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spk09: Welcome to Mesonite's fourth quarter and full year 2021 earnings conference call. During the presentation, all participants will be in listen-only mode. After management's prepared remarks, investors are invited to participate in the question and answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Rich Leyland, Vice President, Finance and Treasurer. Thank you and Over to you, sir.
spk04: Thank you, and good morning, everyone. We appreciate you joining us for today's call. With me here this morning are Howard Heckes, President and Chief Executive Officer, and Russ Tijema, Executive Vice President and Chief Financial Officer. Chris Ball, our President of Global Residential, will also be joining us for the Q&A session. We issued a press release and earnings presentation yesterday reporting our fourth quarter and full year 2021 financial results. These documents are available on our website at masonite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued yesterday. More information about risks can be found under the heading Risk Factors in Masonite's annual report on Form 10-K to be filed at the SEC later this week and in our other SEC filings, which are available at sec.gov and at masonite.com. The forward-looking statements in this call speak only as of today, and we undertake no obligation to update or revise any of these statements. Our earnings released in today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations, which are in the press release and the appendix of the earnings presentation. Our agenda for today's call includes a business overview from Howard, followed by a review of the fourth quarter and full year results from Russ, along with our 2022 financial outlook. Lastly, Howard will provide some closing remarks and will host a question and answer session. And with that, let me turn the call over to Howard. Thanks, Rich. Good morning and welcome, everyone. I'm pleased to be joining you today to update you on Mason Ice's fourth quarter and full year results. 2021 was another outstanding year, and I'm grateful to each of Mason Ice's more than 10,000 employees that contributed to the impressive results we delivered in this challenging environment. Their flexibility, creativity, and resilience enabled us to grow volumes and deliver double-digit growth in both net sales and adjusted EBITDA. End-market demand remains strong, despite a number of well-publicized external headwinds. I'm proud of the way the team navigated the extreme levels of inflation, as well as supply chain constraints and labor-related issues that we faced throughout the year. Amid these challenges, our focus on maintaining a favorable price-cost relationship combined with disciplined capital management allowed us to realize a 33% increase in adjusted earnings per share and a 5 percentage point increase in return on invested capital for the year. And we accomplished this while continuing to invest in the important growth and strategic initiatives that will shape our future. I am also very pleased with the progress that we made on our 2021 on our key environmental, social, and governance initiatives. We published our latest ESG report in June that included our first-ever carbon footprint analysis, and we named Claire Doyle the company's first Chief Sustainability Officer. As part of our continued focus on safety, our operations teams conducted over 1,800 safety-related Kaizen events, helping to reduce our total incident rate by 6% year-over-year, with 10 of our facilities achieving our ultimate goal of zero safety incidents. We also launched our We Help People Walk Through Walls community grant program, with awards going to 15 amazing local organizations nominated by our employees. At our Investor Day in April, we presented our Doors to Do More strategy and our Centennial Plan, As you may recall, we called out three ambitious financial goals for 2025, roughly doubling our annual net sales to $4 billion, achieving adjusted EBITDA margins in excess of 20%, and delivering sector-leading return on invested capital. We made significant progress in 2021, and I believe we are well on our way to delivering on these goals over the next four years. Also at our investor day, you may recall that Russ laid out a glide path to achieving our Centennial Plan goals that included three main pillars of growth. First, we intend to grow our base business organically by capturing fair value for our products and optimizing our supply chain and production processes to increase capacity and capitalize on strong housing market fundamentals. Second, we intend to leverage our strong balance sheet and cash flow to pursue acquisitions which have the right fit and value proposition and which will help us meet our long-term financial goals. And third, we intend to drive growth through our Doors That Do More strategies, which aims to unlock the significant potential we have to differentiate our company through a combination of delivering reliable supply, product innovation, and creative down-channel marketing, making Masonite the supplier of choice and Masonite Door Systems the product of choice for architects, builders, and homeowners. Turning to slide five, certainly in terms of doors that do more innovation, 2021 was a big year. Among the new product launches this year was our Masonite M-Power smart door, the first residential entry door to integrate power, perimeter lighting, a video doorbell, and smart lock into a complete door system that can be controlled remotely through a proprietary mobile app. Last month, we showcased the new M-Power door at the 2022 Consumer Electronics Show in Las Vegas, and the reception was phenomenal. Who would have imagined that a door company would ever be part of CES, let alone win top accolades? But that is just what we did. The Empower Reveal at CES was highlighted in over 130 articles garnering over a half a billion impressions worldwide. Our goal was to make a splash at CES to lay the groundwork for engaging builders about this exciting new product. And I've got to hand it to our marketing team. They executed beautifully. This effort certainly helped raise awareness and interest in the market, and our conversations with builders have been picking up. We recently showcased the door again at the International Builder Show and have already received preliminary commitments from six builders for installation in communities they plan to build this year. We are in active discussions with dozens more, which we are confident will lead to additional sales announcements throughout the year. So we're off to a good start. And while we understand the adoption curve will take some time, we're very encouraged by the early indicators of purchase intent and overwhelming enthusiasm for a product from CES and social media to the leadership at Top Builders. Turning to slide six, when I joined the company in mid-2019, it was clear to me from customer conversations and market research that doors were largely commoditized and underpriced compared to consumer expectations. Innovation in the door space was primarily focused on style and design, while margin growth came primarily from cost management and productivity initiatives. Over the last two and a half years, we've been on a mission to transform Masonite from a manufacturer of commoditized building products to a manufacturer and marketer of consumer durables, of doors and door systems that solve life and living problems where we work and play. The Empower Smart Door is a great example. Our strategy was to begin closing the price value gap by implementing a significant price increase on our products effective January of 2020, followed by investments back into the business focusing on delivering reliable supply, driving specified demand, and winning at the last point of sale. The global pandemic was not originally part of our plan, and certainly the macroeconomic impacts of this phenomenon have resulted in some volatility quarter to quarter. But