Yep. Okay. Good morning, everyone. Thanks for coming to day two of our 40th annual Barclays Industrial Select Conference. I'm Matthew Bouley, Barclays US Homebuilding and Distribution Products Analyst. Very pleased to have with us the team from JELD-WEN this morning, new CEO, Bill Christensen, and new CFO, Julie Albrecht. Before we get into the questions, we're gonna start as, you know, many of you were here yesterday. We're gonna do the audience response questions first. We'll run through those quickly, and then we'll get into the good stuff. Team, if you wouldn't mind starting the first question, please. The audience, do you currently own the stock? Overweight, market weight, underweight, or no? Slightly awkward one. Okay. New investors today.
All right.
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. What should JELD-WEN do with excess cash, bolt-on M&A , larger M&A, share repo, dividends, debt pay down, or internal investment? Weighted towards debt pay down and both internal investment and share repo. No M&A, though. Okay. Interesting. 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. 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. Julie, Bill, thank you for being here.
Absolutely.
Pleasure.
Thank you.
We'll sort of start with a high-level question being, you know, the incoming management team of JELD-WEN. You know, what do you see as kind of the low-hanging fruit and kind of what are your, you know, initial priorities, on sort of, you know, you know, writing the direction of the business?
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. There's three key areas that we're working through right now. Clearly is taking costs 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 costs out of the business, optimize our supply chain, and improve our effectiveness. The third point is clearly we need to delever.
We're above three times today, which we don't see as something that we wanna continue in the future. We need more flexibility. Those three areas, cost, generating more cash, and delevering. Maybe one of the low-hanging fruits is execution. I said this initially. You know, we need to become better at delivering results and executing. I've been with the company since April of last year, started by running the European business, moved into the CEO role in December. We've 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 gonna get, and the resources behind it.
We're able to plan and hold ourselves accountable, which I think 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, you know, kind of a clear bifurcation between some short-term priorities and some long-term priorities. Curious if you can kinda elaborate a little bit on that. You know, what are some of the first things you're gonna do versus, you know, how you're thinking about, you know, the longer term?
Clearly strengthening the foundation is something that we need to do. I mean, this is, you know, housekeeping or homework that it belongs to a well-run organization. You know, one of my reflections when I joined JELD-WEN is that
I'd say we're probably over-regulated and under-managed. 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 do they need to do that. When and if we get that area stabilized, then we move into the longer term, which is more about profitable growth. 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 three different regional setups. We'll probably come back to some of those discussions here in the next 15, 20 minutes.
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, one strategic, one court-ordered, actions, activities that are going on. First, with our Australasia segment. You know, we had announced last fall a strategic review of that business. That's a very active ongoing process, so we're hoping to bring that to closure in the coming months. The, the kind of long-discussed Towanda court-ordered divestiture. Those are a couple of things as well that Bill and I with the team are looking to bring to closure hopefully this year.
Mm-hmm.
Which also kind of cleans the slate for some of this updated, ongoing strategy.
Okay. Yep. We'll, we'll touch on that, as well when we get to some of the balance sheet questions. Just one more, you know, around sort of the high level. You know, Bill, you sort of talked about interesting anecdotes around, you know, your experience in heading Europe, particularly around kind of layers of management.
Yeah.
Right? Just, you know, obviously Europe is very complicated, and it sounded like there were some challenges with, you know, things being perhaps a little bit too centralized, and I'm paraphrasing. You know, how are you thinking about the, you know, sort of layers of management, you know, as you kind of look down, you know, complexity of the business? You know, where do you feel like you wanna kind of move the layers of responsibility for this?
We're looking at a number of different areas to simplify the business. One of the things that we've done in Europe, there was too many decisions being sucked up to the headquarters, and we've pushed that back down to country-level management teams, and we're holding them accountable. Basically, they're developing plans, how are they gonna get from where they are today to where they wanna be in the future? What's the cost to achieve? What are the measures? Then we've bolted on transformation offices 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. I think we've made a lot of progress on creating more accountability in the organization.
It's less of removing layers, it's more of pushing down, setting up clear plans, building on the transformation office to manage, 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. That's one area. Leaning out the HQ. Second is really working with the North American team to really understand within our region, how do we really wanna run, manage, and measure the business? What are the line of businesses that we wanna drive on an annual basis?
Have a very clear view on who needs what resources, what are the goals that we want to achieve? 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. The prior management team had some, you know, rather discrete goals around, you know, footprint, rationalization and modernization. You know, as you've kinda, you know, taken the reins, you know, what needs to change versus, you know, what was being done prior around some of those efforts, you know, and where are we at longer term rationalization process?
