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spk02: answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Chris Teachout, Director of Investor Relations. You may begin your conference.
spk03: Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the investor relations portion of our website, which we will be referencing during this call. I'm joined today by Gary Michel, Chair, President, and CEO, and John Linker, our CFO. Before we begin, I would like to remind everyone that during this call, we will be making 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. 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 measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation. I would now like to turn the call over to Gary. Thanks, Chris. Good morning, everyone, and thank you for joining us today. Over the past few years, We have focused on deploying operational and commercial excellence initiatives as the strategic foundation to propel Gelwyn's long-term growth strategy, leveraging our premier performance culture as a competitive advantage. Those efforts paid off for us in 2021 as we delivered an excellent year of financial performance with record revenue and core revenue growth. End markets were strong. driving robust customer demand for our world-class brands. Our operations were healthy, allowing us to maintain market-leading lead time. And we successfully navigated a challenging year of sharply accelerating inflation. And as we will discuss in a few minutes, we made significant progress on growth initiatives that we expect will position us for a breakout year of financial performance in 2022. I want to thank our global associates and our channel and supply chain partners for their unwavering dedication to serving customers with the highest quality products and delivering this record-setting performance in a challenging environment. To summarize our 2021 performance, net revenues increased 12.7%, driven by a 10% increase in core revenue, with all segments contributing to core revenue growth. Our adjusted EBITDA grew 4.2%, driven by favorable price realization and positive volume mix, which was partially offset by headwinds from inflation. We successfully offset material and freight inflation with pricing actions. However, the net impact compressed our margin rate. We head into this fiscal year knowing that the foundation of our operations is strong, our commercial excellence initiatives are driving business, and the company is primed for sustainable growth and margin expansion, which I will touch on shortly. Please turn to page four as I share a few highlights from the fourth quarter. In Q4, demand remains strong in each of our end markets. reinforcing the strength in new housing starts and replace and remodel or R&R markets. Consolidated core revenue growth accelerated to 12% with a positive core growth in each operating segment led by North America. This marked our sixth consecutive quarter of consolidated core revenue growth. Adjusted EBITDA increased 4% to $120.1 million, driven by positive volume and productivity actions. We also progressed our capital deployment initiatives, repurchasing $45.7 million of our stock in the fourth quarter, bringing the full year total to nearly $325 million, or approximately 11.5% of shares outstanding. In North America, core revenue grew 15% from sequentially improved volume throughput and pricing-related actions. Quarter-end backlog in North America increased sequentially and year-over-year, with strong order rates, book-to-bill, and market-leading lead time for the majority of our product categories. We made investments to attract and retain labor to meet strong customer demand while ensuring more long-term stability in a tight labor market. These investments, combined with our productivity initiative, drove an approximate 8% sequential increase in average shipments per day compared to the third quarter, while on a year-over-year basis, throughput accelerated as the quarter progressed. Our teams also delivered cost controls and pricing-related action to mitigate inflation. In Europe, core revenue grew 10%, a significant acceleration driven by sequential improvements in price realization. And in Australasia, core revenue grew 6% and adjusted EBITDA margin was the highest of all segments at 14.7%, improving 100 basis points. In Australia, we are capitalizing on record levels of new housing demand, although volume mix is being tempered slightly by supply chain and builder labor constraints that have extended build lead times by more than 50%, which we expect to moderate this year. Please turn to page five. We really like the setup for 2022 as all segments execute plans to accelerate top-line growth through new customer-centric innovation launches, capacity expansion, throughput improvement, and channel initiatives. Across global operations, including our 14 model value stream sites, Associates are focused on the rigorous deployment of our business operating system, the GELDWIN Excellence Model, or GEM, which is a competitive advantage, enabling us to increase throughput, maintain market leading lead times, and reduce per unit cost. The results are greater customer satisfaction, share gain, and margin expansion for GELDWIN. Through the work done at our 14 model transformation sites, we've reduced labor requirements by an average of 25% and unlocked approximately $45 million of incremental capacity. The benefits from these transformation efforts extend beyond throughput capacity and lower labor requirements. At these sites that have started their transformations, associate engagement is five times higher than at facilities that have yet to begin. This is incredibly powerful because it impacts every factor that influences our transformation, including reducing associate turnover. We expect to accelerate capacity for site transformations in the coming year, including deploying three times the number of rapid improvement events across our global operations. In Europe, We plan to drive growth through increased market penetration with existing products, expanding in underserved geographies, and launching new and innovative products across the region. This year, for example, we're planning to bring a new line of technical doors to the UK market that is already a part of our portfolio in other parts of Europe, which we expect will be a meaningful contributor to growth. In Australasia, we've