overall, I am very pleased with the financial results that our strategy has delivered over the past two years. Since 2019, net sales are up 19%. Adjusted EBITDA is up 46%. Adjusted EPS is up 123%. And return on invested capital is up 560 basis points. Our strategy puts us on a new growth trajectory, and we believe we have the momentum to follow this path through to achieving our centennial plan goals. Turning to slide seven, I'd like to give an overview of some of the highlights from Q4. I'm pleased to report that we delivered year-on-year growth in both net sales and adjusted EBITDA. The 3% increase in net sales was driven by higher average unit price, or AUP, offset by volume declines caused primarily by the 53rd week in 2020. AUP was up year-over-year across all three segments as we continued to benefit from previously implemented pricing actions. Adjusted EBITDA margin in the quarter increased 190 basis points year over year as pricing actions and SG&A savings more than offset inflation and operational inefficiencies. Russ will discuss this in more detail in just a few minutes. Also in the quarter, we recorded $83 million in pre-tax charges related to architectural goodwill impairment and the annuitization of our legacy U.S. pension plan to remove the liability from our balance sheet. With respect to business and operational highlights for the quarter, end market demand fundamentals remain generally healthy across our residential and commercial end markets. But several unpredictable manufacturing disruptions impacted our ability to efficiently operate in constrained capacity. Among these disruptions was the well-publicized winter spike in Omicron cases in both North America and Europe, which impacted our suppliers and customers as well as our own operations. In our plants worldwide, COVID-related absenteeism increased approximately 40% in the last three weeks of December versus the rest of the fourth quarter. You will note that we saw significant and unanticipated underperformance in our architectural segment in Q4, resulting from a number of factors that increasingly constrained production. Russ will discuss some of this in more detail, but we are clearly disappointed with these results, and we are evaluating additional actions to restore the business to profitability. Finally, I'm pleased to report that the capacity expansion, mVantage process optimization, and sourcing initiatives are moving forward to help lay the foundation for continued growth in 2022. All in all, this quarter was not as strong as we planned, but I believe the issues are primarily transient in nature and that the fundamentals that have driven the success of our business over the past two years remain sound. Before I turn the call over to Russ, I also wanted to highlight the announcement we made yesterday regarding our additional commitment to enhancing shareholder returns. The increased repurchase authorization and announcement of plans for an accelerated share repurchase program reflect the confidence that the Board of Directors and management have in the growth potential for Masonite and the results we expect to see under our Doors that Do More strategy. With that, I'll turn the call over to Russ to provide more details on our financials. Thanks, Howard, and good morning, everyone. Turning to slide nine, I'll provide an overview of our fourth quarter financial results. We reported net sales of $636 million, up 3% as compared to the fourth quarter of 2020. The growth was primarily due to a 14% increase in AUP, which was up year over year across all three segments on favorable price. We also benefited 1% due to favorable foreign exchange. These increases were partially offset by base volume declines of 10%, as well as a 1% decrease from the sale of components and a 1% decrease from the impact of a divestiture. The year-over-year decline in volumes resulted largely from the absence of a 53rd week in 2021, as well as Omicron-related labor shortages, destocking among certain U.K. merchants, and production challenges in the architectural segment. Gross profit decreased 5% to $135 million, and gross margin decreased 170 basis points year-over-year to 21.2%. As expected, our strong AUP growth was sufficient to more than offset inflation, which was slightly higher than anticipated in the quarter. But factory and distribution inefficiencies related to labor constraints and volume declines contributed to the gross margin contraction. Selling general and administration expenses were $66 million, down 31% compared to the same period last year, primarily driven by lower incentive compensation as well as the absence of charges related to the settlement of U.S. class action litigation that were included in the prior year period. SG&A as a percentage of net sales fell 500 basis points from the prior year to 10.3%. We recorded a net loss of $25 million in the quarter as compared to $27 million of net income in the prior year due to the combined impact of the goodwill impairment in the architectural segment and the pension settlement charge that Howard mentioned. These two items represent approximately $83 million of discrete pre-tax charges in the quarter. Absent these items, net income would have increased almost 80% versus the prior year. Diluted earnings per share were a loss of $1.06 compared to earnings of $1.08 in the fourth quarter of last year. Excluding the goodwill impairment and pension settlement charges, adjusted earnings per share increased 60% to $2.01 in the fourth quarter compared to $1.26 in the fourth quarter of 2020. Adjusted EBITDA in the quarter increased 17% year-over-year to $95 million, with adjusted EBITDA margin of 190 basis points to 15%. On the right-hand side of the slide, we have more detail on our adjusted EBITDA performance, which was largely driven by strong year-over-year gains in price as well as SG&A savings. Cost of goods sold remained elevated in the fourth quarter, with material costs up $47 million year-over-year. Raw material inflation, higher inbound freight costs, and global supply chain disruptions all contributed to material costs, which remained elevated in the fourth quarter, yielding year-on-year material cost inflation slightly higher than the mid-teens rate we had expected. We also incurred $16 million of higher factory-related costs in the quarter due to increased wages and production inefficiencies caused by our limited ability to flex labor and overhead costs in line with short-term volume fluctuations. Distribution costs were $12 million higher year on year, primarily due to inflation on freight rates and packaging materials, including wood pallets, as well as an impact from sub-optimized payload and freight lane mix. Let's turn to slide 10 for our North American residential segment results. Net sales increased 9% from the prior year to $495 million, driven by higher AUP, which benefited from multiple price increases implemented throughout the year. Base volume declined 6% year-on-year, principally due to a 53rd week in the prior year. Volume was also constrained somewhat by discrete weather events that led to temporary plant closings, as well as the Omicron-related spike in absenteeism that Howard noted. Despite the volume drop in Q4, full-year volume increased 5%, driven by strong end-market demand and previously announced new retail business. Adjusted EBITDA in the North American residential segment was $88 million in the fourth quarter, up 1% from the same period last year, with an adjusted EBITDA margin of 17.9%, down 140 basis points. While we achieved favorable price costs in the quarter, this was more than offset by the impact of manufacturing and distribution inefficiencies presented by the challenging labor and supply chain environment. As Howard mentioned, we continue to look toward the future and invest for long-term growth. In the fourth quarter, we made significant progress on capacity expansion initiatives, such as our Fort Mill, South Carolina facility. This new facility will fully leverage