JELD-WEN Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Thank you for standing by. My name is Maria, and I will be your conference operator today. At this time, I would like to welcome everyone to the JELD WEN Holding, Inc. 2nd Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations. Mr.

Operator

Armstrong, please go ahead.

Speaker 1

Thank you, and good morning. We issued our Q2 2023 earnings release last night and posted a slide presentation to the Investor Relations portion of our website, which can be found at investor.geldwin.com. We will be referencing this presentation during our call. Today, I'm joined by Bill Christensen, Chief Executive Officer and Julie Albrecht, Chief Financial Officer. Before I turn it over to Bill, I would like to remind everyone that during this call, we will make statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10 ks and 10 Q filed with the SEC. Geldwin does not undertake any duty to update forward looking statements, including the guidance we are providing with respect to certain expectations for future results. Additionally, during today's call, we will discuss non GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non GAAP measures to their most directly comparable financial measures calculated under GAAP can be found in our earnings release and in the appendix of our earnings presentation.

Speaker 1

With that, I'd like to now turn the call over to Bill.

Speaker 2

Thank you, James, and thank you everyone for joining our call today. I'm pleased to report that our Q2 came in better than we expected and we continue to make progress against our short term goals to strengthen to the next question of JELD WEN. First, I want to take a moment to thank all of our associates around the world. Due to their continued hard work, we are delivering on our commitments, including solid financial results in the first half of this year, despite continued challenging market conditions. Let's begin with our Q2 highlights on slide number 4.

Speaker 2

While sales were in line with our expectations, earnings were above our forecast due mostly to continued solid price cost results. In addition, we are generating strong cash flows driven by earnings and working capital improvements. I'm also pleased that we are delivering on important commitments, including reducing our cost structure, improving our customer service with a focus on on time in full metrics, both in retail and traditional, as well as completing the sale of our Australasia business, which I'll speak to in more detail shortly. Julie will also be covering our financial performance in more depth during her comments. Turning to Slide 5.

Speaker 2

As you have heard me say before, we continue to implement a 2 pronged approach to improve JELD WEN for all stakeholders, paying close attention to both the short as well as the long term with a framework structured around people, performance and strategy. We are making good progress on strengthening the foundation of our business. One important focus area is our cost structure and we are taking a disciplined approach to this opportunity. We are right sizing our workforce across the business, optimizing our footprint, addressing procurement opportunities, as well as analyzing many other operating expenses. As an example, we're in the final stage of closing our Atlanta facility and expect to achieve full run rate savings from the closure by the end of Q3.

Speaker 2

Such measures will support delivery of the approximately $100,000,000 of cost savings this year. And we are still in the early stages of engaging all associates to identify as well as implement ways to make JELD WEN a more effective and efficient business. Additionally, we continue to focus on improving operating cash flow to fund the projects that will support our margin improvement and drive higher returns on invested capital. Now turning to the long term part of our 2 pronged approach, we are focused on developing a strategy that delivers sustainable and profitable growth. First, focusing on people.

Speaker 2

We strongly believe that culture and capabilities will be a critical foundation for our success. I have visited more than 15 of our manufacturing sites during the last 6 months and have been listening to our frontline associates to get their perspective on what is working well and where we can improve. In addition, we recently completed an employee survey and collected feedback from over 80% of our global associates to gain insights about how well our organization is aligned and suited to adopt and sustain a higher level of performance. We see significant opportunities and in the coming months we'll dig deeper into our culture opportunity as part of our journey to improve JELD WEN for all stakeholders. 2nd, we are focused on driving improved performance and have intensified the transformation program that we started last year.

Speaker 2

We are close to completing a thorough due diligence process in which a broad set of opportunities have been identified and we are now validating significant potential benefits both in operations and on the commercial side. As a next step, we move into a bottoms up planning process focused on developing actions that detail specific steps and resources required to deliver the respective improvements. As we move forward, We are putting a greater focus on transparency, accountability and governance of our transformation activities. I look forward to giving you more detail around these opportunities over the next few quarters. Moving to Slide number 6.

Speaker 2

On July 2, we completed the important strategic of selling our Australasia segment, generating approximately $446,000,000 of net proceeds, allowing us to both simplify our business and focus on our 2 remaining largest core segments, both North America and Europe. We then acted promptly to delever our balance sheet and last week On August 3rd, we repaid $450,000,000 of senior notes and expect an annual interest expense reduction of approximately $25,000,000 Our net leverage is now below 3 times net debt to adjusted EBITDA on a trailing 12 month basis and we expect further improvements before year end. Turning now to slide number 7. And as you can tell from this year's result, we are making progress to become a stronger, more efficient company. We have shifted our priorities with a focus on driving accountability and engagement as well as improve profitability and return on invested capital rather than just getting bigger.