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. My observations are that the large number of assets that we currently have need to be strategically reviewed and optimized. We need less sites, but we need to invest more in fewer sites to make sure that the automation is there, that supply chain excellence is there. We're doing a lot of the things well. We just need to focus on fewer assets. We've taken five production sites offline in 2022. We announced an Atlanta closure in January. We announced a Saltvik closure in Europe in January. We're continuing to optimize the asset base. That's one area.
It's basically reducing, streamlining, but over-investing in the remaining sites to improve our operating efficiency. 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? There's ongoing discussions, and there'll clearly be more activities this year focused around a better balancing of where we operate and cost to serve.
Got it. Maybe we'll move into some of the near fundamentals and guidance and all that, and maybe just kind of starting with the top line. You know, you gave a guide for, or at least you kind of spoke to what's reflected in housing permits in the U.S., right? Kind of down 20-30%, and I think you spoke 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. How do you kind of think about the cadence of that playing out? Obviously, you were kind of flattish on volume Q4. The question is, you know, is it, is it kind of happening quickly or is it a little more evenly spread through the year?
Yeah. Well, when you look at like the year-over-year, obviously.
Mm-hmm
Q1 of this year is gonna be lower volumes than Q1 of last year, right? You know, sequentially, you know, this is a little bit of a weaker time in the kind of seasonality anyway. Yeah, I'd say really throughout the year we would expect, you know, kind of lower volumes just year-over-year in general. I think that's probably a little more pronounced first half of the year, just again because of the comp when you look at the first half of 2022. Nonetheless, you know, generally speaking on that top line, you know, when we look just high level across the quarters, we see that, you know, kind of 4%-10% lower sales really pretty consistently. It's all relative to the prior year's quarter.
Yeah. Definitely, you know, volumes are, you know, they are lower as we start this year than they were a year ago.
Yep. Understood. I think you had also mentioned, you know, 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. How are you kind of thinking, you know, where customer inventories are and sort of what's the risk that there might be some, you know, additional destocking on their part?
We feel 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. We think that the push and the pull are relatively balanced right now. There's a high level of uncertainty. 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 on how we're starting the year. We're close to our own expectations, no red flags have popped up through January and the mid part of February.
Gotcha. I think, within the guide, you know, you spoke to pricing and, you know, it's largely carryover pricing. You know, I think we've seen some price increases from JELD-WEN, maybe, you know, in very specific categories. I think with wood windows might be one of them, which is not, I guess, huge for you guys. You know, curious kind of, you know, where may you have the opportunity to take incremental price, you know, versus, you know, what do you think about kind of the pricing strategy along the rest of the portfolio?
Pricing in 2023 we feel will be pretty balanced with costs. There's clearly a market reality that I think we managed pretty well in 2022 of kind of balancing price and cost inflation. Cost inflation was significant. I think it was over $600 million in 2022, which is unheard of. And we're still expecting inflation in 2023, clearly we're not out of this yet as a supply base. I think one of the problems that it's just gonna create in general is additional affordability questions on housing for end users. What's happening is we're expecting there's still obviously roll forward price and clearly we're watching closely the inputs. We don't see any deflation coming, that's gonna be pushed through to the end users.
We think a lot of people maybe are on the sidelines or reconsidering, "What do I wanna do?" The flip side of that is when things start settling and stabilizing, we expect a pretty solid rebound. This is across all regions that we're working in. We feel well balanced in 2023, and we're expecting a pretty positive upturn when everything starts to settle out.
On that topic of material inflation, I think you said, you know, you're expecting a further 8%-10%-
Mm-hmm
of inflation this year.
This year.
Some materials, you know, perhaps on the energy side seem like you're seeing a little bit more relief. How are you guys thinking about, you know, especially in Europe, right, the natural gas and that? How are you thinking about kind of, you know, some of these potential tailwinds emerging and, you know, if and when some of that, you know, especially energy costs may actually benefit you? How do you think about the timing of that?
Well, I guess, you know, kind of to be clear, there are very limited areas of deflation. You might say the rate of inflation absolutely has slowed, but there still is inflation. Obviously that's just part of what we're managing. I think Again, I think we need to be really clear that, you know, okay, pockets of ocean freight or logs and lumber in Europe. I mean, there are little pieces where you'd say is, there are lower costs. Otherwise, costs are up, right? It's just, again, as you just mentioned, look at this year as more, you know, kind of high single-digit inflation versus last year's 20%-25%. Again, we're managing through that, right? Again, how do we properly manage, you know, price and the cost?