developed what we believe is an industry-leading lineup of energy star rated product for the Australian market as the country prepares to roll out energy efficiency standards and energy star ratings this year. We expect our suite of energy efficient products will contribute growth and be accretive to margins. And in North America, we have several product lines that we expect to contribute meaningful growth with accretive margins. We're already seeing significant interest from developers up and down the East Coast from our recently opened DPI manufacturing facility in Statesville, North Carolina, which at full utilization doubles our capacity to serve multifamily and commercial customers. Our exterior fiberglass doors are poised for growth as we've further broadened our industry-leading style options, innovated to make our fiberglass doors even more wood-like in appearance. brought value to our builder partners by creating integrated door systems and added capacity needed to satisfy this increased demand. And this year, we will launch a full suite of our Auraline composite windows and patio doors that not only combine a wood-like appearance with the durability and thermal benefits of vinyl, but do so at an attractive price point and with more visible glass than competing options. The oral line products also support consumers desire for more sustainable material options and help deliver on our commitment to reduce our environmental footprint. Our global operations are positioned to deliver increased productivity, and we expect to deliver our unique growth drivers to accelerate performance in 2022 and beyond, giving us confidence in our 2025 revenue and margin targets. Finally, before I hand it over to John, I want to highlight the measurable progress we're making in building a values-based premier performing culture. In 2021, we continue to advance our ESG strategy, including market increases in employee engagement scores, diversity measures, and overall safety metrics. This past quarter, our team in the U.K. was honored for its safety innovation when it received the prestigious British Woodworking Federation Health and Safety Award. As we begin 2022, I want to emphasize that our focus on the safety and well-being of our 25,000 global associates remain at the forefront of our decision-making in all that we do. Now I'll hand it over to John to give you more detail on the financials.
spk08: Thanks Gary and good morning everyone. I'll start on page seven. Fourth quarter net revenue increased 11.8% to 1.3 billion driven by a sequential improvement in both pricing and volume mix. This is our sixth consecutive quarter of core revenue growth. Adjusted EBITDA improved 4.0% to 120.1 million while adjusted EBITDA margin compressed due to the impact of inflation. EPS and adjusted EPS increased 7% to 45 cents and 48 cents, respectively. Relative to the outlook we provided on our last call, improved throughput and price realization drove revenue growth that exceeded our revenue outlook range, while sharply higher than anticipated inflation held EBITDA at the low end of our outlook range.
spk03: Full-year net revenue was $4.8 billion, an increase of 12.7% overall and 10% on a core basis, excluding the impact of foreign exchange.
spk08: This core growth rate exceeded the target range of 6% to 8% annualized growth established at our investor day in May of last year.
spk03: With a healthy demand backdrop and a pipeline full of innovation, we are well positioned to continue this momentum into 2022 with above-market revenue growth.
spk08: Full year adjusted EPS increased 91% to $1.72, and adjusted EPS increased 15% to $1.80.
spk07: By all accounts, 2021 was an extraordinary year as our team overcame unexpected challenges and enabled us to deliver these strong financial results with revenue and earnings growth against a challenging operating environment.
spk03: Page 8 provides detail of our revenue drivers. I'll highlight the record pricing and 7% on a year-to-date basis. Fourth quarter pricing improved sequentially as we realized the benefit of additional rounds of price action to offset raw material and freight inflation. North America led the way with 14% pricing in the quarter, Europe with 10%, and Australasia with 2%. Volume mix increased 1% in the quarter, as our throughput improves sequentially from the labor availability headwinds that we face. Page 9 helps dimensionalize the pace and magnitude of an year we successfully offset material inflation with price, which required multiple rounds of increases to stay ahead of its curve. Over 75% of the inflation hit in the second half of the year, with over 40% in the fourth quarter alone. Looking into 2022, we are well-positioned
spk07: price, and dollar terms.
spk03: Similar to the fourth quarter, early in 2022, we expect the net price-cost impact to be dilutive to profit margin rate before transitioning to a margin rate tailwind in the second half of the year. Net performance, focusing on the fourth quarter. Net revenue in North America increased 15%, pricing an improved volume mix.
spk07: The pace of growth accelerated as the quarter progressed, with North America exiting December with revenue growth above 20% and 1.07. Continued housing demand and strong orders set us up well for growth in 2022. North America adjusted EBITDA margin declined 190 basis points due to the impact of sharply higher inflation. Despite the increase, North America offset material and freight inflation with price and dollar terms, but it was diluted to margin rate. Partially offsetting this, volume, mix, and manufacturing efficiencies were all positive margin drivers in the quarter. Europe revenue increased 7.7% overall and 10% excluding the impact of foreign exchange.
spk03: Strong pricing drove the revenue growth, while volume mix was flat. Our order books remained healthy.
spk08: However, our volume throughput was limited by labor availability headwinds related to the November-December COVID surge across Europe. Materials and utilities.
spk07: Additionally, as expected, we continue to see greater activity in the lower-margin retail channel as compared to our higher-margin project-oriented business.
spk03: Australasia revenue in the quarter increased 5.9% overall and 6% in local currency versus prior year.
spk08: Volume benefited from the lifting of COVID operating restrictions against the healthy market backdrop.