Speaker 2

During this challenging market environment, we are implementing identified self help opportunities and are working diligently to find more opportunities and then sequence their execution. These actions combined with our focus on developing culture and capability who will create a solid foundation for future performance. On capital allocation, We remain committed to a healthy balance sheet and investing in ourselves through strong payback projects to further improve profitability. As we reduce leverage, we are also reviewing our portfolio to assess further actions to better position ourselves for returns above our cost of capital. We are well underway in developing our short, medium and long term goals within each region.

Speaker 2

I am very optimistic about the significant opportunities we have to improve JELD WEN in the quarters years to come. However, we still have work to do, both in terms of due diligence scoping and in developing a clear roadmap to achieve our goals, including resourcing and related costs to achieve. I continue to give you my commitment to share more information when appropriate and for providing milestones so that you can evaluate our progress along the way. I'll now hand it over to Julie to discuss our detailed financial results.

Speaker 3

Thanks, Bill. Turning to Slide 9, you see our consolidated results for the to the Q3. As a reminder, all of our financial results for the periods presented exclude Australasia, unless otherwise noted. We moved the segment to discontinued operations after we signed the related agreement on April 17. Further, since we completed the divestiture in our fiscal Q3, the final impacts of all related activity will be reported in Q3.

Speaker 3

Our second quarter revenue was approximately $1,100,000,000 down 4.5% from year ago levels, driven by a reduction in our core revenue. Our adjusted EBITDA was approximately $109,000,000 in the quarter, leading to an adjusted EBITDA margin of 9 point 7%. This margin improvement year over year and sequentially reflects our solid execution across the business in this challenging macro environment. On slide 10, you see that our 2nd quarter revenue was driven by lower volume of 11%, which was partially offset by 8% of price realization that primarily reflects our price increases in the second half of last year to offset cost inflation. You'll find a revenue walk, including segment details for the Q2 and first half of this year in the appendix of our earnings presentation.

Speaker 3

On Slide 11, you see that year over year, our adjusted EBITDA improved by set by the impact of lower volume mix and a reduction in other income. Related to price cost, Compared to the Q1, we are experiencing a lower rate of inflation, though most costs do continue to increase. During the Q2 of this year, we recognized an increase of approximately $20,000,000 in total cost inflation compared to the prior year. Of this, approximately 60% was driven by raw materials with the remainder driven by labor. Moving to other income, as I've mentioned before, we have a full year headwind of approximately $40,000,000 from unique items in 2022 and almost half of that impact was in the 2nd quarter.

Speaker 3

Additionally, as Bill has mentioned, we are on track to achieve approximately $100,000,000 in cost savings this year. In the Q2, we realized approximately $20,000,000 of these savings that are reflected on our EBITDA bridge in productivity and SG and A. In the first half of this year, The cost savings benefit was approximately $40,000,000 leaving $60,000,000 to deliver in the second half. Our run rate is increasing due to the timing of actions that have been started earlier this year or that will be initiated in the Q3. Moving to our segment results on Slide 12.

Speaker 3

In the Q2, our North America segment generated $817,000,000 in sales, down approximately 3% from year ago levels. This was driven by a core revenue decline of 2% due to lower volume mix of 8% with a positive impact from pricing of 6 percent. North America had adjusted EBITDA of $109,000,000 up 16% year over year, while margins increased a solid 220 basis points to 13.3% driven by strong price cost results. Our demand weakness in North America was spread across most of our products, but I want to highlight the continued strong volume in our Canadian and multifamily VPI businesses. Specifically, our VPI business has grown 50% year over year following our facility expansion in Statesville, North Carolina last year.

Speaker 3

We continue to deliver a number of operational efficiency improvements in North America. These include driving a 4% year over year improvement in units per labor hour, while also improving our on time and in full delivery metrics. We're especially pleased with these results considering this year's reduction in inventory balances, which is helping drive our strong year to date cash flows. Europe generated $309,000,000 in revenue and $24,000,000 in adjusted EBITDA. Core revenues decreased by 9% in the quarter, driven by lower volume mix of 17%, which was partially offset by higher price realization of 8%.

Speaker 3

Adjusted EBITDA was 19% higher year over year, leading to 180 basis points of margin improvement to 7.7%. This improvement was due mostly to positive price cost results with the benefit of market and product specific price increases combined with slowing material cost inflation. Also, our European team has continued to capture market share as certain suppliers have struggled to serve customers and they have been successful in delivering productivity improvements. Now turning to the market outlook on Slide 13. While our North America full year demand outlook is still a low double digit decline in volume.

Speaker 3

We've lowered our outlook for Europe due to weakening demand in their residential housing market. Specific to North America, higher interest rates continue to impact single family housing starts and permits. And our outlook is unchanged with new home construction declining 15% to 20% year over year. For our repair and remodel markets, we still anticipate lower demand at a high single digit rate. While our North America volume and mix was better than we expected in the first half of this year, partially driven by backlog from 2022 and strong mix.