Still it's not, again, even costs are generally in line with our expectations, but yeah.
No. Perfect clarification. Just kind of zooming into the guide, you know, on an EBITDA basis, I think, you know, you spoke to get in the weeds, kind of that $40 million of non-recurring benefit, right? 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, you know, help the audience understand, you know, the ability for productivity to truly offset this volume decline you've guided to and kind of, you know, what else needs to be done, you know, in terms of these discrete cost outs to manage that margin.
Absolutely. As we've talked about the demand weakness this year, I mean, I'd say it's material, right? When you're talking about, you know, $500 million+ perhaps of lower sales, right? From just volume, that drop-through is, you know, $100 million-$150 million, depending on, you know, kind of the range we're using for the margin and that amount of volume potentially down. Frankly, we're talking very broadly across the organization about this. We're very transparent. I think that's another theme we're having, extremely transparency, accountability, et cetera. Literally, we've had global town halls, Bill, me, RSLT, Tuesday night, yesterday morning, to cover the globe of our footprint, talking about the reality of the market and then how we do this as a company, right?
Which is, again, how do we prevent, you know, more sales decline, more importantly, how are we reducing costs. One of the point there is that we're not kidding ourselves, right? We're not kidding our organization about the importance of cost reduction. I guess on that note, you know, there are a couple of buckets there. Obviously, we're focused on productivity. We always are. You think about continuous improvement, ops excellence, that type of thing. We always are. Again, very specifically, as any business should, as volumes are down, we're flexing operations. We need to shorten work week hours, and that type of thing. Obviously, that's a way to help manage, less the headwind to the bottom line.
It's a lot about cost reductions, which we talked about a lot on the call Tuesday on our earnings call. You know, we view that opportunity this year as, you know, should be ±$100 million, right? We've got additional productivity, you know, over and above that would drop through as well. Again, carry-forward actions of cost savings from actions we took in 2022 that still benefit 2023, call it in that $40 million range. You know, we've got the list of things for this year that we're already acting on. Some are public, some are not at this point. We're very active with planning and implementing cost this year, and then that obviously continues beyond.
It's pretty, again, in the spirit of transparency, internally and externally, this is a multi-year, as we call it, right, headwinds. JELD-WEN needs to be better. We're well aware of where our markets are comparatively peers, and you know, it's not where we should be and can be. It's really not just about growing the top line over time, but it really is focused on, you know, cost. That's a top priority for us.
No, that's very helpful. I mean, it sounds like these are very discrete cost actions, right? You know, 'cause sometimes, you know, we think about productivity as sort of a catch- all, right? You know, if you're tends to kind of reflect where volumes are going, right? You know, better decrementals, you know, or worse decrementals, depending on the environment. My question is, we're, you know, we're talking about these discrete items, and so you have a clear line of sight to them. How do you think about just, you know, what's been going on with JEM, for example, right? What's the kind of ability to sort of, you know, if and when volumes recover, how do you think about the ability to kind of, you know, continue to just generally take cost out of the business?
Yeah.
JEM is the JELD-WEN Excellence Model, which, you know, for people who are not aware of that, just think a bit 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 wanna 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 tough 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.
That was also one of the decisions that we are now making, saying, "Well, if it's not gonna chin the bar there, then we're gonna have to look at how can we either change it." We weren't able to change it, so we've made the 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 we've been doing with JEM to improve our productivity across the network. That's working well. We do have different levels of engagement with this across the different regions. One of the things that we did leaning out to headquarters is we've taken the JEM team and we've pushed it down into the regions where it belongs. It's their responsibility, obviously, to drive continuous improvement.
Our contribution to that at the AT2 level is to remove complexity and waste that we've created through unnecessary bureaucracy and rules and procedures that are just not adding value.
Okay. That's very helpful. The Windows business, you know, it's not unique to JELD-WEN, but lead times have been very extended over the past year. I'm curious to kinda update us on that piece and, you know, where are we on lead time and kinda what are the implications if lead times come down? You know, is that like a thing where you can see some de-s tock customers, right? As you do get lead times under control, how do you kind of think about, you know, just the business?
We have a pretty complex windows product portfolio, we service a lot of different materials, so vinyl, composite wood, we're in residential retail, also home builder segment. We do also supply multi-family. Maybe from a segment standpoint, we have a very robust backlog, around 6 months in our multi-family business. Excellent business. There's long lead times, we're probably 1.5 years, two years out on the project acquisition side. That was one of the bolt-on acquisitions that's been going very well. Multi-family for us remains very robust. On the, I'd say, regular windows area of our business, our lead times are balancing back out kind of 4-6 weeks. Wood is a little longer at 8. Nothing out of the ordinary. 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, we're doing whatever we can to take costs out of the business. One of the questions we're gonna be asking ourselves in the second half of the year really is, what's the winning strategy for us in the long term? What segments do we wanna participate in? Where do we think we can deliver the EBITDA that we know JELD-WEN can create and deliver? There's gonna be some discussions with the different line of business owners really about, you know, what's your plan? Where do you think you can get to? Does that meet our expectations? You know, 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.