our mVantage operating system and targeted automation. Its location in the southeast is ideally suited to serve as some of our strongest markets. We have other initiatives underway targeting exterior door production capacity that are scheduled to come online in stages starting in Q2 of this year. Turning to slide 11 in our Europe segment. Net sales of $74 million were down 11% year-on-year, or 6%, excluding the impact of foreign exchange and a divestiture, as strong AUP growth was offset by volume headwinds. Base volumes declined 20% year-on-year, In addition to the impact of the 53rd week in the prior year, we witnessed destocking in the merchant channel, coupled with widespread shortages of various building materials and trade labor, which affected builders' ability to complete projects. Partially offsetting the volume decline was a 14% increase from AUP. Adjusted EBITDA was $11 million in the fourth quarter, down 37% year over year. Adjusting EBITDA margin was 14.4% down to 570 basis points, driven primarily by our limited ability to flex labor and overhead in line with the sharp volume decline we experienced in December. We are keeping a close eye on channel inventories and demand signals in the market and stand ready to manage costs accordingly. But we have already seen order rates for interior doors improve in late January and early February. Demand for exterior doors remains somewhat soft due in part to trade labor constraints. However, given the age of the housing stock in the UK and the limited new construction in the market in recent years, we remain bullish on the long-term remodeling market for exterior door systems. Our new exterior door facility in Stoke-on-Trent will allow for continued growth, and in the fourth quarter, the team successfully began a staged transition of production to the new site. Full transition of production remains on schedule to be completed by the end of Q2. Overall, we are pleased with the full year results for our European segment, which included a 12% increase in COVID recovery volume, primarily in Q2, as well as a 12% increase in AUP. This strong AUP performance, along with the structural work the European team has done to streamline the portfolio, drove a year-on-year adjusted EBITDA margin increase of 240 basis points to 18.1%. Moving to slide 12 in the architectural segment. Net sales decreased by 18% year-over-year in the quarter to $63 million, driven by an 18% decrease in base volume and a 6% decline in component sales, offset by a 6% increase in AUP. The base volume decline was largely the result of three main factors. Material supply outages of third-party source components, the impact of spiking Omicron-related absenteeism, which affected production in this segment to an even greater degree than in our residential plants, and inefficiencies related to the ramp-up of new systems and equipment that are a part of our plan to better leverage our network of door plants. These production constraints, coupled with sustained order flow in the quarter, and extended lead times. Adjusted EBITDA was a loss of $6 million in the fourth quarter. While we continue to realize favorable price, this was more than offset by the impact of lower production volume. The order book for this segment is still strong, and we are now seeing additional price come through from actions taken as recently as December for the QuickShift business, as well as price realization from actions earlier in 2021 that are now being realized on quoted projects. To address material supply constraints, additional vendors have been qualified and we should start receiving shipments from them in late Q1. An intense focus on production scheduling in January has allowed us to ship 80% of our back orders. As for the ramp up of systems and equipment, we've assigned additional continuous improvement resources to support and train local operators. As you may recall, part of our architectural restructuring plan involves increasing production flexibility between plants, giving us the option to service customers out of multiple locations. We are making progress on this initiative, but needed greater temporary support resources to facilitate change management in light of elevated absenteeism and turnover. Given the spike in Omicron-related issues that carried over into January and the time required to solve some of these supply chain and production issues, We are not expecting to see a return to profitability in the architectural segment until the second quarter. Let's move to slide 13 and summarize our full-year financial results for 2021. Net sales were up 15% compared to 2020 due to AUP growth of 11%, base volume growth of 2%, and a 2% benefit from foreign exchange. Gross profit of $612 million represents an increase of 7% over the prior year, while gross profit margin declined 180 basis points to 23.6% for the full year. The benefit of a low double-digit increase in AUP was more than offset by the combined effects of material and logistics inflation, which increased steadily across the year, as well as incremental tariffs, rising manufacturing wages, and manufacturing inefficiencies related to an extremely volatile supply chain and labor environment throughout 2021. Selling general and administration expenses were $308 million, down 16% compared to last year, primarily due to the absence of charges related to the settlement of U.S. class action litigation in the prior year period. and lower incentive compensation, partially offset by higher personnel costs in the form of both wage and benefit inflation and investment in resources to support growth initiatives. SG&A as a percentage of net sales fell 430 basis points from the prior year to 11.9%. Debt income was $95 million for the full year, an increase of 37% from the prior year. Diluted earnings per share were $3.85 in 2021, up 39% from $2.77 last year. Adjusted earnings per share increased 33% to $8.16. Adjusted EBITDA increased 13% to $413 million for the full year, while adjusted EBITDA margin contracted slightly to 15.9%. On the right side of the slide, we provide a full year adjusted EBITDA bridge. A relatively straightforward combo for 2021. Volume growth and strong AUP, partially offset by significant inflationary pressures and higher factory and distribution costs. Slide 14 summarizes our liquidity and cash flow performance. At year end, our total available liquidity was $601 million, inclusive of unrestricted cash, an accounts receivable purchase agreement, and our undrawn ABL facility. Net debt was $484 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.2 times. Cash flow from operations was $156 million through the end of the fourth quarter, down from $321 million in 2020. We anticipated lower cash flows versus the prior year due to higher cash taxes and cash payments related to the settlement of U.S. class action litigation, as well as a rebuilding of working capital from abnormally low levels exiting 2020. This working capital rebuild was exacerbated by the impacts of inflation and elongated supply chains, strategic increases in raw material safety stocks, and lower accruals for variable compensation. Capital expenditures were approximately $87 million in 2021. We continue to repurchase our shares in the fourth quarter, purchasing over 276,000 shares for approximately $31 million at an average price of $111.51. As of February 21st, we have repurchased an additional 388,000 shares of stock for $40 million in the first quarter of 2022. Yesterday, we announced that our Board of Directors has approved a new share repurchase program, allowing us to repurchase up to an additional $200 million of shares. This new authorization, plus approximately $156 million currently available under our existing authorization, approved in August 2021, provides us with over $350 million for future share repurchase activities. We also announced that we intend to enter into a $100 million accelerated share repurchase transaction during the first quarter of 2022. We believe our strong balance