Speaker 3

We expect increased declines in the second half. Taking all of this into account, we do continue to expect a low double digit reduction in full year volume for our North America business. In Europe, we now anticipate that demand will be down by low double digits as the market weakens due to the region's ongoing macroeconomic challenges. Our European volume mix was down by 12% in the first half of this year and we expect a similar decline in the second half. On the residential side, we see sharper declines of 15% to 40% in new residential construction starts depending on the country.

Speaker 3

In some specific markets, residential to the commercial construction market, Volumes are expected to be flat in the near term. Construction on current projects has continued, but there is evidence that new projects are being delayed in a number of markets, which may impact demand into 2024. On Slide 14, we provide our updated full year 2023 outlook for revenue and adjusted EBITDA. While we remain cautious as we start the second half of this year due to the continued uncertain macro environment, We are tightening the ranges and raising the midpoints of our revenue and adjusted EBITDA guidance. We now expect full year 2023 revenues to be between $4,200,000,000 $4,400,000,000 and full year adjusted EBITDA to be between $350,000,000 $370,000,000 Our updated outlook accounts for our stronger than anticipated second quarter results as well as our expectation for demand headwinds in the second half of this year and our ongoing cost reduction activities.

Speaker 3

Specific to our outlook for this year's core revenues, our first half core revenues were basically flat to the prior year as carryforward price increases offset lower volume mix. In the second half of this year, We expect a low double digit decline in our core revenues due to the reduced volumes that I've just discussed with less benefit from year over year price increases. All of this combines to support our full year outlook for core revenues being down 4% to 8%. Now turning to Slide 15, You can see how our first half results combined with our outlook for the remainder of this year to result in our updated full year guidance. As I've described in my comments this morning, our first half results for North America volume mix and global price cost were better than our expectations, while we are delivering on our cost reduction targets.

Speaker 3

In the second half of this year and despite weaker demand, our earnings outlook is generally unchanged as we deliver cost savings that mitigate the impact from lower volumes. In closing, We remain keenly focused on generating strong cash flows to further strengthen our balance sheet and invest in ourselves. We expect to continue delivering high quality earnings and reductions in our working capital. Bill mentioned earlier, we're also committed to improving JELD WEN's return on invested capital through our various actions focused on operational and commercial improvements. I'll now turn it over to James to move to Q and A.

Speaker 1

Thanks, Julie. Operator, we're now ready to begin Q and A.

Operator

Thank you. Our first question comes from the line of Susan Maklari, Goldman Sachs. Please go ahead.

Speaker 3

Thank you. Good morning, everyone, and thanks for taking the question.

Speaker 2

Good morning, Susan.

Operator

Thanks, Susan.

Speaker 3

My first question is, you talked a little bit of or you talked about seeing some incremental weakness as you think about the second half of the year, understanding part of that's driven by Europe. But I guess, when you consider the housing outlook, especially within the U. S. And North America, some of the improving dynamics that are coming through on the new construction side. Do you think that there's an element of conservatism in there?

Speaker 3

How are you thinking about some of those different factors perhaps together in the next few quarters.

Speaker 2

Hey, Susan, thanks for the question. So I would say it's a very dynamic market and we're cautious. If we start to see some of the things that we're tracking, especially in Q2, if we look at Some of the retail softness and we felt we kind of exited Q2 at the run rate that we're expecting for the rest of the year. As Julie said in her prepared remarks. Q4 was a pretty big overhang that dropped into Q1.

Speaker 2

Retail has obviously built through that. And now into the Q2, we see and we hear also from customers that inventories are very tight Across retail locations in North America and sales to stock below 98% means some customers are not getting what they want. So we feel we're close to or at the bottom of the retail valley in North America. But obviously, consumer sentiment is guarded. And so we remain cautious, especially when you look at bigger tickets.

Speaker 2

So doors and windows are tracking obviously at different rates, both Down, but patio doors, for example, are significantly worse than doors. So we see people remaining cautious. Traditional still in kind of that 15% to 20 a little better than we had expected. But as everyone is remarking in the second quarter Results, we remain cautious and I don't think that our view has changed versus the end of Q1. We're firming up a bit where we see the range.

Speaker 2

Europe remains a challenge. There is significant macro uncertainty. Julie commented on some of the markets that are down. It really is a very Tough market reality and something that we're very cautious and expect also that the softness will drag into 2024. So that's why We're working hard to make sure our cost structure is appropriately matched to that market reality.

Speaker 3

Okay. That's helpful. And then you mentioned a lot of the progress that you're making on the company specific efforts in terms of costs and service levels and those initiatives there. As you're getting to the final stages of closing that Atlanta facility, can you talk a little bit about some of the Coming key milestones or key steps that you're thinking about as you think about maybe the end of this year and even into 2024?