spk03: Pricing improved year over year and was flat sequentially. We have implemented additional price actions to mitigate inflation pressures in 2022.
spk08: Australasia adjusted EBITDA margin expanded 100 basis points in the quarter as positive volume, price, and manufacturing efficiencies were partially offset by inflation. For the full year, Australasia expanded EBITDA margins by 10 basis points.
spk03: Please turn to page 11. Adjusted operating cash flow totaled $288.4 million for 2021, a decrease of $84.7 million.
spk08: The decrease in cash flow from operations is primarily due to higher cash
spk07: purchases, as well as inventory investments to support our customers and position us for growth in 2022. We expect cash flow conversion to improve in 2022 as the impact of these working capital investments convert to revenue.
spk08: Adjusted free cash flow declined $87.5 million to $188.7 million, while capital expenditures remained relatively unchanged compared to prior year.
spk07: The balance sheet and liquidity remain in fantastic condition to repurchase our shares in 2021. Liquidity sat at $837.8 million at the end of the fourth quarter, and net debt leverage was 2.8 times. which gives us the operating flexibility to invest in initiatives that will drive future revenue and earnings growth.
spk08: Net leverage stepped up slightly this year above our target range of two to two and a half times due to the compelling opportunity to repurchase our shares at an attractive valuation. We remain focused on deploying our cash in a disciplined returns focused manner and compounding the returns on that cash over time. Looking to 22, we are well positioned for growth and margin expansion. With that, I'll turn it back over to Gary.
spk03: He'll provide closing comments. Thank you, John. Please turn to page 13. Let me share our outlook for market growth. We expect housing fundamentals to remain favorable in each of our end markets in 2022, driving increased demand for our products. In North America, we expect residential new construction and R&R activity to remain robust, driven
spk07: by continued strong homeownership trends and consumers' desire to improve their homes.
spk03: Fundamentals remain supportive, including historically low interest rates, healthy consumer discretionary budgets, and record home equity accumulation. We also expect labor availability and supply chains to improve throughout the year, allowing build times to normalize, helping to alleviate pressures on home affordability. In Europe, we expect housing activity to remain positive, but market growth will moderate toward pre-pandemic levels in the low single digits. Economic growth remains positive and should accelerate modestly as countries continue to recover from the impact of COVID-19. We believe this will drive positive activity and will support growth in each of our end markets and channels. And in Australasia, activity should remain robust, as the market continues its recovery from a multi-year housing recession. Record housing starts and the overall strength in housing demand due to government program incentives, low interest rates, and solid economic growth are a positive backdrop for performance. In summary, we expect that favorable housing fundamentals in each of our regions combined with our unique growth drivers, will accelerate above-market growth in 2022. Please turn to page 14. We expect total consolidated revenue growth between 7% and 10% for 2022, which includes a small headwind from foreign exchange. This revenue outlook is supported by core growth from all three segments, with North America delivering the highest growth rate. Additionally, we expect to deliver full-year adjusted EBITDA in the range of $520 million to $565 million. Our margin improvement implied by this guidance is a result of volume growth, including accreted new product launches, our strong pipeline productivity project, and the benefit of price increases already deployed to offset continued inflation. In addition, we expect our capital expenditures to range from $130 million to $150 million. As we look ahead, we are laser-focused on delivering new market-leading product and service innovation and growth for our customers. We believe Gelwyn's global footprint, multifaceted growth platform, world-class brands, and premier performing culture, combined with a favorable housing backdrop, will deliver more organic growth, margin expansion, and compounding cash flow. Thank you for joining us this morning. John and I will now take your questions.
spk02: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from a line of John Lavelo from UBS. Your line is open.
spk11: Good morning, guys, and thank you for taking my questions. The first one is maybe, you know, Gary, can you get into some of the specific levers that you guys can pull in addition to pricing that could help hit that 2022 margin target? And should we expect both 1Q and 2Q margins to be down on a year-over-year basis? And maybe just along those same lines, is there any change in the cadence that you're expecting to hit the 2025 margin targets?
spk07: Thanks. Thanks, John.
spk03: Good morning, and thanks for those questions. Very, very good ones. Yeah, let's talk about 2022 targets. Um, obviously we, uh, we are seeing, um, you know, sequential improvement in price, offsetting inflation. We actually, uh, you know, kind of saw that number of cars in the fourth quarter. So accelerated third quarter, fourth quarter, and into this year, um, we'll see that accelerate as the year goes on. Um, really what's driving our, uh, our, our, our growth and, uh, and, and our guidance here in 2022. are strong markets for sure, the ability to get price to offset inflation, and then some gentlemen-specific payouts for us on investments that we've made in growth, growth for capacity expansion. For example, in margin-increated businesses like our BPI multifamily business where we've just recently opened an East Coast facility which has the potential to double our capacity for that business. continued expansion in our exterior door business, which has been growing significantly over the last couple of years and will continue to grow this year, as well as our introduction of our Auraline product this year, our composite window patio door product, which, again, is also an accretive margin product and one that we're very, very excited to have out in the marketplace I talked about in the prepared remarks in Europe and Australasia are also margin accretive. So if you think about price offset, more than offsetting inflation throughout the year, accelerating, and those accretive growth initiatives and capacity expansion in margin accretive products, we've got a real nice setup for 2022.
