Jefferies Building Products analyst here. We're excited to have the JELD-WEN team here. Representing the company, we've got Bill Christensen, the CEO of the firm, and James Armstrong, I'm sure many of you guys have chatted with, heads of IR. So Bill, I guess my first question for you is, you've been the CEO for the company for a little less than a year, but, you, you know, what are some of the things you've learned, in this capacity where, you know, in terms of opportunity, where you can lock and what are some of the surprises, the good or, bad, I guess?
Yeah. So thanks, Phil. So there's a lot of opportunity. We're looking at it in three different dimensions: people, performance, and strategy. I think some of the things that we're uncovering as, you know, we listen and I work my way around the organization, is that trust and transparency can definitely be improved. I think that's not only an internal-looking topic that we're working on, but it's also external. So we also need to improve trust and credibility with the investor community. So that's the one area where we see a lot of opportunity around, and we're setting up Culture and Capabilities team to really drive that. On performance, there's multiple areas with which we can and need to improve the organization.
So obviously, there's a lot of cost initiatives that we're working on this year. We've committed to delivering $100 million. We're well on track. Fifty of that should roll in then to next year to give us some tailwind there. But there's, there's more opportunity as we dig deeper into the organization and start to unlock some of the trust within the organization and create more of a bottom-up planning process, which is what we're in the process of rolling out right now, is giving us line of sight on some of the other opportunities. So it's very mixed. There's some short, some long term. We've harvested a lot of, I'd say, the long-term, no-regret moves, with some of the initial actions that we've taken the first six months.
We're now looking into building a portfolio for 2024 on work streams, and we'll be coming back to the capital markets in the next earnings calls with some more detail on what we really see as we look forward into next year.
Okay. Since JELD-WEN's been public, they've gone through a lot of management change. Everyone's got their stamp on restructuring. So Bill, perhaps, you know, how are you approaching it differently? Do you have the right people, KPIs in terms of compensating people? And what are some of the opportunities maybe your predecessors may have missed that you're trying to unlock here?
Yeah. So I'm CEO number 7 in 11 years, which is, I think, a pretty good signal that there's been a lot of churn at the top. And, you know, we're going into this with our eyes wide open. We know that sending signals for home runs and striking out is not a great way to develop a track record with Wall Street, and so we're very focused on short-term delivery of improvements. And for that, we need two things to be working effectively. We need a leadership organization that understands taking the responsibility and accountability for making decisions and delivering results. So we're working a lot on putting the right people into leadership roles that can and want to take on ownership of making improvements. And the second thing is creating more visibility within the organization.
When I joined into the CEO role, if we look at North America, that was a large bucket of about $3.5 billion of sales, and we've broken that into smaller pieces. So we have a windows area, we have a doors area, we have a distribution area, and we're really drilling down then into the organization to challenge the teams on where are we today, where do we need to be in the future, and what are some of the key measures that we need to improve? So we're pushing down the responsibility and authority. We're looking for the people that wanna take that ownership and drive the improvements, and we're being very open and transparent with the internal teams, but also with the street, because that's what we've earned the right to do by a lack of delivery in the past.
It's all about hitting the quarters and sending signals as to delivery on what we control.
Okay. Sorry to harp on this. You know, the previous management team were targeting an EBITDA margin at 15%-17% range. You know, maybe you may get there a little differently. Is that still an achievable target when you look out the next few years?
Yeah, so we've pulled that guidance-
Okay.
You know, our view is more on how do we strengthen the foundation before we start thinking about the longer-term goals.
Okay.
So the $100 million was at least the first signal, and as I said, we're on track. We feel comfortable with that, so we're really working on lifting the profitability and getting the pieces right before we start sending signals about the overall future state.
Okay, that's helpful. From a consumer standpoint, there's been some signs that the consumer is waking a little bit, and certainly the market's been hyper-focused on the last few weeks with rates going up, what that could mean to demand. You know, it certainly has impacted existing home sales. So curious what you're seeing from a demand signal, whether it's commentary from your customers, the channel, and whatnot, I guess.