Short-term stabilized, from a lead time standpoint, and we're kind of looking in the second half of the year really to the strategic road forward, what are gonna be the implications for us?
On the door side, maybe sticking with interior doors in North America, has obviously been, you know, some material price increases in recent years. You know, in my words, this is the year when that's more difficult to achieve price, and so, you know, we haven't seen a price increase. How are you thinking about kind of longer term pricing strategy in that business? You know, as we kind of get past, you know, this drop the end market of this year, you know, what type of annual price should we look for in the doors business?
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 asked them last year, they'd say maybe it's 20%. I think we're gonna rebalance to a more optimal level. Europe has historically been kind of 2%-4% to offset the labor economics inflation costs. On the other hand, what we're really driving towards internally is, you know, what costs should we be responsible for and how can we take costs out of the business to make sure we're not pushing things through to the customer that they don't wanna pay for. There's a lot more reflection on what we really think pricing should be the future and what we can control and what we feel we need to pass through.
That's kind of the, 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 a door, whatever that may be. I think it's a win-win both for ourselves and our customers in the channel because that's the innovation I think that the market needs. Clearly, there'll 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. We spoke about cash flow earlier. I think you said on the call the other day that, you know, you're targeting something like $100 million in working capital, off the balance sheet this year.
Yep.
You know, presumably, as Towanda comes to fruition, you know, you'll have some de-leveraging events there as well. Kind of, you know, putting all that together, how should we think about, one, free cash flow this year relative to what happened last year? Number two, where do you wanna be from a leverage perspective as some of these deals come to fruition?
Yeah, sure. I guess first, with 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. 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 planning to generate from lean, as well as the working capital reduction on the other, keeping things clean from a cash flow perspective.
Yeah, so like we've talked about, I mean, from a leverage perspective, our target is to be below three times. We think with the cash flow generation, and again, you know, if we don't have any of these unique cash events, depending on how this lands this year, you know, we have visibility to that under three times and still investing in ourselves. That's critically important as well. Growth, profitability really first. You know, ways we're investing in our factories and even in our purchasing and financial data, decision-making and all that kind of thing is also a good thing.
Before I ask one final one, does anyone from the audience want to ask a question to the JELD-WEN team? Okay. My final one is shifting over to Europe. You know, I think you spoke about some kind of moving pieces from an end-to-end side, right? You know, new construction seems to be the hardest impact in 2023, and then you might be seeing more strength in some other areas of Europe and term Europe as a catch-all for a lot of markets for JELD-WEN. You know, curious if you can kind of, you know, elaborate a little on sort of the, you know, the inside baseball there and, you know, which markets are, seem to be better versus, you know, where do you think Bill has built a very strong platform in Europe through the years. We've acquired a basket of leading brands in leading markets. We have very strong presence in Central Europe, very strong presence in Northern Europe. Those are very good markets for us. In general, we serve three different segments. We serve interior, we serve exterior, and we serve what's called special solutions. This is fire, this is noise, this is smoke. We're getting better at kind of sharing competencies across the different regions. That's our footprint. If you kind of look at Europe in general, there's only one solid data source called Euroconstruct , which basically forecasts two a year, going forward on 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. Right now they're kind of saying a -3 to kind of zero as to what Europe would look like. They're saying Northern Europe is suffering, which is right. There's significant demand impact just from inflation. It's high double digits in many of the European, Northern European countries. 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. It starts in Sweden. They're dropping off a cliff, et cetera. There's a lot of, I'd say, economic driven to Northern Europe. Central Europe is holding up better. R&R is usually pretty stable in Europe. We look to that as kind of to be the underpinning through the cycle. Commercial is longer. Projects have been funded in the past. Central Europe will be okay.
U.K. is in a tough spot. Northern Europe, tough spot. People think, including Euroconstruct , France will be okay. France is a nationalistic made in France, holds a lot of weight. We do make products in France. At the end of the day, the Ukraine situation is resolved. There'll be no clear line of sight for Europe.
Understood. Great. With that, we're up on time, Bill and Julie Albrecht. Thank you.
Thank you very much, Matt. Highly appreciate it.