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

Yes, go ahead, Julie, if you want to. And then I can chip in at the end because there was additional areas, Mike, that I think we just need to highlight as well, but we'll talk through the splits and then we can come back on some of the other areas where we think there's also additional opportunity.

Yes, definitely. I guess, Mike, if I'd say the 3 buckets, call it SG&A, which obviously are things like headcount reductions, but other cost efficiencies, where we've optimized through various actions kind of lower SG&A expenses, so that's 1 bucket. Obviously, you mentioned plant closures, which really mostly impacts, let's say, cost of goods sold but also some over SG&A tech things as well. And then I'll call it just broadly with the managed transportation indirect stand, call that just other cost of goods sold improvements, right? So let's just call those the 3 buckets. Roughly 1/3, 1/3, 1/3. I mean that's not precise, but that gives you an idea that the initiatives are spread among those 3 buckets. And I'd say we view probably over time, the biggest opportunity to be in cost of goods sold. And so while we'll always focus on how can we make our overhead structure from an admin SG&A perspective, more efficient, so that is absolutely ongoing. We do feel like probably the larger opportunities continue to be out of that cost of goods sold category, the build. Whatever you want to [indiscernible]

Absolutely. What we have probably not been diligent enough in the past on is commercial excellence, which is really understanding how effective is our sales force. And what's the cost of that sales force and how does that benchmark against other players in the market? And second, how we look at pricing and the details around pricing in the various markets that we serve, the various segments that we serve. So we're doing more work to better understand those levers to really work, not only on the COGS side, but also deliver, I'd say, a cleaner top line and a higher quality of sales. So I would probably summarize it as we're more focused on the bottom line than the top line. And I think this is a pretty significant swing to prior leadership teams because there's so much opportunity. We just need to make sure that the quality of sales is appropriate, but also the cost structure to serve meets our expectations and we'll deliver the right return on the capital that we're deploying with the assets.

Right. Right. That makes sense. Well, maybe I'm going to switch up -- my next question was on North American margins. But before -- then after that, I had North American windows versus doors. And I think I'm going to ask that second question first. It probably plays more into the answer of the margin, broader, bigger picture margin question. So I was hoping to get kind of an update on your North American segment in terms of the exposure to doors versus windows. I mean in prior companies that I've followed and across the industry, I've seen window companies typically, they're much more difficult companies in terms of lower margins, much higher degree of industry fragmentation, level of competition. And so I'm curious to understand JELD-WEN's business a little bit through this lens. And trying to get an understanding of within North America, what's the split between doors and windows? And what are the competitive landscapes between those 2 segments in terms of top line growth and margin profiles for each of those product categories?

So just from a high level, Mike, we're probably 2/3 stores and 1/3 windows, just to kind of size. We don't share profit margin details on specific segments. What we are doing -- coming back to what I had said earlier, is we're pushing down the responsibility to really shine the spotlight in on different segments. So [ John Kraus ] and his team in North America are working now on the windows area or the doors area or the distribution area to really understand where are we, where do we want to play and how are we going to win? So as we get into some of these different areas, the drivers are very similar. So it's residential new construction, traditional build channel, R&R on both sides. I would agree that just in general, I would say windows is more fragmented than doors also in Europe. So clearly, there's an opportunity that we've seen rolling up some door assets around the world and have done it quite well with a very strong portfolio of brands. Windows is a little further behind. We don't serve the windows segment in Europe, however, we do in North America. And for us, it's all about quality of growth and investing in the assets that we feel have a long-term sustainable competitive advantage in the market. And clearly, we have a lot of those, but we also have other areas we're starting to identify and say how can we make this more competitive? And what are some of the things that we need to do coming back to kind of the cost measures that we're taking? So we're still in the process of evaluating the quality of growth. But as I said, our view clearly is on bottom line, not top line because we need to improve the margin profile in general within our organization.