Yeah. So we've had a lot of questions also in the sessions today around demand expectations looking forward. So just to recap what we talked about in Q2, we said that both North America and Europe, our expectations for a full year are down kind of low double digit. If we drill into North American market, New resi down 15%-20%. Our guide was more on the 15% side, and we've seen that stabilizing. If we talk about retail, which is a pretty important market for us in North America, the expectations were down 5%-10%. We were looking more towards 10%. As we've developed through Q3, we actually see some order rates starting to improve on the retail side of the business.
It's not completely surprising because inventories are very, very thin, and if we kinda roll that forward, our expectations are actually shifting towards, I'd say, the better end of that range on retail. So we're thinking more down 5 as opposed to down 10, which is not necessarily a strong signal that things are turning completely, but I think underscoring the lack of inventory in the channel, and if there are demand pockets that are popping, there's a pretty strong pull-through to us. So we're cautiously optimistic with some of the developments that we're seeing in Q3, especially on the retail side in North America.
That's really encouraging, Bill. What about what you're seeing on the European front?
... Yeah, so I would say Europe is close to a perfect macro storm. Unfortunately, it's been, you know, fighting some headwind, whether it's energy, inflation, whether it's interest rates, whether it's the war in Ukraine. Just in general, customer sentiment is very low. The expectations for a recovery, it's too close to call right now as to when that's gonna happen. The expectations are Europe is gonna continue in a pretty tough macro headwind environment for the rest of this year. It'll definitely swing into a challenging environment in the first half of 2024. So we're looking for some macro changes, such as resolution of war in Ukraine, which would be a positive effect and really change some of the sentiment. We don't see anything right now, so we remain very cautious with our outlook for Europe.
It sounds like it's pretty stable?
It is, yeah, stable on a low level, unfortunately.
Okay. Focusing back on North America, the commentary around retail being a little better. So it sounds like it's maybe the inventory dynamics, or are you starting to see some of your channel partners look to restock inventory to a more normalized level, or still too early to call?
Too early to call. We're trying to help some of our strong retail partners rebalance inventory. When they get below 90%, their targets are 95% fill rates on the shelf. You know, when you show up to buy a door or window, if it's not there, you're probably gonna go to a competitor to buy the same product. So we're really helping them with our retail teams to focus on, you know, spot filling of the channel, which is necessary because the broader consensus, I think, in retail is keep inventory tight and really wait until things turn, and there's no strong signals, I'd say broad-based, that are pointing to a turn.
It's very spotty actions that our teams are taking, and we can see, based on some of the order rates we're seeing, it's starting to have a small impact for us.
Gotcha. On the new construction side, your commentary just now was it's largely in line with what you thought, maybe on the lower end, which is encouraging. How do you—I mean, some of the public builders have talked about orders kind of picking back up. Talk us through what you're seeing on that front. Has there been any change in conversations in light of, potentially a higher interest rate environment?
Yeah, so 15-20, as we said, down. We're seeing it tracking at kind of the better end of 15 down pretty consistently. We're 3-6 months off a start before our product's installed. What we are starting to see when we're talking to some of our traditional partners, truss sales, for example, you know, are definitely not getting worse. They're stabilizing, maybe even getting a little better. So that sends some signals to us that we probably are not in for a very much worse development on new resi starts. But 3-6 months pushes us into next year before we start to see some of the potential uptick for that volume rebound.
So we remain pretty confident that the 15-20 and more the 15 is the right pocket for us in the back half of this year.
Great. On the restructuring turnaround piece, it sounds like a lot of the focus has been on cost, but also if you're balancing in bare spot, I think, Bill, you've talked about perhaps reinvesting in the business. So when we think about JELD-WEN since they've gone public, volumes have been actually pretty anemic. Is there an opportunity with some of the investments that you're looking to put in pockets where you're, better positioned to win? Can you see that growth profile kinda perk up, and how, how should we think about the long-term growth out there?