sheet and steady cash flows allow us to take advantage of what we see as an attractive investment opportunity in our own shares, while maintaining ample resources to pursue both organic and inorganic growth initiatives. On slide 15, we have provided our consolidated full-year outlook for 2022. As backdrop, we believe that demand fundamentals will remain healthy across the markets we serve, particularly in the North American residential market, where existing for-sale housing inventories remain historically low, prompting continued strong demand for new housing, and higher home values, which are supportive of repair and remodeling activity. While concerns about the impact of inflation and rising interest rates cannot be ignored, our current viewpoint is that, barring any significant supply chain disruptions, housing starts and the triple R market will be flat to up slightly in 2022. In the UK, slight headwinds are beginning to materialize in the form of limited availability of trades labor, which is impacting the construction markets broadly, as well as moderating consumer confidence. However, we remain constructive on the long-term fundamentals in that market due to the underbuild of new housing, which has persisted throughout Brexit and the COVID-19 pandemic. As for our commercial markets in the U.S., the ABI index has moderated slightly in recent months, but has remained in positive territory since February of 2021, indicating that non-residential markets will likely continue to see some recovery in 2022. As an overlay to end market demand, we continue to monitor the health of supply chains and the labor market as they may ultimately influence construction activity in the near term. We entered the year with meaningful constraints on our own production related to the end-of-year spike in Omicron absenteeism. January deteriorated further. Thankfully, we saw these rates start to improve in February, but they remained elevated and have put a governor on our ability to meet unconstrained demands thus far in Q1. In view of these factors, which potentially impact both demand and supply, we are assuming minimal volume growth in our consolidated 2022 outlook. In terms of pricing, we are assuming a nearly double-digit benefit at a consolidated level for the full year, comprised of both the carryover impact and mid-year pricing actions taken in 2021, and additional price increases implemented in early 2022. We expect the impact of these recent price actions to be somewhat muted in the first quarter, given timing of implementation and the impact of extended lead times on some of our products. In addition to volume and price, we assume our net sales will be impacted by a one-point headwind from foreign exchange and a one-point headwind from the impact of the mid-year 2021 divestiture of our check business in the Europe segment. Considering all of these factors, we expect net sales growth of 6% to 10% versus 2021, or 7% to 11% excluding foreign exchange. With respect to adjusted EBITDA drivers in 2022, we anticipate that inflation will remain a substantial headwind. We assume our raw materials costs will remain elevated and yield an annual inflation rate in the low to mid-teens. with year-on-year increases heavily weighted to the first half, given the trajectory of inflation across 2021. Inflation on wages and benefits, as well as on logistics, are expected to come in at mid-single digits. And finally, we would expect SG&A to grow year-over-year, roughly in line with net sales growth, as we also incur wage inflation that is somewhat higher than historical norms and continue to invest in resources important to deliver growth and improve operational capability. Based on this cost overlay to our net sales outlook, we expect adjusted EBITDA to be in the range of $445 million to $475 million. Taking into account the price and inflation dynamics I previously mentioned, quarterly counts for adjusted EBITDA margin are likely to be particularly challenging in Q1, given the strong price and much lower relative inflation we saw in the first quarter of 2021. We are expecting margins to be down year-over-year in Q1, approach paring in Q2, and then improve in the second half, with year-on-year margin improvement for the full year. We expect that adjusted earnings per share in 2022 will be in the range of $9.10 to $10.05, based on an assumed tax rate of approximately 22.5% and an average diluted share count of approximately 24.5 million. The share count includes the repurchases made through February 21, 2022, but does not consider the impact of our planned accelerated share repurchase program or other repurchases that may be conducted throughout the year under the remaining authorization. We expect cash taxes in 2022 to range from $60 million to $70 million, and for capital expenditures to increase to between $100 million and $120 million. reflecting our focus on strategic investments in capacity, service and reliability, health and safety, and product innovation. On the basis of these assumptions for adjusted EBITDA and key cash flow drivers, we anticipate free cash flow of $150 million to $180 million for 2022. With that, I'll turn the call back to Howard for closing comments. Thanks, Russ. To summarize, we're pleased to have delivered double-digit sales and adjusted EBITDA growth in 2021 on top of what was already an extraordinary year of growth in 2020. The team navigated numerous challenges with perseverance and creativity this year. While we have some carryover issues that we need to address in the architectural segment specifically, the investments we have been making in capacity, productivity, and new product innovation across all of our business segments leave us enthusiastic about our prospects as we enter 2022. A tight supply of housing stock and rising home values in North America are supporting both the new construction and repair and remodel demand and could provide upside for volumes in 2022. Margin growth will be a priority for us this year, and we'll be focused on cost management, improving our mix, and continuing to capture fair value for our products. At the same time, we will continue to invest in our Doors to Do More strategy to further grow the company and help us achieve our ambitious 2025 Centennial Plan goals. For the past two years, we've been faced with plenty of macroeconomic volatility, and yet our team has found a way to focus on what we are able to control and generate results. So while no one can say with certainty what's in store for us in 2022, I'm confident in our ability to step up and deliver another year of continued momentum and exceptional growth. And with that, I'd like to open the call for questions. Operator?
spk09: Thank you. Mr. Hackes, if you would like to register a question, please press star 1. If you are using a speakerphone, please lift your handset before entering your request. We ask that you limit yourself to one question and one follow-up. Ladies and gentlemen, as a reminder, to register a question, please press star 1 on your telephone keypad. The first question comes from the line of Mike Dell with RBC Capital. Please go ahead.
spk05: This is actually Chris . Thanks for taking my question. Good morning. I'm just touching on the margin outlook for this year. I mean, obviously, you guys are putting through a ton of price, double-digit increases this year. It should be a substantial margin tailwind, but it doesn't seem that for the full year you guys are modeling a significant margin tailwind off that. I mean, understanding that raw materials are up a lot and labor and logistics are up, do you think the drop down would still be more meaningful? At least do you think we want meaningful earnings tailwind for you guys? I guess is there something that we're not appreciating in terms of on the margin front in terms of price cost or some other levers that's impactful and maybe particularly the 1Q drag, is that something that that What's the potential kind of quantification around the headwind there?