spk11: Okay, that's helpful. And then my second question, can you help with just the magnitude of the new price increases in 2022 and maybe how much carryover should we expect from 2021? And then are you seeing any shift in consumer preference towards lower-priced products given the amount of pricing put through?
spk08: There will be some carryover, John speaking. We did have some price increases that took effect in the late half of the year as we talked about sort of that third round of pricing actions. But I guess what I'd say is at this point, we've got visibility to the price that's embedded in our outlook. We've either already taken either the combination of carryover and or new pricing actions that we've already implemented and communicate to the market, those are all out there. And at this point, we don't need to take any additional actions to achieve the pricing that's embedded in our outlook. But in terms of quantifying sort of carryover versus new price, I'm not sure we're going to parse that out of the guide. And I would say, no, on the sort of mix or trade down, we're definitely not seeing any notable sort of trade down in terms of lower price product. This really seems to be an environment where, you know, the manufacturers who have products, who have inventory, and who can meet need time, that seems to be sort of trumping, you know, the price of products at this point. You know, consumers and builders just need product and we're seeing less sensitivity towards price. Got it. Thank you.
spk02: Your next question comes from a line of Deepa Raghavan from Wells Fargo Security. Your line is open.
spk01: Good morning, everyone. Thanks for taking my question. A little bit big picture and more relevant to the interest rate backdrop currently.
spk06: Are you factoring in?
spk01: Any slowdown in the North American segment either in the new build market or R&R activity in the second half? And any thoughts how you think the current backdrop with the interest rates being high could or could not influence?
spk03: Thank you for that question. What we're seeing is a very strong backdrop. You asked specifically about North American residential and R&R. We're seeing a very strong back up. We just spent some time with customers over IDF and over the last several weeks. And what we're seeing is strong demand continuing in residential reconstruction and the setup for the R&R market continues to be strong as well. There's low housing stocks across most of the country, high equity. positions and strong consumer budgets right now. They continue to focus on upgrading and remodeling as well. So we think there's a pretty strong backdrop there. We haven't seen any interest rate movements that are curtailing that at this point. Obviously, we'll look out for that. But I think on the builder side, what we're seeing is the backlog of new orders is certainly there. It's efficient. to carry us through this year. And what we're looking at and we see is labor constraints and supply chain constraints loosening up in that channel in order to have those new orders turn into bills.
spk01: Okay, that's helpful. And just, you know, you mentioned labor constraints. So just a And you also mentioned your sequential throughput has improved since, you know, since bottoming in August. Can you talk through what your expectations are in 2020? You're expecting that, I mean, you obviously are expecting labor constraints to improve, but, you know, how much of that could drive, you know, is it a... In the last...
spk07: I was mostly referring to there were residential construction and in the trades and their ability to complete their so so I think that's going to start working its way through there's challenges there obviously in our own in our own
spk03: operations, we saw the biggest challenges kind of last summer, and we started to work. We actually used our own GEM tools, our own GEL1 Excellence Model tools around problem solving in looking at how can we attract, develop, or train people within our operations. And we saw sequential improvements in what we would call absenteeism or our ability to staff our our facilities, and that's really what helped us drive that sequential throughput improvement through the remainder of last year and will continue into this year. We watch things like COVID-19, this Omicron, which I think is mostly behind us at this point, but we're starting to continue that sequential throughput through the year. I don't know that my fidelity is good enough to put a 2% improvement or a number on that for you, but I will tell you that building our guidance is our ability to continue to use the tools that we put out there to staff our facilities appropriately and to make sure that throughput continues to improve, which is a fundamental output of our channel.
spk01: Okay, sorry, just a quick clarification question for me. So you're assuming, just to be clear, you have only taken prices that have been implemented so far in your guide, right, not any upcoming price increases?
spk08: Yes, there's prices that have been implemented but haven't actually started being realized yet due to customer notification dates. No, that's correct.
spk07: We need to deliver the price in the full year. It's not all hitting the P&L yet in Q1.
spk06: Great. Thanks so much. I appreciate it. Good luck.
spk02: Thanks. Thank you. Your next question comes from the line of Matthew Booley from Barclays. Your line is open.
spk09: Morning, everyone. Thanks for taking the questions.
spk07: I wanted to ask about the site transformation efforts.
spk09: You know, that was helpful color you gave up top on. sort of the benefit to capacity and labor productivity. I think I heard you say you plan to deploy three times the number of events across your operations this year globally. I'm curious if you could put a little more color around that. You know, how many more sites will you deploy this model to? And is there sort of a benchmark we can look to around annual capacity expansion that you're targeting from that program? Thank you.