Speaker 2

Yes. So we're working on 3 things. As we've discussed people, performance and strategy, On the people side, we're making great progress on really trying to dial in the culture and capabilities that we need as an organization to really transform ourselves. So we've done a lot of digging with the help of our associates around the world to really benchmark and baseline where we are today. On the performance, We're still controlling what we can't control and we really feel quite positive about the work that we've done taking costs out of the business and getting So dialed in, there's 2 big buckets that we're really digging deeper into, looking really bottom up at all of the opportunities.

Speaker 2

1 is operations, footprint and making sure we're aligned, especially when we look towards the European market outlook and that volume reality. And the second thing, what we're really trying to work through is on the commercial side, so to make sure it's the right offering, the service levels are appropriate, we have the pricing under control. And as we've reported in the past, some of the things like managed supply chain, etcetera, are going to start dropping in, in the back half of this year. So we'll be back with our next quarter, the results with more specifics around some of these Cost levers and some of the broader initiatives that we think we'll have. We also want to share more about the culture journey that we'll be on at that stage and just let you know how we want to hold ourselves accountable as we look into 2024.

Speaker 3

Okay. Thank you for the color and good luck with everything.

Speaker 2

Thank you very much, Susan.

Operator

Our next question comes from John Lovallo from UBS. John, please go ahead.

Speaker 4

Good morning, guys. Thank you for taking my question. I just wanted to go back on Susan's question for a moment. What specifically are you guys seeing that makes you think North American volume and mix is going to decelerate so much sequentially in the second half? I mean, it sounded initially like it may have been a timing issue, meaning that the pickup that we're seeing in starts right now maybe Something that flows through in 2024, but Bill, your most recent comments that, this softness may continue into 2024, leaves a little bit of a question there.

Speaker 4

And along the same lines, the 15% to 20% decline in single family starts that you guys are forecasting seem to be conservative given Improving activity and easier comps in the back half. But just curious, is that just really out of an abundance of caution? Or are you seeing something more specifically that gives you Thanks, Derek.

Speaker 2

Yes. So I would say Europe, the comment around Europe was definitely weakness into 2024. That wasn't related to North America. Specific on the North American market, we've done a lot of work with our retail partners and our retail team is doing a great job really to try and figure out what's the reality that we're facing. And as I said, we feel that we've exited Q2 at a run rate that is probably very realistic, but it's a very tight market environment.

Speaker 2

So sell in and sell out are very close to each other. There's very low channel inventory. A lot of the retail partners are really Turning the screws down on working capital, talking about reducing labor, etcetera. So they do also see weak demand. And as soon as you start seeing stockouts on And you know that it's really touch and go.

Speaker 2

So that's why our expectation is the end of Q2 is very close to what we are expecting at least for Q3 and possibly into Q4. So that gives us, I'd say, a limited confidence that we believe our expectations are on the mark For retail, and we've been calling it since the Q1 that it's going to be soft and it's a bit tighter than we expected, but we don't feel it can get much Worse just because of the inventory reality in the channel. And if with new starts around It's 15% to 20% down market and we do have a lag. Our expectations are that, that will stick. But there's a couple of different dynamics if we look at different product lines and different materials.

Speaker 2

Vinyl windows, which are typically a production builder Product line, they've been soft since the beginning of the year. We see the volumes at that level, but holding steady. Clearly, price is a broader discussion topic now with the volume as tight as it is. And on wood windows, for example, which is more of a custom, semi custom builder, that's a more robust H1 Product line for us and that's now starting to slow down as we see some of these builders pushing starts out. So that's, I'd say, overall some of the key drivers that we're seeing.

Speaker 2

So cautious and a dynamic environment and expectation for softening in 2024 in Europe, But U. S, we're talking more back half and not 24.

Speaker 4

Okay, understood. Thanks for the clarification. And then can you guys help us on The cadence of the Q3 and Q4 margins and sort of the expected realization of productivity and cost saves as we move into the back half of the year? Yes, sure.

Speaker 3

Yes, John, I can take that. I mean, I think, obviously, by the way, yes, of course, Q2 very strong. We're Very pleased with that. We do see margins a little bit pressured as you might imagine from that level in the second half. And so Yes, I think when you look at our typical kind of Q3, Q4 margin, Q3 slightly better than Q4.

Speaker 3

I'd say we'd expect that to continue in this year as we look forward. So Again, while second half margins, we're targeting being kind of flattish, if not maybe down a little bit, but targeting flattish to first I see Q3 being slightly better than Q4. From a cost savings perspective, I think like we mentioned already this morning, We've recognized and generated about 40% so far this year of what we're expecting. And so I think that is ultimately probably a little bit more balanced kind of Q4 over Q3, although we do see that run rate accelerating in Q3 over Q2 and then Q4 slightly over Q3.