spk04: Thank you. Yeah, Chris, it's Russ. Let me take a shot at that. Maybe I'll start with the question around Q1. It's important to remember that in the prior year, we had much lower relative raw material inflation in the first quarter. It only ran at surface 7% before it really started to ramp up in Q2 and Q3 in particular. We also entered last year with an outsized benefit from price that we implemented pretty quickly in the quarter. And so I would characterize the relative price-cost tailwind in the first quarter last year as better than we expect in the first quarter this coming year. And so that's really what's driving that margin to be down, we believe, year on year. Probably more in line, first quarter, with what we saw this fourth quarter, so flat-ish sequentially. Before we get to parity year on year, as I said, during my remarks in the second quarter. And then you really start to see the growth in the second half of the year because we'll have a much more moderate year-on-year comp with respect to raw material inflation. Now, if you just step back and look at our margin guide for the full year and what that applies to the margins, here's how I would unpack it. We start off a base of 15.9% actual in 2021. If you look at price-cost, and for this comparison, I'm going to talk about cost just raw, raw material. We talked about price on a consolidated level being nearly double digits. Let's, for illustrative sake, say that's 9% for the overall company. And then if you look at material inflation, first, unpack our talks. About $1.9 billion in cost of goods sold in 2021. A little over half of that is material, so call that a billion. And we set mid-teens, low to mid-teens material inflation again next year. Let's call that 14%. So our material cost equates to about 40% of our sales. Against that, low to mid-teens, inflation rate on raw materials, you get roughly a six percentage point as a percent of sales headwind on ROS. So price-cost rate there is, let's call that net, three points plus. The offsets then are inflation that we're seeing everywhere else in the business. I mentioned during my prepared remarks inflation that we're seeing in distribution and in labor. That inflation we're seeing across really all parts of our factory footprint, including some of the overhead accounts. Utilities are up, equipment rattle, et cetera, et cetera. So you apply a mid-single-digit inflation rate against the balance of our cost of goods sold, that's certainly another point and a half where the headwinds. And then the balance I would attribute to SG&A growing, as we said, with the rate of sales, we need to replenish for incentive comp, which paid out at below targets in 2021, and we're continuing to invest in growth initiatives, and we're seeing higher relative inflation for professional staff wages and benefits. So all in all, call that roughly a point. That's how I would walk you from the 15.9 that we reported to, you know, circa 16.5 in 2022.
spk05: Got it. I appreciate the call there. And then just moving on to the volume outlook, I guess a similar line of questioning, how should we think about the relative impact of a week or one Q and kind of netting that out? I mean, what would you assume a more normalized volume growth outlook for this year would look like, barring any incremental supply chain headwinds?
spk04: Yeah, Chris, this is Howard. You've got to think about our segments. We think about our segments a little bit differently. We think that the macros generally are very favorable in the residential segment. We think our business, just as a reminder, is about 55% repair-remodel and 45% new construction. We think that both of those are likely to be at least flat and maybe up a little bit. And so we think the macros are generally positive. We also think doors are going to over-index. So all the things we've been talking about over the last several quarters regarding people staying at home more often and wanting a private space or an office or a den and people moving out of the urban core to the suburban areas because they don't necessarily have to commute into work every day leads to bigger homes, more doors. So macro is good. We think volume in a residential as a result should be good and could be upside to our outlook. The flip side of that is in the UK in architectural, where we think there could be more challenges from a volume perspective. Russ mentioned that we had a fourth quarter volume challenge in the UK. Now, interior door business has picked up a little bit. Exterior remains a little soft. And obviously, trade labor and other building supplies have been short there and have elongated the build cycle a little bit. We're cautious on our outlook for volume in the U.K. And then architectural is a business that we need to fix, and that's going to be focused on our internal production capability and whatnot, but we're not planning any volume growth there. Generally, our biggest segment, our most profitable segment, NARES, we feel good about the potential there. I think there could be some upside to outlook with volumes in North America residential.
spk05: in terms of the expected drag for 1Q and I guess cadence from there?
spk04: Yeah, I think that the first quarter You know, we had a tough January. We talked about Omicron and the 40% increase in Omicron cases at the end of December. That actually spiked to like 250% in January. But the good news is it's back to sort of where we were stable through the fourth quarter, the rest of the fourth quarter. But there was a tough start. January was a tough start. And so February has picked back up, but the comps will be a little tougher in the first quarter.
spk05: I appreciate all the color.
spk09: Thank you. The next question comes from the line of Josh Chen with Bard. Please go ahead.
spk07: Hi. Good morning, everyone. Thanks for taking my questions. Good morning, Josh. Good morning. Maybe just to start off with the prior line of questioning about the volumes. I guess, how much do you think the disruption impacted your volume in Q4 within NA Resi? And then, you know, knowing that, you know, January was a tough start, how quickly do you think production rates can really normalize from all of the disruptions in the Resi business?
spk04: Yeah, let me talk about Resi specifically, Josh. Volumes were down 6% in the fourth quarter, of which the vast majority was the impact of 53rd week, like 5 of the 6%. So that leaves 1% volume decline. We can attribute that essentially to two primary things. One is the spike in Omicron, which hurt our capacity. And then we had what I'm calling unplanned manufacturing disruptions. Specifically, we have two plants in British Columbia, and you might remember the dramatic flooding they had in the end of November and early December. Both of those plants were shut down for an extended period of time because people couldn't get to work. Fortunately, we didn't have any long-term damage in either of those facilities, but they were shut down. And then we had a tornado event in our factory in Tennessee, which also created some downtime. And so between those issues, the Omicron spike as well as those unplanned weather events, our volume would have been up. Now, we had a... Pretty big spike, as I said, that Omicron absenteeism continued and, in fact, exacerbated much further into January. But we're back to normal levels now. And the good news is we look about, you know, this isn't really a quarter-to-quarter game. We're bringing capacity online. Our Fort Mill facility will be making doors in the second quarter. We're working on some capacity improvement initiatives in our exterior door space. And so we're very bullish about volume capacity. going forward and our ability to support that volume in the residential business.
