JELD-WEN Holding, Inc. (NYSE:JELD) Q4 2023 Earnings Call Transcript
JELD-WEN Holding, Inc. (NYSE:JELD) Q4 2023 Earnings Call Transcript February 20, 2024
JELD-WEN Holding, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Company Participant: Bill Christensen - Chief Executive Officer Julie Albrecht - Chief Financial Officer James Armstrong - Vice President Investor Relations
Conference Call Participant: Phil Ng - Jefferies Susan Maklari - Goldman Sachs John Lovallo - UBS Joe Ahlersmeyer - Deutsche Bank Andrew Azzi - JPMorgan Steven Ramsey - Thompson Research Group Alex Rygiel - B. Riley Keith Hughes - Truist
Operator: Thank you for standing by, and welcome to the JELD-WEN Fourth Quarter and Full Year 2023 Results Call. I would now like to welcome James Armstrong, Vice President Investor Relations to begin the call. James, over to you.
James Armstrong : Thank you and good morning. We issued our fourth quarter and full year 2023 earnings release last night and posted a slide presentation to the Investor Relations portion of our website, which can be found at investor.jeld-wen.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 certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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-K and 10-Q filed with the SEC.
JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance that 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. With that, I'd like to now turn the call over to Bill.
Bill Christensen : Thank you, James, and thank you everyone for joining our call today. I'm pleased to report that our fourth-quarter earnings were better than we expected, and we are making great progress on strengthening the foundation of JELD-WEN. I want to thank all of our employees for their continued dedication as we work together to plan and execute our performance improvement activities. Today, I'll start by giving a brief overview of fourth-quarter results and discuss some of the actions we've taken to improve our financial performance. I'll then introduce several of our new leaders before handing over to Julie to discuss the financial results in more detail. I'll then return to discuss our transformation journey before providing 2024 financial guidance and taking your questions.
I'll begin with our fourth-quarter highlights on slide four. While sales were in line with our expectations, earnings were above the top end of our guidance, primarily due to solid execution of our ongoing productivity actions. As a result, margins significantly improved year-over-year. We continued to generate strong cash flows, driven by improved earnings and reduced working capital balances. Lastly, I'm pleased to report that we achieved our 2023 cost savings goals as we continue to remove fixed costs, including site closures and implement additional performance improvements across the business. At the beginning of 2023, we committed to improving our business. And as I look back at what our team accomplished last year, I'm proud of what we achieved.
On slide five, you see some of the important actions that are driving our improved results. We are focused on streamlining our business and took important steps in 2023, such as initiating our transformation journey, as well as selling the Australasia business. Next, we prioritize strengthening our balance sheet and using the Australasia divestiture proceeds, we repaid $450 million of long-term debt. We also made significant working capital reductions that were an important part of our strong cash flow generation. All of this delivered a net leverage of 2.5x down from 3.6x at the prior year end. Finally, we have taken significant steps to reduce our cost base, including closing or announcing the closure of five sites. And as I mentioned earlier, we delivered our targeted $100 million of cost savings.
As you can see, we take our commitment seriously and we are delivering on what we said we would do. In the fourth quarter, we continue to strengthen our foundation, a key initial phase of our transformation journey. On slide six, we outlined some of the major actions in our key focus areas of people and performance. As part of our culture and capabilities work stream, we finalized the key leadership behaviors that we believe will support achieving our goals. We're starting a broad training program about these behaviors in the coming weeks targeting 1,600 global leaders. Another important action was launching our Change Agent Network. This network consists of approximately 300 associates within the organization who are both trusted and recognized by their peers as leaders at all levels.
The Change Agent Network will allow us to more effectively share information, gather insights, and provide support for the many projects we have underway. Switching to performance, we completed an extensive bottom-up planning process that engaged thousands of our associates to generate ideas, followed by a business case and a project plan for each initiative. We have now sequenced these initiatives and are using a disciplined approach to track our implementation progress. Our expectation is that these projects will lead to significant long-term profitability improvements. Finally, we announced or completed the closure of four facilities in North America and Europe. Combined, these closures are expected to drive more than $13 million of annual EBITDA improvement that will phase in over the next 12 months.
