Turnaround Letter Buy-recommended Jeld-Wen (NYSE: JELD) reported a decent fourth quarter and provided encouraging guidance for 2019 and beyond. Jeld-Wen shares, up 33% since our November 2018 recommendation, remain Buy-rated with a $25 price target.
Jeld-Wen’s adjusted net income of $42.5 million, or $0.41/share, increased 49% from $28.5 million, or $0.26/share, a year ago. The $2.8 million difference from reported net income resulted from fees related to its litigation, as well as impairments and accounting adjustments. Shares outstanding were about 5% lower from a $125 million repurchase program during the year.
Revenues grew 12% from a year ago, entirely from acquisitions which produced 14% growth, partly offset by a 2% headwind from currency translations. Net of these effects, “core” revenues were flat. Jeld-Wen benefitted from raising its prices, which helped offset higher raw material and freight costs along with modestly lower volumes. Overall, the company’s price increases appear to be sticking.
For the full year, core revenues grew 1% compared to 2017.
Jeld-Wen’s EBITDA increased by 6% from a year ago, largely due to acquisitions. While the 10.0% margin was lower than the 10.6% margin a year ago, North American and Australasian margins improved. European margins contracted by 310 basis points (one hundred basis points is one percent) due to lower margins in its acquired businesses combined with more volumes being sold through lower margin distribution channels.
The company’s manufacturing overhaul is progressing well. Prior service problems have been improved, the global manufacturing footprint is being consolidated to produce higher quality output more efficiently, and the integration of the many acquisitions made by prior leadership is making headway.
Currently its manufacturing costs are higher as it needs to ensure that new capacity is fully operational, carry extra inventory and incur extra labor and other costs prior to taking older production off-line.
Jeld-Wen’s free cash flow of $101 million in 2018 was about half that of 2017, due to higher capital spending and increased working capital. Free cash flow should increase in the next few years from higher earnings and lower working capital. The debt balance of $1.5 billion was about $200 million higher than a year ago as the company repurchased $125 million in shares, combined with the lower free cash flow.
For 2019, the company guided to modest core (ex-acquisitions and currency) revenue growth of about 2% as it sees its end-markets remaining healthy. Adjusted EBITDA was guided to $470 million to $505 million, implying an 11.2% margin. Capital spending will be elevated, at $140 million to $160 million, compared to about $119 million in 2018, as it upgrades and consolidates its production and other operations.
The company said it is continuing the appeal process from the Steve’s litigation but had no further update. Kirk Hachigian, the board chairman, will be retiring in May. Current board member Matthew Ross will be the new chairman, reducing the board size to ten from the current eleven.
Turnaround is on track
Jeld-Wen reiterated their confidence in reaching an Adjusted EBITDA margin of 15% by 2022 (compared to the 10.7% margin in 2018). Most of the gains will come from higher productivity. This puts the company on track to achieve our turnaround target price of $25.
We continue to rate shares of Jeld-Wen (JELD) a BUY with a price target of 25.
Disclosure Note: An employee of the Publisher owns JELD shares.