Speaker 4

Understood. Thank you very much.

Speaker 5

Thanks, John.

Operator

Our next question is from Phil Ng with Jefferies. Please go ahead.

Speaker 6

Hey, guys. Congrats on a strong quarter in a pretty dynamic environment.

Speaker 2

Thanks, Bill.

Speaker 4

Good morning, Bill.

Speaker 6

Good morning, everyone. Bill, outside of the inventory destock on the retail side, what's your read on the R and R market? How is that kind of trended in the U. S. Intra quarter through, Call it early August.

Speaker 6

And if things do snap back, what's your ability to meet that demand? And you called out how you're expecting weakness In Europe through 2024, is your view any different on the U. S. Side? Do you see some sort of recovery early next year?

Speaker 2

Yes. So I would say that it's definitely choppy market on R and R. Big tickets are definitely weaker And we're seeing some of our retail partners really focused on turns on lower ticket items because that's where they're getting some traction. We're working with them obviously as much as we can to make sure that the right mix And balance is across their network, so we can satisfy any demand that exists. So I'd say we remain cautious.

Speaker 2

I just think, Phil, that there's a lot of consumer uncertainty currently in the market. Interest rates are high, inflation is sticky, Discretionary spending, people are just cautious. And our belief is that we are really close to the bottom of the inventory in the channel. And we're doing a lot of work on making sure our delivery metrics And our network is ready for a potential rebound, and I think that's the key. And one of the things that we're looking at from a bottom up Downpoint is what's the right footprint to serve our markets and how do we make sure that we can help them through a rebound post to the softness that we're seeing.

Speaker 2

That's in North America. We're not calling the North American market right now if it's Just a 2H, 23 softness or if that rolled into 2024. Clearly, with the starts where they are And our products 3 to 6 months built in after the starts, the softness on the traditional channel We'll roll into 4Q and potentially into the 1st Q of next year. With that said, the good news is there's a lot of pent up demand and that's getting bigger every month. So there will be a snapback.

Speaker 2

Same goes for Europe. I think we're more cautious on Europe. There's a lot of macro uncertainties. The war is still ongoing. We're rolling into another heating season with some uncertainty around energy, inventories and costs.

Speaker 2

So there still are a lot of things that are really foreshadowing people's decision to buy something new. And Julie mentioned the rates of the new build and it's pretty significant and severe. So there's a lot of work that the industry has to do to make sure we can get ourselves positioned to kind of ride out the storm, but also get ready for the rebound, which we don't see until into 2024 in Europe.

Speaker 6

Got you. Okay, that's helpful. And then maybe a question for Julie. On the pricing side, certainly very solid through the first half. Curious from a guidance Dan, Paul, are you baking any price erosion in back half?

Speaker 6

And then from a price cost standpoint, how should we think about the second half as you kind of lap some of these previous increases as well?

Speaker 3

Yes, sure. Generally speaking, kind of year over year pricing in the second half, I'd say flat to maybe still up just a hair. I mean, as you noted, it really was second half of last year where we caught up and got in front of price cost. And so that's the comp we're entering into now, right, in Q3. So the first half, second half comps this year are quite different.

Speaker 3

And obviously, you've been seeing that in the first half and we're expecting that in the second half. So the pricing environment is relatively stable. I mean, there are puts and takes in the regions. But again, it's really just about the comps. And so again, kind of flat to up a little bit.

Speaker 3

And so Because similarly from a price cost perspective, we are expecting that benefit to Narrow a lot in the second half. I mean, it's clearly been a real great driver to our first half earnings, slightly better than we effective and we do see that tightening a lot in the second half.

Speaker 6

In the slightly better than expected in the price cost in the first half, Julie, has that been more on the price side or it's been on the cost side with input cost being maybe a little more

Speaker 3

It's been some of both. I will say inflation in both North America and especially Europe has been better than expected. You think about coming into the year what we were expecting with energy costs in Europe. That clearly was better than we Thank you again and very much so in the Q1. So price has probably been a little more stable than we expected, but a lot of the benefit Has been weighted on the less inflation on the cost side.

Speaker 6

Okay. Appreciate all the great color.

Operator

Yes, sure. Our next question comes from Mr. Michael Rehaut, to JPMorgan. Please go ahead.

Speaker 7

Hi, everyone. This is Andrew Ozzie on for Mike. Good morning and congrats. I just wanted to ask in terms of the drivers of the raised guidance, Both in terms of sales and EBITDA, was it just 2Q or are there any changes to your kind of 2H outlook in terms of sales or margins?

Speaker 3

Yes. Really, most of the key driver is the to upside delivery from our expectations for the Q2. And so, when we look at the second half. I mean, again, we've adjusted, we've mentioned more weakness in Europe. However, we've obviously tweaked as well our expectations around cost savings as well as some price costs as well.