spk07: That's great, Howard. Thanks, Howard. And then I guess my follow-up question is on inflation. I guess, you know, looking at the chart that Russ gives with the different components of inflation, Do you think in dollar terms, if you add up material, factory, and distribution, that inflation sort of peaked in Q4? And I guess first that, and then kind of what are you seeing in terms of sequential raw material costs, any reliefs on that front? Thanks for the cover there.
spk04: Yeah, Josh, it's Russ. Maybe let's unpack that a little bit. I'll talk about raw material first of all. If you think about raw material just in year-on-year comps, it really peaked in the third quarter. On a year-on-year playing basis, it moderated in the fourth quarter, but frankly was still a little bit higher than we expected. We would have anticipated raw material inflation in that, you know, call it mid to high teens, 16%. It came in about a point higher than that in the fourth quarter. And as we look forward into 2022, Those inflationary headwinds don't abate meaningfully, in part because our steel contracts reset. So we're seeing some outsized inflation in the metals part of our basket. But we're still seeing very tight supply chains with respect to wood and chemicals. So those trends of, call it, low double-digit inflation probably continue going forward. If you think about the inflationary trends in the rest of the business, We'll continue to see inflation in wages in the factories. You would typically see our annual merit cycle kick in middle of the year. Now, we manage that on a plant-by-plant basis based on local conditions, and in some cases we've accelerated some of our merits, and we'll see a little bit more inflation as we go forward. Your question was around in terms of peaking. Yeah, I think we certainly peaked on the material side, but we're not expecting any deflation. In fact, the inflation rates are going to stay consistent in 2022 and 2021, and we see a little bit more inflation ahead of us on the factory side, particularly in wages. Does that help?
spk08: Yeah, that's a good call. Thanks, Russ, and good luck for 2022. Thanks, Josh.
spk09: Thank you. The next question comes from the line of Mike Rehot with J.B. Morgan. Please go ahead.
spk01: Hi. Good morning. Doug Wardlaw on for Mike. You guys mentioned making progress in new product development and how that was a big part of your strategy moving forward. Can you dive further into those new products and as well kind of talk about how material constraints could impact the potential timeline of those launches?
spk04: Sure. It is an important part of our strategy, and we believe we have the right strategy to deliver our centennial plans. That strategy, just to remind people, is delivering consistent, reliable supply, very important and fundamental to what we do, driving specified demand with stores that do more on new product innovation, and winning at the last point of sale and down-channel marketing with dealers and others that sell our product. That specified demand is critical because over the years, doors have become a bit commoditized, and we believe it's important for consumers to want and specify, or architects, building owners, make the right products. We're trying to differentiate our products. The Empower Door is, I think, a perfect example of that. We believe that 36% of homes are now connected. They're smart homes. And there's absolutely no reason that the front door should not be part of that environment. And so we've integrated video doorbell and electronic locks and lighting with power because batteries happen to be a very big dissatisfier in that case. to the front door controlled by a proprietary ad. That has fantastic mixed margin implications for us as customers trade up to these differentiated door systems. That's one example. We launched a product called Durastyle this year, which is a wood door that has 22 times better water penetration. So wood exposed to the elements can be difficult, as you know. And we have a proprietary sealant application process, which makes that door almost impenetrable from water. And so that's important, particularly around the glass. And so that's the product we introduced. We introduced in our architectural segment a product we call Defender, which is an attack-resistant door targeted at the education vertical, which deters or saves seconds, if you will, in an active shooter event. And that's very important. So we're trying to introduce products that literally do more. Now, it's important to also note, Doug, that there are doors that do a little more. And we've made solid core doors for a long time, for example. the hollow corridor is the most standard in home building. And we're trying to encourage homeowners and builders that there's life and living benefits to solid corridors. 70% more privacy, for example, from a solid corridor. And we've seen We advertise that down channel. We talk about sound decisions. We talk about people being at home. And we've dramatically over-indexed in selling solid core doors. The growth of solid core, much higher than the growth of our standard doors. And so all those things are dragging what we see as innovation in the space. And I think we're just getting started. That's what's really going to lead to our centennial plan goals of $4 billion and 20% even our returns.
spk01: Thanks. And just to follow up on all of that, thanks again. Do you view any of the current material constraints potentially impacting some of these new products moving forward?
spk04: You know, it's a great question. This powered and connected door uses chips, and there's – Obviously, chips are short, and so the good news is our supply chain team has secured plenty of chips, but the response to this has been very, very encouraging, and we're working hard to secure more product, and we could be a bit constrained in chips in mPower by the end of the year, but we're working through that. Generally, I'm really proud of our supply chain team as they've differentiated, they've tried to add alternative suppliers. And, you know, we've been able to sort of prove that we can pivot and deal with the significant volatility of the supply chain. So, so far we're covered, but, you know, we work at it every day.
spk01: Awesome. Thank you.
spk09: Thank you. Thank you. The next question comes from the line of Jay McCandless with Redbush. Please go ahead.
spk06: Thanks for taking my question.