Right. Right. That's helpful. I'm actually pulling up most recent note here to make sure I'm getting -- I'm going to get all the numbers right for my next question which I have had this in front of me. But okay, so in terms of North American margins, over the last several years, your EBITDA margins for North America ranged between 10% and 13%. And comparing it to your closest public peer, Masonite, their North American EBITDA margins, as you probably know, have been between 19% and 21% since 2020. So -- and obviously, this is your front and center kind of area and goals with the cost takeout program. And as you just mentioned, a focus on bottom line versus top line. I'm -- we'd love to try and get an understanding of how that difference breaks down. And in other words, to the extent that I'm on the right path or kind of thinking about windows versus doors correctly, how much of the difference is structural in terms of windows historically being a lower margin business? And to the extent that you're identifying these different areas, not just the $100 million cost takeout, but other areas as you've started to mention as well, where can we see or what's your aspiration of getting the JELD's North American EBITDA margins over the next 3 or 4 years? So kind of a combination question, what might be structural in terms of that gap, again, perhaps it's windows, perhaps it's other things? And where might you be able to close that gap?

So let me start at the 40,000-foot level. One of the things that we need to do as an organization is focus, and we believe that we are playing in too many areas and not doing it as effectively as we should. And as a result, we've underinvested in many assets over the last number of years. So our view is very clear. We need to do more with less. And one of the first steps in that process was divesting our Australasia business, which we signed an agreement with Platinum Equity, and we expect close in Q3, early Q3, which will give us, number one, additional flexibility on the balance sheet because we'll be reducing our debt. Number two, give a clear focus for leadership in the organization on the core regions, North America and Europe. So that's the first step is focusing the organization more on the core of the business. As we drill down into the core, your specific question was North American margin profile. Clearly, we're not happy with the margin profile that we're delivering today. I think that's message number 1. Message number 2 is it's probably not -- it's pretty hard to find a comp for us today. Clearly, there's area comps, but there's no company comp because we are pretty diversified, and diversification can be of strength, but it can also be a weakness. And we're going into that context and better understanding how can we win in the segments that we choose to play and winning for us means an appropriate return on capital, appropriate investments, the right team, the right innovation and the right products. And clearly, it's going to take us some time to dig through the different areas that we participate in to really understand what's the aspiration that we have. So it's too early to share where we think we need to be in 3, 4 years. My message is that there's significant opportunity when I'm looking at the portfolio to really improve the bottom line, and that will be some of the content that we want to share with the capital market in the back half of this year when we're talking about where do we feel we need to focus and where do we think we can get our margin profile by making some smart decisions and focusing on fewer things, but doing those more effectively.

Okay. Great. Maybe just moving on to -- I have a couple more questions here, and we have about 10 more minutes left for the session. Again, for those that are dialed in, if you'd like to ask a question of your own, please hit the button. Operator, actually the website kind of is now not allowing me to get in. So operator, if you have those questions, you can forward them to me in the chat, and I'll pass them along. But next question would just focus on price mix. It's a big area of focus, obviously, in general. You mentioned pricing, Bill, earlier in terms of perhaps areas of margin opportunity going forward. How should we think about price mix annually on a go-forward basis, specifically, if you have thoughts around pricing each year and also on the mix side, obviously, you have some higher growth product categories like VPI and [ Oral line ], I'd love to get your sense of both of those components.

So clearly, our goal is positive price/cost, but we need to do it in an appropriate fashion. And the expectation was for ourselves, but also from many people in the industry that the inflation headwinds are still very relevant. So pricing is a key factor and has been for the last, let's say, 12, 12-plus months just based on the disruption on the economic side, but I'd maybe hand it over to Julie to go through some details specifically on price/cost, if there's more content that we can give you. But we're happy with the work that we're doing, and we need to keep that level of diligence up. I'd say we were late to the game last year, and we've caught up, and now we're getting much better at assessing and seeing the signals early enough where we can take appropriate actions. So that would, on a high level. Julie can give some more details.