spk03: Thanks for the question, and good morning.
spk07: Yeah, we're really excited about the move. We've been talking about GEM for, you know, well, three and a half years or so.
spk03: And, you know, after the first kind of deployment of basic problem-solving tools and some basic tools across the entire enterprise, you know, we obviously have seen some great benefits there. In 2021, we identified our 14 model value streams, which really is an end-to-end look at portions of our business and deploying what I guess you might even call something like Gem 2.0, a deeper look on a more narrow part of our business that actually makes a big difference. and how we perform, and where you're seeing a lot of that work is around cycle time improvement in our facility that are showing up as competitively advantaged lead times in our business. We've been able to talk about significant improvements in lead time last year in throughput compared to our competitors in the area of vinyl windows, for example, and and in interior and exterior doors. So it's really given us capacity expansion without having to deploy a whole lot of capital in those areas. So as we talk about taking what we call rapid improvement events, some might call them Kaizen events, we're deploying those across those 14 value streams at all points.
spk07: right from order entry all the way through to cash collection, but a lot of it focuses on our operations.
spk03: We take the same type of work and deploy that to other operations, but the major focus is on these 14 value streams that have the biggest push. Once we start to get the advantage out of that, Matt, we'll take those 14 and obviously expand the further value streams across the company We have targeted numbers for that. We know where we'll go next, but we really want to make sure that we make a difference, that it sticks, and that what we learn in the 14 model value streams is applicable and we can look across the rest of our operations to take standard work to them.
spk09: Got it. That's really helpful color there, Gary. Thank you for that. Second one, just back to the guide and revenue guidance for the year. So the 7% to 10% revenue growth in 2022, I know you're not quantifying carryover price versus kind of any new price, but high level, is there a split between price and volume that you're assuming that you can speak to? And is there any cadence to the volume side through the four quarters that we should be aware of? Thank you.
spk08: Sure. In the 7% to 10%, as Gary mentioned in the prepared remarks, that's an all-in, including FX number. So there's about a 2% estimate right now for the headwinds that we have from FX. So on a core basis, we're implying that, excluding FX, that the core revenue growth is more in the 9% to 11% range. If you kind of strip out that 2% or 9% to 12% range, if you strip out that 2%, And I would say certainly pricing will be positive on the volume mix, but has risk of being flat, just given what we're seeing in some of our markets right now, still on labor availability in Europe and Australia related to COVID. But so we can meet the demand we've got. We've got a strong backlog. And, you know, strong order book, just anxious to be able to push that out to customers. And so the volume will come as the year progresses. Got it.
spk09: Well, thanks, John. Thanks, Gary, and good luck.
spk02: Thanks, Matt. Your next question comes from the line of Phil Ng from Jefferies. Your line is open.
spk05: Hey, guys. John, I've kind of lost track of the amount of price increases you guys have announced since last year. So it would be helpful to kind of refresh us since the last call late last year. What incremental price increases have you announced in your bigger markets, and how does that kind of layer in? And then I guess a follow-up on the margin side of things. You said margins up year-over-year, but should we expect it to inflect positively year-over-year by 2Q? It sounds like 1Q you still have some catch-up.
spk07: Good morning, Phil.
spk08: I would say that in terms of the price increases, yes, it's a lot to keep track of just given the number of markets that we're in. We'll focus on North America because that's probably of interest. The most recent change was in the wholesale channel, which was an all-product price increase that took effect at the beginning of the year. So that was effective as of Jan 1. And then our retail price increases are layered in as the first quarter progresses. They're not quite as a bright line like that. So that would be the most recent round of pricing that was done. And then as you get into Europe and Australia, the timing is different given the disparate nature of customers and channels there. In terms of margin cadence, yes, I mean, margins, we do expect margins to be down in Q1, primarily due just to the impact of inflation. And although we're covering it in dollar terms, it's still a headwind to rate. Second quarter, you know, probably getting closer back to flat margins and then seeing some very nice margin uplift in the second half of the year.
spk05: Got it. That's a really great color, John. And a question for Gary. You guys have been buying back your stock pretty proactively. Valuations are obviously pretty depressed here. Just curious, how are you thinking about capital employment for 2022? You kind of hinted at maybe doing more M&A as well. Curious, what are you seeing out there from a pipeline standpoint? And does any color on valuation, certainly in the public market, you've seen some multiple compression here?
spk03: Yeah, thanks for the question, Phillip. We continue to look at opportunities. As we talked about in our investor day, we laid out a plan for a strategy for growth and areas that we were most interested in potentially bolting on. There's a number of things in our pipeline. Without getting specific, we're always nurturing those and looking at valuations that make sense. We did a significant buyback when the opportunity presented itself last year, and we'll continue to look at that. And we've got a number of great projects internally that continue to pay out for us. I look at 2022 a little bit as a payout year for some of those investments that we talked about earlier, both in the capacity expansion side of the equation. Look at BPI, the opportunity a couple years ago. I'm really paying out as we're about to see the benefits of doubling the capacity in that business, which is part of that strategy. So we're looking for more VTIs, more opportunities to add on to our strategy that we laid out back last year.