As part of our transformation journey, it is important that we have the right people to execute the significant changes we are planning. As you see on slide seven, and as announced on February 7, we recently added several new executives to our senior leadership team. First, Gustavo Vianna was appointed as EVP and President of Europe. He brings over three decades of experience from various multinational companies. His experience includes operational and commercial transformations, as well as promoting cultural change. Second, Dan Valenti was appointed as EVP, North America Doors and Distribution. Dan joined us from Whirlpool Corporation, where he spent nearly 13 years in leadership roles, most recently as SVP and General Manager KitchenAid Small Appliances.
Dan possesses significant commercial, product development, and supply chain experience. His expertise in understanding market dynamics, identifying growth opportunities, and making informed strategic decisions will be extremely valuable to our team. Finally, Matt Meyer has joined us as EVP, Chief Digital and Information Officer. His ex-manager is a digital and information officer. Matt has helped multiple companies advance their digital transformations. His most recent position was EVP, Chief Digital and Data Officer at Driven Brand Holdings, where he was responsible for data technology outcomes for the largest automotive aftermarket services provider in North America. We are confident that these new leaders will be important catalysts in helping us achieve our goals, and I look forward to their insights and expertise.
I'll now turn it over to Julie to discuss the financial results.
Julie Albrecht : Thanks Bill. Looking at slide nine, our fourth quarter revenues were approximately $1 billion, down 13% from the prior year. This decrease was driven by a reduction in our core revenues due to market-driven volume declines in both North America and Europe. Despite the lower sales, our adjusted EBITDA was $87 million in the fourth quarter, up 11% year-over-year, leading to an adjusted EBITDA margin of 8.5%. This strong year-over-year margin improvement of 190 basis points reflects solid execution of our productivity actions in areas such as site closures, headcount reductions, freight management and sourcing optimization. On slide 10, you see that our full year 2023 results tell a similar story as the fourth quarter.
Our full year revenue was $4.3 billion, down 5% year-over-year. This decrease was driven by our core revenues as volume mix was lower by 10%, with a partial offset from 5% of higher price realization. Our full year 2023 adjusted EBITDA increased by 9% to $380 million and margins expanded by 110 basis points to 8.8%. Our full year EBITDA growth was driven by operating cost reductions and positive price-cost results that were partially offset by the impact from lower volumes. As Bill mentioned earlier, in 2023, we significantly increased our cash flow and reduced our leverage. Turning to slide 11, you see that we generated $345 million of operating cash flow, a $315 million improvement year-over-year, as we had strong operational performance and significantly reduced our working capital balances.
We also substantially improved our balance sheet. Using proceeds from the sale of the Australasia business and our strong cash flow, we reduced our net leverage ratio by more than a full turn to 2.5x at the end of 2023. Our leverage is now within our midterm target range of 2.0x to 2.5x. As you can see on slide 12, our fourth quarter revenue decline was driven by lower volume mix of 16%, which was slightly offset by 1% of price realization and a 1% positive foreign exchange translation impact. I'll provide additional comments about our North America and Europe volume trends shortly. Additionally, you'll find a revenue walk, including segment details for the fourth quarter and the full year in the appendix of our earnings presentation. On slide 13, you see that our adjusted EBITDA increased by $9 million year-over-year.
Despite significant volume mix headwinds, we generated solid profit contributions from improved productivity, lower SG&A expenses, and favorable price cost. Regarding price cost, we remain focused on pricing discipline as we do continue to see inflation in costs such as labor and insurance. Moving to our segment results on slide 14, in the fourth quarter, our North America segment generated $748 million in sales, which was a decline of 13% from year-ago levels. This was driven by a core revenue decline of 13% due to lower volume mix of 14%. However, North America's adjusted EBITDA improved to $94 million, which was up 8% year-over-year, while margins improved by 250 basis points to 12.6%. This was due to positive price relative to inflation and strong productivity, which more than offset the negative impact of lower volume mix.