Yes, I'll just add a few more comments. I think clearly, price/cost is one of our most important factors this year. Obviously, we're talking about the weakening demand. Obviously, cost reductions, we've been talking about that. That's a big theme. But as well, as Bill said, really making sure that we're doing the right thing for JELD-WEN as well as our customers right around pricing. And it was pretty resilient in the first quarter, which was one of our drivers to stronger-than-expected earnings in Q1. As we move through this year, and as Bill mentioned, in 2022, right, we were catching up to inflation and really feel like we caught up in the second half of the year, which means for '23 and when you think about comps, right, and especially top line, we see this plus 10% that we recognized in Q1 on price really declining and really flattening out year-over-year. And a lot of that is comp driven as well as caution around in this environment, where we are able to maybe limit to get new price increases versus a real focus on holding price. But as Bill mentioned, we've really made some nice improvements, especially in North America around visibility, inflation that remains in inventory, right, that we can't lose sight of as that runs through the P&L. And so again, I think just a lot more diligence and better information around managing price, protecting price appropriately. And then again, as Bill said, one of our priorities is staying price/cost positive.

Right. And just on the mix side, Julie or Bill, any way to think about mix over the next couple of years? I mean, again, you've had some higher growth product areas, product categories, obviously, positive mix is something that most companies trying to focus on, but there are trends within your industry that would also suggest supporting positive mix over the next couple of years. Any thoughts around expectations of what a positive mix might contribute to the top line or even the [indiscernible ] side on a go-forward basis?

I think it's premature to really give any numbers there. But if you think about -- and if you heard what Bill was just talking about, generally, as we push down more accountability into the regional leadership teams and really shine the light from Bill, myself and down through the regions, again, sales mix and where we're focusing our investments and how are we simplifying our business, these themes that Bill has been talking about, I think all of that leads to -- we would expect to be improving our mix. And so there are pockets of that right now, like we have positive sales mix in Q1. I mean, that's nice. But I mean we're thinking in the coming years, we would hope to see, and as a part of our strategy, we'll be focusing more, call it, big on mix of our products with more of an eye on profitability.

Right. We have a couple of minutes left. I don't see any questions in the queue, but I have a couple more of my own. I think probably time for one more important, bigger picture, which is on the balance sheet and capital allocation and Bill, you referred to the sale of Australasia to Platinum. I think following that sale, you expect to fall below 3x net debt to EBITDA by year-end. How should we think about your leverage goals for '24 and beyond? And as that leverage comes down, how would you extensively balance further deleveraging over a '24, '25 time frame versus M&A and share repurchase or other uses of capital?

Yes. So where we are today clearly does not meet our expectations, so we need to be below 3x. And we feel with the proceeds of the Australasia divestment, which will have very limited tax leakage and some strong cash flows as we've communicated, we should get below 3x by the end of the year. Clearly, that's not the goal. Rather the goal is to continue delevering and is it 2.5x? Is it below 2x? I don't know, Julie and I are working through that. Clearly, we need to strengthen the balance sheet because we need to do a couple of different things on the capital side. We need to invest in ourselves, which is -- which we're seeing great opportunities with all of the internal projects, the paybacks on these streams are very compelling. So we need to continue that. We need to overinvest in some of the assets that we really haven't taken care of as we should have in the past. Clearly, continue thinking through delevering to give us some more optionality on tuck-in acquisitions because, clearly, once we strengthen our foundation, we are already thinking about profitable growth levers, how are we going to build our portfolio going forward. And I suggest kind of near to midterm share buybacks for us are a pretty low priority, not out of the picture, but we feel that there's ample opportunities for capital allocation in other areas, which would deliver a pretty solid return based on the current setup. So that's what we're looking. But the first goal is to focus, sell Australasia, delever and get below 3x by the end of the year. So that would be our first kind of target that we're communicating.

Great. Well, that actually, I think, does it. We're just about at the ending point, 10 of the hour. So we'll cut it off here. Bill, Julie, thanks so much for your time. Great to -- like I said, meet you at least virtually for the first time. So appreciate your participation. For those on -- that are still on, we'll be continuing at 9:00 a.m. with LGI Homes followed by MDC. Later today, we'll have Fortune Brands, KB Home. The afternoon session will contain Taylor Morrison, PGT and Forestar. So thanks again, Bill and Julie, appreciate it, and we'll see you soon.

Thank you, Mike. Have a good day.

Thanks, Mike.

Appreciate it. Thank you.