spk05: Thanks a lot. Great call.
spk02: Your next question comes from a line of Mike Dahl from RBC Capital Markets. Your line is open.
spk03: Just want to touch on your expectations on cost inflation this year, particularly in the back half of the year. Realizing you guys could go out with incremental pricing, but what are you assuming in terms of year-over-year inflation and cost and the cadence of that between the first half and the back half of the year?
spk08: So certainly we'll have some favorable comps on inflation as we get into the back half of the year. And as you think about sort of what the curve looked like in 2021, you know, we still expect inflation in Q3, Q4, but the magnitude will be much less than what we expect here in Q1, Q2. You know, I'd say, you know, from a percent standpoint on both kind of that material and freight, bucket of cost. I would say inflation will be slightly less than 2021 in percentage terms, but in dollar terms, in terms of the dollars we have to cover inflation, that the magnitude is pretty close to the same in 2022 in terms of 2021. So it's still a big challenge that we've got to overcome and we're well positioned to do that.
spk03: I appreciate that. And then just, um, follow up on, um, via price costs and your outlook there, obviously it's, I think you guys said you were expecting it to be a positive this quarter ended up costing the phone the other way.
spk09: Obviously it's a volatile situation there, but, um, just your confidence on, on achieving price costs, favorability in that region, um, given, given all the bully pieces.
spk08: And you're here. Yeah. Um, yeah, I think that the biggest, uh, utilities and natural gas sort of spiked and we did not have visibility. I would say would be similar to our other regions in terms of being neutral in dollar terms. I wouldn't really call out anything. you know, really unique about that. It's just the magnitude of the utility inflation. We're also staying a bit on the logs side that goes into our sawmill, and then metals, you know, continue to be an area of inflation as well, just given the steel that we use in our steel door, steel frame business.
spk09: Okay, I appreciate the call.
spk02: Your next question comes from the line of Susan McClary from Goldman Sachs. Your line is open.
spk00: Thank you. Good morning, everyone. My first question is around the special order products that you have. Can you just give us a bit more color on the order trends that you're seeing there and how things are coming together? as we enter 22. And then I guess with that, can you also talk a little bit about the various channels and how you're thinking about some of the volume and mix that will flow through the retail side versus the wholesale side for this year, where those inventories stand as we come into 22? Good morning, Susan.
spk03: Thank you for the question. You know, I'll start with the retail question. You know, retail and really R&R markets have been fairly stable and growing for the last several years. They continue to be pretty strong. We have seen a mixed shift or a strong mix towards stock units, as you pointed out, over the last couple of years. That mix has been changing over 2021 and improving towards – special orders, which are margin accretive for us. We're seeing that trend continue. Stock levels are getting to be in pretty good shape. We're in that season now where we expect to true up stock units in aisle units in retail. So we're going to keep our eye open for that. But we are seeing special orders continue to trend more favorably, and hopefully we'll get back to pre-pandemic levels sometime in 2022. On the traditional channel, wholesale channel, we've actually seen significant acceleration in orders really over the last several quarters. They've really been growing in North America. Part of that's from Builder, and some of that's from R&R. So that's been trending in the right direction, and we've been pretty excited to see that happen as well. And just like I said earlier, general strength in both residential reconstruction and the R&R markets is really driving all that.
spk00: Okay, that's very helpful color. And then, you know, when we look at the CapEx guide, the 130 to 150 million for this year, it is, you know, somewhat of a step up relative to where you've been the last two years. And I know you kind of talked a bit about some of the projects that you're seeing in terms of capacity ads and those sorts of things. But, you know, any sort of color on anything specific to highlight within that and how you think about the ramp that will come through in there and what's maybe baked at the lower end versus the higher end of that range?
spk08: Sure, Sue. As you think about 2021, how the year played out, our guide for CapEx at this point last year for 2021 was actually pretty similar to what we're guiding to for 2022. As the year progressed, just like a lot of industries, lead times for equipment and things got pushed out. And so we did not accomplish all of the projects in 2021 that we had hoped to. So these are everything from automation to productivity and safety and maintenance type projects. And so I think I would frame up the 2022 guide as moving up to a more normalized type of spend level where we see great opportunities to invest in ourselves, as Gary mentioned, and hire IRR payback projects for productivity type initiatives, as well as some selected capacity expansion projects and target products. But outside of that, there's really nothing unique to call out in terms of the phasing other than getting back to a more normalized spend as lead times from our suppliers for these large equipment purchases get back to more normalized levels.
spk00: Okay, gotcha. Thanks for the color and good luck with everything.