Speaker 3

So net net, The back half of the year from an EBITDA perspective is generally about what we expected, as we have again reassessed to all the moving parts of our forecast. And so really the increase in the guidance range is mostly due to our over delivery versus our expectations in the second quarter.

Speaker 7

Got it. That's helpful. And then in terms of the broader portfolio review, I wanted to ask if that includes in the North American product portfolio. Should we expect anything in terms of something substantial or is it more just modest tweaks?

Speaker 2

Yes. So at a high level, just to kind of set everyone on the right Trajectory here. So we had 3 areas of business and we closed the divestment of our Australia Asia segment, 2 core segments then North America and Europe. And what we're doing with our regional leadership is now taking a deeper dive into each of the regions, really looking at the market segments that we serve, what's core, what's non core and where are we on our ability to serve and win in those various markets. So we are in that process now and we feel more comfortable than sharing as we progress towards the end of the year.

Speaker 2

So no specifics right now on what we're doing, but we're looking at everything And it's a dynamic environment, so we are also spending a lot of time making sure our cost to serve and our delivery metrics are on track. But more details at the end of the year regarding any portfolio opportunities that we want to dive deeper into.

Speaker 7

Okay. Thank you for that color. I'll pass it on.

Speaker 2

All right. Thanks, Andrew. Have a good day.

Operator

Our next call comes from the line of Steve Ramsey with Thompson Research Group. Please go ahead.

Speaker 8

Hi, good morning. Maybe to start with just some clarification. VPI growth very strong, Multifamily, great backdrop this year for VPI. As you look into 2024, That end market potentially slowing, are you preparing the business operationally for that kind of environment yet or is it still to execute on the opportunity at hand.

Speaker 2

Well, I think it's I mean, short term, long term, obviously, Steve, we're executing and we're doing exceptionally well and we're very happy to look at some of the financing constraints, etcetera, for some of the multifamily properties, but we still have a pretty significant backlog and something that's going to serve us well through the back half of this year. So there's no movement expected now of us making sure that we can load the appropriate mix into 24, and that's what our sales organization is working through now. But they've done an exceptional job of building the right portfolio and making sure that we're matched with our production location. The new one, as Julie mentioned on the East Coast with the volume that we're selling into here.

Speaker 8

Great. That's helpful. And then Kind of zooming out assessing the environment here, this reset period with volumes down, some lingering inflation And cost savings being worked out, this environment pretty much forces all producers to make these kinds of moves. Are you seeing anything from channel partners or competitors that you think would change the overall competitive environment when we reenter A growth territory for the market, are you seeing anything irrational in the near term that may change what things look like on the other side?

Speaker 2

I would remark, I'd say, I think the short answer is no. I think the longer answer is that There's a lot of things that we can control and we are starting to control that will give us a great when things do rebound. So we're looking at cost structure, we're looking at cost to serve, we're really dialing in on our on time and full metrics. There clearly is a lot of pricing discussion as one would expect when volumes are soft, Especially in segments that are typically higher volume, lower value, but these are things that also will help guide us as we look through our portfolio and start making decisions as you know where we want to play and how we want to win. So we feel as comfortable as we can be in a very discomforting volume environment just because we still have a lot of homework to do and fix our foundation.

Speaker 2

But I don't see anything exceptionally irrational currently in the market outside of just as expected pricing discussion, competitiveness given kind of the weak volume and an overcapacity in a number of different segments.

Speaker 5

Very helpful. Thank you.

Speaker 2

You're welcome, Steve.

Operator

Our next question comes from Joe Eller Smyr with Deutsche Bank. Please go ahead.

Speaker 9

Thanks and good morning.

Speaker 5

Hi, John. Good morning.

Speaker 9

Just curious about your first half results in overall residential new construction, if you kind of combine single family and multifamily.

Speaker 2

Is there

Speaker 9

a way to think about that decline?

Speaker 2

Yes. Well, what I would say is that our multifamily pillar is definitely a lot Smaller than our residential pillar is. So even though we're growing at exceptional high double digit rates. It's going to take us a while to get to that scale effect that we're looking for. So definitely overweight on NewRez.

Speaker 2

And as a result of that being down as much as it is, that's overshadowing. If you look at Europe, it's a little more balanced, not quite, but commercial has a stronger presence in Europe and that's been helping us because we're now working through a backlog that has existed for a number of months, but there's also Expectation is that the backlog will soften and we see it already into 2024. So that's also another reason why we're being cautious on the guide in Europe, Especially as we look forward into 2024.

Speaker 9

And when you talk about your multifamily business being smaller as a proportion, Are you just talking about the VPI mid high rise type stuff or is the garden style apartment Also included in that single or in that multifamily discussion.

Speaker 2

No, I'd say it's mid high, so 6 story type of units that are going in all over metropolitan areas, especially on the East Coast and West Coast. That's the area that we're talking about.