Yeah, so I think if we look back as to kinda our performance versus market, clearly we've lost share. There was a strong tailwind in the last couple of years, and we were definitely growing at below those levels. We've also lost some pretty good people, and there's a lot of reasons for that. We've touched on that a number of the calls that we've had. When we kinda look to focusing on developing more profitable growth, there's a couple areas, especially as you said, Phil, our balance sheet is a little more robust and allows some more flexibility. We're focused on tuck-in acquisitions that will really help us supercharge some of the growth pockets that we have, but we haven't yet reached scale.
We're definitely not in the market for turnarounds, and we're gonna take our time to make sure the fit is right. But we also can't forget there's so many internal projects that we're uncovering that we're gonna wanna put some capital behind. So we're balancing internal capital deployment with external. And as the cash flow improves, and it is improving this year as we have expected, that gives us a lot more flexibility. But as you know, the M&A market is pretty thin right now, so there's not a lot of assets around. Good time for us to be focusing on internal improvements.
Okay. From a price mix standpoint, price mix has been pretty. Actually, more important, price mix, along with the cost piece-
Yeah
... has been stellar in the first half, and margins have held up, you know, far better than I think many people would have feared. Give us a little more color on how you're looking at, how, how's pricing holding up in the back half, looking out to 2024, as well as the cost component as well. Are you seeing any deflation?
So don't want to give forward guidance on pricing. What I can say is that our aspiration is to be positive on price costs. We were late to the game last year in the first half, as many were, but we were exceptionally late. We got our act together in the second half, so we're coming into H2 2023 with a tough comp, H2 2022. So year over year, the comp is more challenging. Our expectation is that pricing holds the back half of this year. We're still seeing some inflation, albeit at a much lower rate than we saw in the first half of the year, but costs are still increasing. So therefore, we feel we'll be able to hold pricing, and we are holding it currently within the expectations that we've communicated.
What we're seeing on pricing in general is the dynamic is changing from an annual one-time price increase to a much more repetitive process, where people like us are really assessing the input costs on a quarterly basis and adapting our models and making price adjustments if necessary. We don't expect any broad-based changes in the second half of the year because our expectations are being met regarding where we see input costs landing. And it's too early to make a comment on 2024. We got a lot of questions today about it's a very interesting dynamic. Volume is going down, costs are still going up, but we still feel that the market is just getting caught up on input costs and cost inflation. So there is still a positive price cost in the system, and we're not seeing anything that would lead us to believe that's different.
Gotcha. You highlighted the $100 million cost out target you have, and that's great. You guys are on track, and then if I heard you correctly, Bill, there's $50 million carryover going into 2024.
2024, yeah.
Should we think of this like a steady state number going forward? Could that step up? How should we think about some of the cost out opportunities? You know, some companies talked about cost out offsetting inflation, and if you get volumes, drops down to the bottom line. Just broadly, how should we think about some of these cost out productivity initiatives in the medium and longer term?
Yeah, so what, what we're trying to do is create a much broader scope of the improvement potential across the organization. In order to do that, we need to activate the organization, which is the culture and capabilities piece, and if we do that effectively, and we're on the right track now, but this is a longer-term process, we feel we're gonna be able to start sweeping the corners to get everyone engaged in, "Hey, this is how we can improve the organization." So the $50 million that rolls forward are for things already in the hopper. That will then have a full year run rate impact then in 2024.
But we're constantly refilling buckets, and we're going through a pretty diligent process right now in a bottom-up planning project across the organization to pull in all of the improvement opportunities that the organization sees, prioritize, put price tags on it, add resource to it, and then start defining sequencing of when we can drop those improvements in through the next, let's say, 12-18 months. And what we're also doing is improving the decision-making process across the organization to increase the velocity at which we make decisions.