spk02: Thank you. Thank you. Your next question comes from the line of Mike Reinhart from J.P. Morgan. Your line is open.
spk11: Hi. Thanks. Good morning, everyone. Mike Rehart.
spk03: First question, I wanted to go back to the guidance for a second and appreciate the earlier color where you said that the 9 to 12 core being driven more by price. I think you said more than half of it from price. You know, so on the volume side, I was trying to get a sense, you know, Gary, you kind of laid out earlier in the call, you know, different types of initiatives you've been implementing, you know, capacity, expansion, investment in labor, also various new products. I was trying to get a sense, particularly in North America, if we could zero in there for a moment, you know, you know, if there's any way to kind of quantify what that impact of the different, you know, either capacity expansion or new product initiatives, what that impact represents in terms of the, you know, overall thought for volume growth. Let's say if volume growth perhaps is less than half of the 9 to 12, so let's say maybe something in the 2% to 4% range. I'm just kind of putting a number out there. Is that 2% to 4% or let's say 3% to 5% primarily driven by in-market growth? How much is driven by these different company initiatives like capacity and new products? Yeah, so I think you've got the basic elements. Obviously, you know, putting the price aside, we've got some unique initiatives or unique developments within JLM that are driving growth. I speak of it a little bit as a payout year for us on some of the investments that we have made. You know, clearly gaining share in some of our categories has required us to put in some of these capacity expansions as well, you know, in the sheer desire and demand for our products. So if you think about the things that are building up, those Gelwood-specific growth initiatives above and beyond market, share gain, this expansion, the investment in expansion around our, and you asked specifically about North America, so around our exterior fiberglass door business, that's been growing rapidly. Incredibly, over the last several years, they share, again, new products, new door systems that builders and customers really like because they add value in their ability to take labor, easier to install, plus their modern style. The expansion of our BPI business. We said we were going to move that business east. You know, it's just incredible the amount of attention, the amount of demand we're now getting up and down the East Coast, you know, based on opening our new facility in Statesville, North Carolina. Again, the opportunity to ultimately double that size of that business. And then the expansion and the addition of our Oroline composite business this year will also add more. at revenue, all of those are accretive as well to our margin position. If you think about kind of what those, in addition to share gain and price, it's probably about $100 million of additional growth just related to those initiatives alone or part of those in North America. You then add on what we're doing in Europe and Australasia, and you get the additional growth of the company. Okay, no, that's helpful. Appreciate that. I guess, secondly, you know, kind of looking at the margin progression, when you think about, you know, this year, or rather in the fourth quarter, you were able to, you know, neutralize material freight with price, and yet you had the margin contraction driven by other factors.
spk07: You talk about the overall margins down, second quarter margins flat, and then expansion in the back half.
spk03: Ostensibly, but from a price-cost standpoint, how should we think about the first and second quarters? Should it be more neutral and then more positive in the back half? or, you know, the other factors that you've kind of mentioned driving, you know, the margin contraction in 4Q or the last two or three quarters, you know, those kind of also turning around?
spk08: I'd say for the progression, you know, price costs in Q1 should be sort of in dollar terms should be, you know, in that neutral area for pricing material and freight inflation. That, you know, that's neutral in dollars. That is still a headwind to margin rate, though. And then, so you're getting slightly better in Q2, and then it's really Q3, Q4, where that price cost becomes accretive to margins in the back half of the year. I think, you know, in terms of our other margin drivers, I mean, we've got positive productivity, manufacturing efficiency baked into the plan from all the work we're doing on gyms. And you've also got favorability from the leverage on the volume that Gary just outlined. And then we're anticipating this mix situation that was a headwind in Europe in Q4, was a headwind to margins, but that will at some point give us some relief. And so there's a lot of visibility to the levers that will drive margin improvement. But certainly in the first half of the year, that's getting diluted by inflation in terms of a rate standpoint. Great, thank you.
spk02: Your next question comes from a line of Truman Patterson from Wolf Research. Your line is open.
spk10: Hey, good morning, everyone. Thanks for taking my questions. Just first for clarity, embedded in your 22 guidance, are you all baking in costs where we sit today at the end of December or February, or are you all expecting some further cost inflation?
spk08: I'd say we do expect year-over-year inflation throughout the year. I wouldn't say we're expecting the inflation to get worse from where we are today.
spk10: Okay. And then you all mentioned that pricing is offsetting material and freight inflation here in the fourth quarter. And I'm looking at gross margins. They, I think, fell over 400 basis points. I'm just trying to understand how much labor inflation might have impacted that number and just some of your expectations for the labor component to trend in 2022.
spk08: Yes, labor inflation in the quarter was certainly significant. I mean, I think from a terminology standpoint, we're thinking of that more as an investment. I mean, we are doing targeted wage increases in certain plants to make sure we can attract and retain the right labor. And so it is an inflation cost headwind, but it's also – you know, we view there's a payback on that, right? If you get the right labor and retain it, then you can get the volume throughput and get it out. But, you know, say in Q4, the, you know, in dollar terms, you know, labor inflation was, you know, in the $15 million range, something like that. If you want to try and put a number on it, which would be my best estimate.