Speaker 9

Understood. Okay. And then on cash flow, Julie, is there a way to think about maybe the run rate CapEx requirement going forward. And then just over the next 4 to 6 quarters, how should we think about perhaps the amount of deleveraging that you can accomplish over that timeframe?

Speaker 3

Yes, sure. I think from a CapEx spending this year, I think 2nd half could be a little bit more than we did in the first half of the year, but we're still not expecting any, I'll call it, Dramatic ramp up at this point, kind of first half into second half. So we're kind of sticking with our kind of original guidance that we did for the year. So call it kind of around that $100,000,000 range or so of like total CapEx. We will be reevaluating the CapEx kind of needs, let's say, of the business as we look at the bottoms up planning that Bill's been talking about this morning and how do we to invest in ourselves to, you think about automation, digitization, the footprint and these kinds of things.

Speaker 3

And We'll be firming up plans like that and delivering more guidance as we go forward about kind of the outlook for CapEx as we go into 2024. And so I'm not going to kind of commit to that yet, but I do think there is potential for increased CapEx spending in the business. Clearly, we're looking for those high return on invested capital types of investments that we know are going to really help our to EBITDA improvement, ultimately cash flow, etcetera, etcetera over time. And when I look at really kind of deleveraging in capital allocation and Bill can add some of his comments here. I mean, we're still we're really happy to at this point be just under our 3 times net leverage that we've been targeting.

Speaker 3

And so we're going to be as we look forward really looking hard at capital allocation. We're still very bullish on the cash flow generation of the business, the capabilities. And so again, very happy with what we delivered in the first half, still focused on kind of returning to pre-twenty 22 levels of cash flow like I've mentioned before. And So again, we're continuing to focus on the balance sheet, but again, how are we also investing in ourselves? When are we ready to look at the portfolio from a bolt on acquisition perspective, etcetera.

Speaker 3

And so really more to come on that as We move forward, but we're pretty bullish on the cash flow generation and again what we're going to be able to do with that cash investing back in ourselves.

Speaker 9

All right. Sounds encouraging. Thanks a lot. I'll turn it back to

Speaker 2

you.

Speaker 5

Yes. Thanks, Joe. Thank you.

Operator

Our next Question comes from Mr. Keith Hughes with Truist. Please go ahead.

Speaker 10

Thank you. Earlier you talked about flattish, flattish and modestly at price in the second half. I think you're talking about the U. S.

Speaker 2

Can you dig down in that?

Speaker 10

Is there any areas where you're actually doing better than Bryce, any products or any that are lagging a little bit as we head into the second half of the year?

Speaker 2

Yes. So Keith, we Good morning, 1st. And second, we typically wouldn't provide that kind of detail. I can just tell you there's a couple of things. I mean, as Julie said in her prepared remarks, So it still is an inflationary environment, but it's definitely slowing.

Speaker 2

Point number 2 is we have a more robust H222 price comp. So the bar is getting higher when we look at kind of a year over year comp. 3rd message is that we've been doing a lot of work on the commercial side of the business, especially in Europe to really make sure that we're priced Appropriately in different markets. So it's not a one size fits all approach. It's more of a fine tuned granular approach.

Speaker 2

And that's something that we've been spending some time on and we haven't done it well in the past. So we're starting to really improve transparency, dialing the granularity and make sure that we're appropriately priced in the market. So I think those two levers have been delivering the solid performance that we've seen. But again, the bar Is ratcheted up in the back half of the year, and that's something that you need to be aware of when you think through your model.

Speaker 10

Okay. And that would apply to Europe as well as

Speaker 5

the United States. Is that correct?

Speaker 2

Yes, it would. Yes, it would.

Speaker 10

Okay. All right. Thank you.

Speaker 2

Yes, you're very welcome.

Operator

Our next question comes from Matthew Bouley with Barclays. Please go ahead.

Speaker 11

Hey, good morning guys. Thanks for taking the questions.

Speaker 2

Hey, Matt.

Speaker 11

So on Europe, to the extent Residential is soft and commercial could be softer into next year. I'm curious, what Actions may need to be taken, sort of incremental to what you've been previously doing. And would these be permanent or type of more temporary austerity actions, I guess, how are you planning to kind of manage to this downturn in Europe here.

Speaker 2

Yes. So obviously, that's top of mind as you can imagine right now. It's going to be a mix of both. We're already in short work scenarios in different countries based on the local rules and regulations of labor market. So we are utilizing that and have been for a number of months with obviously a double digit down volume.

Speaker 2

Second thing is we're taking a hard look at footprint, time to achieve such Projects have a longer gestation phase in Europe. So there's things that we're constantly looking through to try and make sure We're balanced with the expectation of the market reality, which remains very dynamic. So that is a challenging factor. And we're also obviously taking costs out of the business. So part of the $100,000,000 that you're seeing are some sites that we've taken offline last year that having an impact this year.