spk04: So the first question I had, any update on alternative sourcing for lumber and any update on the tear situation? I'll take that one, Jay. Our supply chain team for the last two years has been working on alternative sources and has done a really nice job. Unfortunately, the demand is requirements, as well as sort of this moving and rolling COVID outages across the globe have caused us to try to, you know, we might find an alternative supplier in South America or an alternative supplier in North America from somebody in Asia, and then due to COVID spikes or this continued demand, we'd have to go back and buy from the original supplier maybe in Asia and subject ourselves to the tariffs that we were trying to avoid. So our tariffs were higher than we had planned throughout the year for that reason. Not because we couldn't find alternative suppliers, but because we were forced to use some of the suppliers that we found alternatives for due to demand or other outages. So that work continues. I think the team's done a remarkable job in keeping us in supply, and we have a lot more choices today than we might have had two years ago relative to our supply base, but we're going to keep working on that. Okay, great. And then my second question. I guess, could you guys talk a little bit more about these D stocking efforts in the Europe segment? And is that a temporary thing? Is it going to be more permanent? And I think it sounded like it was more on the new construction side. But it just seems like your tone around Europe and what's going to unfold this year may be a little less positive than what you guys talked about last quarter. First of all, let me start by saying that European team has done a remarkable job in growing margins. Margins up 280 basis points last year, and that's due to continued mix as well as the portfolio work they've done. So a really nice business. The destocking is absolutely transitory. It was in one particular channel, the merchant channel. Their inventories have grown to, we think, about 12 weeks, and typically they're sort of closer to six to eight weeks. And as the building cycle elongated due to labor challenges in the building and in the trades, these merchants destocked down to, you know, we think closer to eight or nine weeks. So still maybe a little bit high, but once they get back to normal run rates, that should be fine. There is a little more uncertainty in Europe relative to Brexit and 90,000 contractors have left the trade, according to our data. And so, you know, there is some more uncertainty in that segment. However, our base business is very strong. We're adding capacity in the exterior segment. We've had a lot of that business in 2014, consistently growing that business sort of 15% to 20%. And that capacity will come online later in the first quarter, early second quarter. And... Long-term, that's fantastic business. These are transitory problems. Yeah, and Jay, it's Russ. I might just offer a little bit of additional color in what we've seen in the supply chain there. There are certain building materials categories upstream from us where we've seen a lot of shortage. And by the way, I should just remind everyone, in the Europe segment, with the exception of component sales that we make to other markets, it's exclusively the U.K., And in the UK in particular, there have been shortages in some of the upstream building materials categories like roofing tiles and bricks and blocks. So we've seen that temporarily, we believe, push out the build cycle in the new build channel in the UK. And that's what created the inventory situation where some of our merchant channels, showed clear evidence of needing to pull back inventory in order to match that elongated bill cycle, and in some cases protect some of their inventory dollars for buffer stocks in those other material categories. So Howard said we clearly see this as a transitory event, and, in fact, we have seen order rates begin to recover in the U.K. So we're very bullish on this market long term.
spk05: Okay. Sounds great. Thanks for taking my questions.
spk06: you thank you the next question comes from the line of reuben garner with the benchmark company please go ahead thank you good morning everybody um so i guess you know first the clarification on the on the pricing um embedded in the the guidance so uh is Is your outlook, I guess, just inclusive of what's already been announced so far this year? And I guess maybe this is a difficult question to answer, but would it be likely that we will see more pricing actions later this year, even if we don't have further inflation, just to catch up on some of the margin pressure that you've seen over the last year with all the inflation?
spk04: Hey, Ruben, it's Russ. I'll take that. And obviously with our standard proviso that we don't talk about pricing on a prospective basis. If you look at our guide for the year, it comprehends, first and foremost, the inflammatory factors that I outlined, both in my remarks and in some of the prior Q&A, as well as pricing that's already in market. And that would include carryover benefits from pricing that we took across all sectors in 2021, as well as incremental pricing actions that were announced to go into effect here in the first quarter for the North American Registrar. So what is embedded in our guide is essentially everything that has been announced and implemented in the market. Now, that all said, as you know, our key focus is maintaining a favorable price-cost relationship and being paid fair value for our products. So just as we demonstrated in 2021, when external factors and inflationary pressures dictated that we'd be more nimble and we go to the market more frequently on price, we would stand ready to deal with the inflationary environment, whatever comes. And I would like to add to that, Ruben. This is Howard. You know, the midpoint of our guide for 2022 implies sort of a mid-16s EBITDA margin. We outlined a plan, a centennial plan, to drive to 20% EBITDA margins by 2025. We had a one-year setback due to rapid inflation that was ahead of price. But we're going to be right back on track in 2022 to get to that 20% goal in our centennial plan. So really proud of the margin performance in light of the very unusual year. And I think we'll be right back on track in 2022.
spk06: Thanks for that, guys. And just a quick follow up the you still feel that maybe that there's a value gap between what's being charged for a door and what consumers find the doors to be worth, correct?
spk04: Yeah, we do, Ruben. And not only a value gap, just a pure play value gap, but we talk about this difference in solid and hollow and making life and living actually better. The difference in price between a solid corridor and a hollow corridor is, particularly when you think about it in context with the value of a home, absolutely insignificant. And yet, the privacy and the sound, the benefit that you get is significant. And so the more we can convince people homeowners and builders that those six or seven really important doors in the house, bedrooms, bathrooms, laundry room, for example, you know, can create a much better living environment, there's a massive trade-off opportunity as well. So not only do we think that there's additional value just comparing the same door, but the trade-off to help solve some of these life and living problems is significant.
spk06: Great. I'm going to sneak one more in if I could. Given the focus on new products and innovation and that sort of thing, is there any way for us to kind of track the progress of this? Is there maybe a new product metric or targets for what percentage of revenue these initiatives can make up over a period of time? And if that was in the investor day, apologies. I just don't remember that.
spk04: We talked at a macro level on Investor Day about the importance of the doors that do more strategy and the fact that we thought that that was going to contribute. There's a billion-dollar gap between sort of our organic business and our aspirational goal of $4 billion. Some of that's going to be M&A, and some of that's going to be new products. So we talked at a macro level. But when we talk about AUP, historically, most of that benefit has been priced. we would expect that more of that becomes mixed as we launch new products. And so that's one easy way that you'll be able to see some of the progress that we're making there.
spk06: Great. Thank you, guys, and good luck in 2022. Thanks, Ruben.
spk09: Thank you. The next question comes from the line of Noah Mercosco with Stiffens, Inc. Please go ahead.
spk02: Good morning, and thanks for taking my questions. First, I wanted to dig in a little bit on your volume expectations, at least in North America this year. It sounds like flat to maybe up slightly. I'm trying to think through the timing of starts versus completions. If we see starts maybe pull back a little bit, it's well publicized that there's a massive backlog in the industry. We haven't seen a lot of completions throughout given what we've seen from starts. you know, if we do see starts move down a little bit lower, that you might be able to still see volume growth just given the amount of completions yet to materialize.
