them last year, they'd say maybe it's 20%. So I think we're going to rebalance to a more optimal level. Europe has historically been kind of 2% to 4% to offset the labor economics and inflation cost. But on the other hand, what we're really driving towards internally is what caution we'd be responsible for and how can we take cost out of the business to make sure we're not pushing things through to the customer that they don't want to pay for. So there's a lot more reflection on what we really think pricing should be in the future and what we can control and we need to pass through. So that's kind of just the baseline economics. The second question is how can you create more value per transaction by delivering more innovation, by delivering more value per transaction in the door, whatever that may be. And I think we win both for us and our customers in the channel because that's the innovation, I think, that the market needs. Clearly, there will always be some of the high volume, lower value that's just transactional-based. But I do think there's opportunity to increase value that we deliver in the channel through innovation.

Got it. And so we spoke about cash flow earlier. I think you said on the call the other day that you're targeting $500 million working capital off the balance sheet this year.

Yes.

So presumably, as Towanda and Australasia come to fruition, you'll have deleveraging there as well. So kind of putting all that together, how should we think about, one, free cash flow this year relative to what happened last year? And number two, where do you want to be from a leverage perspective since these deals move to close?

Yes, so I guess, first, our cash flow target for this year, I will say for 2022, we're obviously not happy at all with those results. And really, most of that was about inflation of inventory on the balance sheet. I view that as an anomaly. When we look back over what the business can produce from an operating cash flow perspective, it's upwards in that kind of $300 million range. And so more like that up towards the $300 million is what we're looking at for this year. Obviously, that requires good quality earnings, like we're [indiscernible] as well as the working capital reduction on the other, keeping things clean from a cash flow perspective. And then, yes, like we've talked about, I mean, from a leverage perspective, our target is below 3x. And we think with the cash flow generation, and again, without any of these cash events, depending on plan this year, we have visibility to get to 3x and still investing in ourselves, that's critically important as well. Growth and profitability really first, and the way we're investing in our factories and even in our [indiscernible] purchasing and financial data, decision-making and all that kind of thing is also [indiscernible].

And then before I ask one final one. Does anyone from the audience want to ask a question to the JELD-WEN team? Okay. So my final one is shifting over to Europe. I think you spoke about some kind of moving pieces from end-to-end side, right? New construction seems to be the highest impact in 2023, and then you might be a little more stretched in several areas in Europe. [indiscernible] a lot of markets for JELD-WEN. Curious if you can kind of elaborate a little on sort of the inside baseball there and which markets are you seeing [indiscernible] versus where do you think [indiscernible]?

So JELD-WEN has built [indiscernible] through the years. So we've acquired a basket of leading brands and leading markets. So we have a very strong presence in Central Europe, very strong presence in Northern Europe. So those are very good markets for us. In general, we serve 3 different segments. So we serve interior, we serve exterior, and we serve what's called special solution, fire, noise, smoke. We're getting better at kind of sharing competencies across the different regions. So that's our footprint. If you kind of look at Europe in general, there's only 1 solid data [indiscernible] which is called EUROCONSTRUCT, which basically forecast twice a year where we're going and what the expectations are. My experience, I've been in Europe for a long time, is that EUROCONSTRUCT is always too optimistic. They never get it right. So right now, there are kind of [indiscernible] minus 3 to kind of 0 as to what Europe looks like. They're saying Northern Europe is suffering, which is right. There's significant demand impact just for inflation. It's high double digits in many of the European -- Northern European [indiscernible]. Consumers are delaying all decisions that are non-critical. They're more worried about, can I heat my home? Which is a serious significant effect that starts in Sweden. They're dropping off the cliff. There's a lot of, I'd say, economic-driven [indiscernible] in Northern Europe. Central Europe is holding up better. R&R is usually pretty stable in Europe. We look to that as kind of the underpinning through the cycle, commercially longer. Projects have funded in the past [indiscernible] to offset. Central Europe will be okay. U.K. is in a tough spot. Northern Europe is in a tough spot. People think, even EUROCONSTRUCT, France will be okay. But France [indiscernible] made brands with a lot of waste. We do make products in France. At the end of the day, [indiscernible] the Ukraine [indiscernible] is resolved. There'll be a clear line of sight for Europe.

Understood. Well, great. With that, we're up on time. So Bill Christensen and Julie Albrecht...

Thank you very much, Matt.

Highly appreciated.