In Europe, we generated $273 million in revenue and $16 million in adjusted EBITDA. Core revenues decreased by 18% in the fourth quarter, driven by lower volume mix of 20%. Adjusted EBITDA declined by $6 million from last year, leading to 110 basis points of lower margin. This decline was due to continued weak demand that was partially offset by improved productivity. Now, turning to the market outlook on slide 15 and starting with North America. We expect North America volumes to be down by low single digits in 2024. We anticipate that new single-family home construction will be flat to up slightly during the year. However, the outlook for repair and remodel activity remains uncertain, and we currently expect R&R activity to be down by low to mid-single digits.
In the U.S., high interest rates continue to weigh on consumer confidence and create an affordability challenge. Existing home sales remain at relatively low levels, as people with low interest rate mortgages are reluctant to move. However, this dynamic creates an opportunity for increased new housing starts. The European market is expected to continue experiencing demand weakness due to the ongoing macroeconomic and geopolitical challenges. Overall, we anticipate volumes in the region to be down by high single digits. Residential construction markets remain soft across Europe, and we anticipate that these volumes will be down by high single digits. Additionally, commercial project volumes are slowing in Europe, and this demand is expected to decline by mid-single digits.
I'll now turn it back to Bill to talk about our transformation journey.
Bill Christensen : Thanks, Julie. As I've shared in previous earnings calls, we are taking a two-pronged approach to improve our business. As we show on slide 17, in the short term, we are focusing on strengthening the foundation of our business. Our solid 2023 results underscore the significant progress we are making on reducing our operating costs and improving our operational performance. However, our margins are still not where they should be, and we have a lot more work to do. We remain committed to building a strong foundation that supports our future growth. In addition to the short-term focus, we continue to assess opportunities to grow our business, and we commit to only invest where we have the right to win. While this process is ongoing, we see a lot of opportunity for profitable growth in the years to come.
Turning to slide 18, as I've shared before, my three focus areas are people, performance, and strategy, and our transformation journey is currently focused on people and performance. We are engaging thousands of associates around the world in activities to positively impact both culture and financial results. Our teams have identified, validated, and now sequenced more than 800 initiatives. Related to our culture, we are working to more clearly connect our values to our everyday work. This includes investing more in training about important behaviors, including safety, continuous improvement, and accountability. We are then measuring our progress and getting feedback from our teams. I'll talk more about our organizational health activities on the next slides.
Shifting to performance, our numerous initiatives include a balanced focus on both growth and cost reduction actions. We are working to improve our team strength, processes, and tools within our various commercial activities. In addition, we continue to right-size our manufacturing network, as well as invest in automation and utilize our scale to streamline sourcing, among many other smaller initiatives across the organization. We are investing more in ourselves as we execute on our solid pipeline of high ROIC projects to deliver improved profitability this year and in the future. To give you a better understanding of the type of work we're doing, I want to walk through a few examples of specific projects. Slide 19 outlines our focus areas aimed at fostering a more agile culture.
After assessing our organizational health index in the first half of 2023, we have honed in on three key areas, communication, training and incentives. In our global organization, ensuring that important information reaches the right individuals in a timely manner presents a significant challenge. Nevertheless, we are committed to fostering transparent communication at all levels, employing both formal and informal channels. One method we are employing to improve communication is utilizing our recently launched Change Agent Network. This network comprises approximately 300 individuals within the organization who are empowered to accelerate communication in support of our cultural transformation. We are also investing in employee development through a variety of training initiatives.