spk10: Okay. Okay. Thanks. And then Final one for me, just trying to understand SG&A a little bit. As a percent of sales, it had been increasing earlier this year, but then here in the fourth quarter, I think you all were able to walk it down by 400 basis points or so to some of the lowest levels that you've had. On a blended basis for the full year, it was in the low 14% range, I believe. just trying to understand your expectations for SG&A in 2022, given some of the accelerated investments or overhead spend, just trying to understand what level you are comfortable running in.
spk08: Yeah, there's certainly a lot of areas that we'd like to make investments in and use some of the pricing that we've been receiving from the market to not only offset inflation, but fund R&D, innovation, growth, And so I think on an absolute basis, you're right, we did a good job sort of managing cost control in 2021. But if you were to sort of think about Gelsman relative to other peers, you know, there's an opportunity for us to really invest more in SG&A as a percent of sales. And so as we think about the future, we'll be looking for those highest paybacks for an investment that we can make. And a lot of it is tied to funding growth. And so we think about what's baked into the plan in 2022. There's definitely some increased SG&A year over year, but those are projects that we can toggle on and toggle off depending on how the business is performing and But all of them would be, you know, those new initiatives would be tied to sort of driving more growth in the future.
spk10: All right. Thank you.
spk02: And your final question comes from the line of Stephen Ramsey from Thompson Research Group. Your line is open.
spk12: Hi. Good morning. I wanted to think about Australasia for a minute. 2021 passing the 2019 levels and getting closer to the 2018 recent peak. Do you think you reach 2018 sales levels this year or is that something next year? I would expect new construction activity rebounds and the progress and R&R allows you to surpass those levels in the coming year. So just any color there.
spk03: Yeah, we're pretty excited about what's going on in Australia and Australia in particular. We've seen, you know, 2021 was a, I believe, a record year in orders, new home orders. We do expect the order rates probably, you know, be off a little bit this year. But the issue is some of the build times, the good cycle times there in Australia are pushed out, you know, months. I mean, they have a huge backlog of unbuilt demand. So for the very same reasons we were talking about here, labor availability and supply chain. So we're in a really good position to supply the residential new construction market. We think that their backlog is pretty well known. We're going to see growth in its starts and finishes this year. And it'll be dependent on how the builders and contractors are able to stay to the job and complete them. So I think it's kind of a smooth sailing for residential construction in Australasia this year. The borders just reopened. You know, things are starting to get back to normal. You know, they still have, you know, they were probably hurt, hit the most by full shutdowns of anywhere in the world. So as that opens back up and labor availability starts to find its way to home building, those orders are going to turn into a start. So we're, We're pretty bullish on where we are in Australasia. The results are certainly sequentially improving, and I think after a two-year recession in housing, we're pretty excited about where we are.
spk12: Great. And then thinking about Europe increased market penetration, I guess, what are the key ways you intend to do so through this year and how much of the benefits there hit in 2022 or does it build and have a fuller impact in 2023?
spk03: Yeah, so we've been, you know, we laid out our strategy for Europe last year or yesterday. really around a few things, but one around taking the various product categories that we already make and sell in certain markets and moving those into markets that we currently sell other products so that we complete our product portfolio lineup there. I talked in the prepared remarks about technical doors or fire physical doors from Central Europe, for example, into the U.K. That will be a dramatic driver for us. You know, additionally, we've got the opportunity and we've been doing some nice innovation in Europe, particularly around sustainable doors, connectivity, and the like. There's some pictures there in our deck of some of that. Some of that work is definitely driving growth and will drive growth in 2022 and beyond in Europe, but it also becomes a platform for work that we're doing around the world. And then we've got opportunities where There's additional geographic expansion that we can do where, you know, there are markets that we underserve today where we can take our full product portfolio. It looks a lot like what we sell in other countries and other regions and take that across other countries in Europe. So that's our overall strategy in a nutshell for Europe. We will see growth in 2022. and it will continue to accelerate as new innovation comes along and we continue to transfer products across markets.
spk04: Excellent. Thanks.
spk02: And this brings us to the end of our question and answer period. I turn the call back over to the management team for some closing remarks.
spk03: thank you all for joining us today and thank you for your continued interest in gelwind um you know as we said earlier um our markets are strong we like the layout for uh for where we are in 2022 our operations continue to be healthy giving us competitive lead time in many of the categories and markets that we serve obviously we're navigating the inflation challenges with price offsetting material freight inflation we expect that to accelerate the benefit for us in 2022 And we've got a number of gentlemen-specific initiatives that are driving growth and productivity in 2022. So we're pretty excited for the setup. We look forward to spending more time with you as the quarter progresses and updating you on our progress. Again, thanks for joining us today, and thank you for your great questions.
spk02: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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