So we want to get visibility on overall projects and opportunities, and we also want to increase the velocity of decision making, with our goal finally being getting to a five-day decision-making process between topic coming in and getting escalated to the senior leadership to make sure that there's no decision-making roadblocks on putting some of these measures to the bottom line. And then it's all about the right sequencing, the right resourcing, and capital availability. So that's what we're working on. That's the long answer, and then the short answer would be there's definitely more than $50 million that we see, but we're pulling it together to get a pretty strong view on what we think that could be, and in the subsequent quarterly calls, we'll come back with more detail.
Are you guys realigning, like, incentive comp for branch managers, lower to middle-level management team to kinda instill some of these changes you guys are trying to implement?
Yeah. So that's one of the— We've taken an organizational health assessment across the organization. So we had about 80% of our organization participated in a pretty detailed analysis as to what is our organizational health. We measured 32 different dimensions. There were three key messages that came out of that. So message number one is the organization is really lacking kind of a vision of the future, and more importantly, if we know where we wanna go, how are we gonna get there? There was a lot of where do we wanna go in the past, but there was not a lot of support on how we're gonna get there. Number two, the organization wants authority, but we also need to make sure that we tag responsibility with the authority, so people are making decisions but holding themselves accountable.
And the third piece, to your point, Phil, is there needs to be a holistic review of the incentive structure and how are we incenting our organization to improve on a daily, weekly, monthly, quarterly basis. So that's something that we're taking a look at, and clearly, there's opportunities to improve.
Super. Following the ordered divestiture, certainly should improve your balance sheet, and cash flow remains pretty strong. When you've looked at your portfolio holistically, are there any other pockets within JELD-WEN that is non-core, whether it's, you know, pieces of North America or, or even Europe, more broadly?
So we're looking at everything. I think the focus that we have right now is to strengthen or fix our foundation, and then as we get to levels that we feel are more appropriate, we're gonna start asking the challenging questions of, you know, do we need to be in every area of business that we're currently in? Do we have the capital availability to fund appropriately all of those different areas? And, you know, if the answer is no, then what are the options? So we're starting to go through that process, but the first topic for us is really gonna be strengthen the foundation, and then look longer term, once we've reached the level that we feel appropriate is on, you know, where does it fit in the overall portfolio?
Okay. You talked about how you're looking at targeted bolt-ons. Any pockets that stand out to you where there's a void or markets that make a lot more sense for you guys?
Yeah, so there's some areas where, you know, we have a small nucleus today, but in the grand scheme of our portfolio, 30%-50% CAGR rates don't really move the needle, so there's some things like commercial, where, you know, it's a great business and we love it. There are specific areas in the windows where, you know, we could definitely do more. So we're constantly on the lookout, but these are smaller, niche type of acquisitions that we can consolidate with existing areas and create more growth locomotives. So that's what we're watching for. And I would say we have more of a targeted list than we have in the past, so we're not reacting. Rather, we're looking, and we're screening, and waiting for the right opportunity.
Any questions in the audience? I will continue. In your door business in North America, we've seen really good rational pricing discipline in the last few years. It's effectively an oligopoly. You know, is that something that you think is sustainable going forward with potentially the Towanda sale? And I think perhaps one of your competitors might be investing on the door skin side of things. So how do you think about that industry structure and the pricing dynamics of that business in the medium, longer term?
Yeah. So the Towanda divestment, which has been going on for quite a while, is court-ordered. It's a remedy to an antitrust ruling, precedent-setting. We can't, as we've said in a number of different occasions, comment specifically on that event.
Yeah.