Speaker 2

And on the flip side, we want to stay balanced because some of our competitors are really struggling. We've had competitors going out of business. We've had Customers coming to us for short term switches of supply base. So we are picking up volumes in select markets where other customers have or other Competitors have been having trouble. So it's balancing a bit picking up where weaker competitors are suffering, but at the same time preparing for the longer term right size of the fixed asset base that we need to supply to market.

Speaker 2

So that's ongoing, Matt. We'll have more detail at the end Q3. And as we said, there's a number of things that we're working through. And as soon as we're ready to announce it, we will.

Speaker 11

Got it. Okay. Super helpful there. And secondly, back on the topic of capital deployment that Julie was Speaking to so you've now reached that 3 times leverage goal. I'm curious, what's on the wish list For organic investment versus M and A, potentially return to share repurchase.

Speaker 11

And what would the timing be around that. Is it the type of thing where you want to be more further below 3 times or just any thoughts there on timing? Thank you.

Speaker 2

Yes. Thanks, Matt. So I'm pleased, very pleased. I want to thank the organization that we're even having this discussion already. So that means that we've hit kind of our goal number 1 of getting below 3 times and doing that in a pretty rapid fashion this year.

Speaker 2

So if we go through the wish list, there's kind of 3 things that are on our list. And one is definitely investing in ourselves. We still do see a lot of very accretive internal investment opportunities in the transformation process. And we expect When we're done with the diligence and the bottom up planning, there'll be a lot more. So that's the one big bucket.

Speaker 2

2nd is we're looking at some M and A options, We constantly screen the market. Obviously, it's an interesting environment right now, but our leverage reality gives us a little more flexibility to look at some non organic opportunities. And clearly, share repurchase is an option lower priority right now because we think bucket 12 that I just have some opportunity here in the midterm. So we'll obviously be back to the market if we're going to act on any of those, but we'll be coming back in Q3 and just really laying out the investments in ourselves and what we want to do there. So it's pretty clear and transparent.

Speaker 5

All right. Thanks, Bill. Good luck.

Speaker 2

Yes. Thanks, Matt. Have a good day.

Operator

Our next question comes from Tim Wojs from Baird.

Speaker 5

Please go ahead. Hey, everybody. Good morning. Good morning, everybody. Maybe just we've run through a lot here, but maybe just go back to the portfolio reviews.

Speaker 5

As you kind of look through that, maybe Just give us a little bit of guardrails or some of the attributes maybe that you're looking forward to say certain So it should be part of JELD WEN or maybe they're better off kind of somewhere else. What are the 2 or 3 things that you're kind of looking for when you do that?

Speaker 2

Well, I mean, pretty simple. The first thing is before we even start that discussion, Tim, what we want to make sure is that we do our homework we sweep the corners and fix the foundation? So that's what we're working on right now to make sure that the businesses that we do currently run, We have a robust plan with our management as to how we want to improve them. So that's step number 1 is, I'd I'd say fix or strengthen the foundation. Number 2 is clearly to define core, non core and how do we really want to grow the core and what are the key questions that we want to ask around non core assets.

Speaker 2

And as we've said in prior calls, our teams are really doing a good job. We're pushing down the responsibility and Authority in getting kind of the business pillars really detailed within the regions and challenging the leadership of each of those pillars to really come up with a plan on where they are, where they need to get to, what's the capital that they're going to be requiring to change and what's the return on that capital that we can as an enterprise. So that's a process that's ongoing and it's going to be a sum of the parts discussion. And so it's Return on capital, ability to win, core growth, those are the key levers that we're focusing. And my assumption is that the Foundation has been strengthened in those pillars and we need to do that 1st and foremost and that's the focus right now and what we've been working on diligently In the last 6 months.

Speaker 5

Okay. Okay, that's great. And then maybe just on price cost, Julie, I think in the first half, kind of a $94,000,000 benefit on a year over year basis. Would you expect that to kind of step down in the back half just with to lower year on year price and then maybe slipping to see some similar deflation?

Speaker 3

Yes. We absolutely expect to that $94,000,000,000 to really decline, primarily pretty dramatically. We expect to be positive price cost in the second half of the year, but it will be notably less of an impact versus what we have seen in the first half.

Speaker 5

Okay. Okay, very helpful. Thanks for the time and good luck on the back half.

Speaker 2

Yes. Thanks, Tim. Have a good day.

Operator

I will now turn the call back over to James Armstrong, Vice President of Investor Relations for closing remarks.

Speaker 1

Thank you very much. If you have any further questions, please feel free to reach out. I'd be happy to answer any follow-up. This ends our call today, and please have a great day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
JELD-WEN Q2 2023
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