These programs cover leadership, change management and technical skills. While some of these trainings take place in formal classroom settings, we are also leveraging on-the-job mentorship for more effective learning experiences. Finally, we're realigning rewards and recognition across the organization to improve connectivity with both financial performance and targeted behaviors. Simultaneously, we are decentralizing responsibility while improving accountability within the organization. Now shifting to performance, on slide 20, we show one of the growth-oriented projects we have underway in Europe. An opportunity that we have identified is improving efficiency in our quoting process. Our European team is developing a next-generation CPQ or configure, price, and quote system, that will allow customers to configure their own orders and identify the right JELD-WEN products that fit their needs.
The system will then accurately price and provide detailed quotes to customers. When this project is complete, we will improve our customer service, refine our profit visibility and integrate quotes with our manufacturing systems. To execute this project, we expect to spend approximately $2.5 million in both expense and capital, but anticipate a cumulative EBITDA impact of more than $15 million over the next five years and an IRR of more than 50%. Moving to slide 21, I want to highlight an initiative that is a first in a series of investments to increase automation in our North America Door facilities. By leveraging proven technology, this project will drive operational efficiencies on our production line and elevate our product quality. Furthermore, the project will address bottlenecks in our facility, resulting in a substantial reduction in the build cycle duration.
This initiative is expected to generate more than $6 million in EBITDA a year once fully ramped up, with an IRR of more than 45%. Once this work is complete, it will also lead to further opportunities to reduce our network complexity and improve cost to serve. These two performance-related projects are just examples of the over 800 large and small projects that came from our bottoms-up planning process. We expect these projects will lead to a much stronger JELD-WEN with a solid foundation and significantly improved profitability. I now want to discuss our 2024 guidance. On slide 23, you see our initial guidance for revenue and adjusted EBITDA. We expect our 2024 revenue to be between $4.0 billion and $4.3 billion, as our core revenues are expected to be flat to down 7% compared to 2023.
This is driven by the continuing market uncertainty in both North America and Europe, as Julie mentioned earlier in her comments. We anticipate that our adjusted EBITDA will fall within the range of $370 million to $420 million, driven potentially by lower volumes, which we expect to be more than offset by ongoing productivity improvements. We expect cost savings of approximately $100 million, which is a combination of approximately $50 million of carry-forward benefits from last year's actions and new initiatives that will be delivered this year. At the midpoint of our guidance, our margins are improving from 8.8% last year to 9.5%, a solid 70 basis points. As we look at the phasing of earnings this year, we expect our first quarter EBITDA to be slightly lower than the same period in 2023 due to anticipated volume headwinds and lower backlogs than we had when we entered last year.
However, we expect benefits from our internal investments to ramp up throughout the year and therefore expect approximately 40% of EBITDA in the first half of the year and the remainder in the second half. I'd now like to provide some information about our cash flow outlook for 2024, which is outlined on slide 24. We expect that this year's operating cash flow will be similar to 2023 before we invest approximately $100 million of non-repeating cash expenses to fund portions of our transformation journey. In addition to these investments in JELD-WEN's future, we plan to increase our capital expenditures to approximately 4% of sales, to drive costs out of the business and set ourselves up for future growth. As you can see from the examples of projects that I discussed earlier, we are keenly focused on delivering returns significantly above our cost of capital.
All in, we expect our free cash flow to be approximately $50 million to $100 million this year, which reflects both our strong commitment to investing in JELD-WEN's future and our ability to self-fund these investments with planned operating cash flows. As I wrap up, let's turn to slide 25. I'm excited to continue updating you on our transformation journey as this year progresses. As I mentioned earlier, we take our commitment seriously and we are executing on what we have said we will do. We know that by fixing our foundation, we are preparing for profitable growth when the market improves. I'm confident that over the next few years, JELD-WEN will deliver significantly improved profitability and return on invested capital. We appreciate your continued interest and I'll now turn it over to James to move to Q&A.
James Armstrong: Thanks Bill. Operator, we're now ready to begin Q&A.
Operator: [Operator Instructions] Our first question comes from the line of Phil Ng with Jefferies. Please go ahead.
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