However, if something does happen, that will clearly change the competitive landscape in the industry. There's so we're not naive, and we understand that there will be a reset. What we're working on is controlling what we can control, which is our cost structure, our ability to serve the market, and again, our skins business, first and foremost, is to supply our internal value chain. And even with a potential divestment, that would not disrupt that side of the business. The second is to really create a more competitive JELD-WEN, so we have more flexibility as we look forward based on what a competitive dynamic potentially could be. But, you know, standing up new skins capacity is a challenging task, and it's a complex technology. So it's not a plug-and-play, and you build it, and you start it tomorrow, and it's running.
So we do also expect that we have time to get our house in order, which is what we're working on.
Question on Europe, certainly that's near and dear to you. You ran the business-
Yeah.
Before taking on the CEO role. If the demand backdrop remains challenged, what are some more leverage you have at your disposal to kinda drive strong results? I mean, the margin profile for that business has been actually quite great despite a challenging demand backdrop.
Yeah. So, I mean, as you know, the duration of making structural cost adjustments in Europe is much longer than in North America. There are some tools already in place from a lot of the governments coming out of the COVID pandemic, where you have Short Work opportunities, and we've activated all of those. So we are in the Short Work corridor and balancing as effectively as we can. If demand continues to stay soft for a longer period of time, then of course, you look in the structural cost adjustments and footprint adaptations, and that's already something that we have on our grid. We've taken three sites in the UK offline last year, and we're constantly thinking through what are the different scenarios. What we can't ignore is a potential sucking-in effect.
When the war does end in the Ukraine, there's gonna be a massive rebuild required, so that is gonna have a significant impact on supply and demand across the region. So there's a couple different forces that we're thinking through. Short-term work is kind of the first measure, and that's already being activated. Longer term, it's taking capacity offline and rebalancing based on an expected lower long-term run rate.
Your business in Europe is pretty spread out and fragmented a bit into different countries, from what I understand. Is there an opportunity to kinda, like, really hone in your focus into certain products or markets that could enhance profitability?
Yeah. So we're, we're looking at our product market mix today. So we serve markets all across Europe. We're not in the Iberian Peninsula, so Italy, Spain, Portugal, we don't serve. Benelux, we don't serve, except with, with an export from other countries. Everywhere else, we're active. So we have strong brands and strong markets like Switzerland, Germany, Austria, like France, all across Scandinavia. So we do have a great asset base, but we do need to get better at optimizing the products that we're selling into countries. But Europe is not a country. It is a mix of very small countries with barriers to entry, different rules and regulations, so it's complex. So winding your way through that complexity is something that we're working towards, but we're not yet at the goal line.
Okay. From a cash flow generation, it remains pretty strong. Is there more opportunities to enhance your free cash flow conversion? And when we think about deploying capital, M&A is certainly a focus, but, what about buybacks? Your, your valuation on your stock still remains pretty depressed here.
Yeah. So we're doing a good job of improving free cash flow. Last year was really a low point, so we're unlocking a lot of what we feel we need to. So that's on track, and we're happy with the progress we're making there. Clearly, with the opportunity inside of the projects that we're seeing, the payback profiles, the return on capital there, first priority for us is investing in those internal projects, whether it's, you know, amping up our CapEx or hitting some of the projects that are coming up through the bottom-up planning. Second is really looking at bolt-on M&As, opportunistic, but based on kind of a corridor of what we think we want, and then clearly buybacks, dividends, those are probably further down, the opportunity list, you know, if we get that far.
But I still think that the return on some of the projects that we have ahead of us are very attractive. We want to fund those first.
What kind of hurdle rates and returns are you getting on some of these internal projects? And when you think about M&A, are there any hurdle rates, returns you guys are tying it to if you pursue a deal?
Yeah. So, you know, I mean, the short message is ROIC needs to be above WACC, and it needs to be a pretty big spread on the positive side. So we're looking at high double-digit returns when we're assessing internal projects, and then kind of working our way down as we look at capital intensity. And that should lift the average over time. So that's the focus that we have.
Okay. We're gonna wrap things up here. Thank you, Bill, for all your great insights, and I really appreciate your time.
Yeah, you're welcome. Thanks, Phil.