spk04: Yeah, no, it's Russ. I think that's generally a fair statement. Here's how I would think about the drivers involved. We touched on this a little bit earlier in the call, but if you want to unpack the dynamics happening across the three segments, I think Howard outlined this, is that we feel very good about the macros generally for housing in North America. So, if you look at our overall revenue guide for next year, it's premised primarily on price. There's very little volume embedded in that, but the area for upside volume is indeed in the We think that there are some headwinds in Europe that are going to present some volume challenges in the U.K. business in particular. And we're simply not planning for any volume growth in architectural until we can see a more steady trend of operational stability in that business. So it really comes down to what your volume assumptions are for NA Reds. And we have some very modest growth in there, but we believe that there is upside volume opportunity if we see the housing starts and, more importantly, the supply chain dynamics stabilize in the year. Now, if you look at the cadence across the year, we would anticipate that volume will be down slightly in the first quarter. On the heels of some of these operational challenges and absenteeism spikes, how we're noted, actually increased into January before retreating now so far this month in February. So we're managing through those supply chain issues, and I would second Howard's comments earlier. I think our operations and supply chain team have done a really, really nice job of managing what's been a really volatile environment. We'll see that volume stabilization and operational stability improve as we get into the second quarter and out through the second half of the year. And just to add one minute, Noah, this is why our strategy is so important. When we talk about specified demand, We expect to be a growth company in any kind of macro environment, right? We happen to think the macros are good, but they won't always be. You know, at some point in the future, things will turn down. And as we can drive specified demand because customers say, I really want that powered and connected door, that makes sense for me, then Masonite can be a growth company in any kind of environment. And that's really our goal.
spk02: Thanks. That makes sense. And then for my follow-up, You know, it sounds like you've had a successful launch with the Empower Door System. I know you'll have some other higher-priced products that you'll be able to roll out or will be rolling out here shortly. And I guess, is there any price mixed benefit from that baked into the guidance or any way you can quantify that for this year? And then I guess, is it safe to assume that that mixed benefit will accelerate in 23 just based on, you know, products that you might have in the pipeline today?
spk04: Yeah, I think the answer to the second part of the question is yes, certainly. And as far as the guide goes in 22, very modest. You know, the adoption curve, this is a dramatically different product. And the adoption curve is going to take a little while. Now, I happen to have an executive in purchasing for one of our big customers who saw it and said something like, This is going to be standard in every home. Why wouldn't people want it? I hope he's right. I tend to believe that, too. But that's going to take some time, right? This is different. And we believe the guidances are, as I said, very modest. But throughout 23, 24, and 25, our centennial plan, it becomes important to our goals.
spk02: All right. Thank you. I'll leave it there.
spk09: Thank you. The next question comes from the line of Stephen Ramsey with Thomson Research Group. Please go ahead.
spk03: Thank you. On European Q4 headwinds, you've discussed merchant destocking, also the product shortages. Do those moderate kind of fully in the first half, or is there visibility to how that potentially gets better as the year moves along?
spk04: Yeah, Stephen, it's Russ. I'll take a shot at that. What we saw in the UK business in particular in the fourth quarter is that the volume declines were really exacerbated in the month of December. And that's where we saw this clear trend of destocking on the part of the merchant channel. And as I mentioned a moment ago, we saw that trend reverse somewhat in January, and order flows start to return on the interior door side of the business. And just as a reminder, if you look at interior versus entry door business for us in the UK, we are primarily serving the new-built channel with our interior products and the repair and remodel channel with our exterior door systems. And we've seen a little bit of softness in both of those, given concerns around consumer confidence and this issue with upstream building materials in particular. But we are starting to see some nice recovery on the interior door side. So that leaves us, again, firmly in the camp that this is a transitory inventory management dynamic that we're seeing in the channel. I just remind everyone, the long-term fundamentals for housing in the U.K. are fundamentally very strong given that we have been underbuilt in that market, really beginning with Brexit and now all the way through COVID-19. So while supply chains have been fragile and they've had spot outages in a number of different building products and materials that have elongated this build cycle and hurt the builder's ability to actually put new housing stock into the market, there's demand for it. And we think that demand will continue, and that's why we're positioning the business for continued growth in the future.
spk03: Okay, helpful. And then further thoughts on the architectural segment, the loss in Q1 still there, but maybe more modest than Q4. Can you discuss the ramp to what the full year could look like? And then is 2023 going to hit the pre-issues margin levels, or do you think you need greater volumes, or is that kind of purely internal production issues being resolved in architectural terms?
spk04: Yeah, it's really a combination of both, Stephen. Volumes are important, obviously, because we have certain fixed costs, and that's really what's hurt us since the global pandemic. But let's remember, this is a good business that needs work. Historically, it is a $300 million business, approximately, and made $40 million in 2020. And so there's real potential there. When volumes dropped off, it exposed some of the inflexibility of our network, which we're trying to fix. In the fourth quarter, we got hurt really by three things. This labor shortage issue we talked about, as most people have relative to the overcurrent spike. We got a nagging material challenge on one particular material that's made it difficult to produce enough doors that we're working through. And then, this phase three of our plan, remember we closed the veneer plant last year, we closed the style veneer plant. Phase three was the flexibility of our flush door plants. Required some new equipment and systems to be installed. And both of those, while installed successfully, there were some incremental learning curves and some labor that were hired sort of ahead of the production that increased our costs. And so the fourth quarter was absolutely disappointing to us. Now we're working through those challenges, trying to get that volume back. Order demand continues to be pretty solid, so that's fine. We would expect that we're going to work through those in the first quarter, and as Russ said, a return to profitability in the second quarter. And that curve then should, you know, improve and increase to historical levels would be our objective. So this is a nice business that, you know, can have some incremental EBITDA for us on a consolidated basis.
spk03: Excellent. Thank you.
spk09: Thank you. Thank you. ladies and gentlemen we have reached the end of question and answer session and i would like to turn the call back to mr howard haggis for closing remarks thank you thank you operator and thank you all for joining us today we appreciate your interest and your continued support and this concludes our call operator please provide replay instructions thank you for joining mesonite's fourth quarter and full year 2021 earnings conference call This conference has been recorded. The replay may be accessed until March 8. To access the replay, please dial 877-660-6853 in the United States or 201-612-7415 outside United States. And you can enter the conference ID 13725958. Thank you for your time. Thank you. You can disconnect your lines now.
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