Q4 2020 JELD-WEN Holding Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to cash chunk When Holdings, Inc. Fourth quarter 2020 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask the question during the session you will need to press star and the number one on your telephone keypad.

If you require any other further assistance please press star zero.

Be advised that today's conference is being recorded of it.

Now I'd like to hand, the conference over to your Speaker today, Chris teacher Director of Investor Relations. Please go ahead.

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 our CEO and John Linker, our CFO before we begin.

I would like to remind everyone that during this call we will make certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095 of 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.

The one does not undertake any duty to update forward looking statements, including the guidance, we are providing with respect of certain expectations for future results or statements regarding the expected outcome depending of litigation.

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 the substitute for results prepared in accordance with GAAP.

Reconciliation of these non-GAAP measures to the most directly comparable financial measure of 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 deployed the strategic foundations of propel gel winch Premier performance, we are executing a disciplined plan to accelerate organic growth expand margins and improve cash flow, while effectively allocating capital to optimize shareholder returns and we're making good.

Progress in each of these areas.

The underpinning of our strategy deployment is our business the operating system, Jim the gel with excellence model.

Jim is the systematic way that our people work within the company to deliver our strategy globally.

Holistic approach is anchored in the very essence of of lien problem solving culture. The practice of continuous improvement development in respect for people and the identification and elimination of waste.

While still in the early stages, we are seeing consistent outperformance and the areas where Jim has been deployed and we are seeing progress in the strategic growth drivers in.

In previous calls we've highlighted our commercial work focused on customer and channel segmentation innovation and unleashing the vast opportunities to expand distribution of gel wind products and services across geographies and channels.

This combination of commercial strategies and disciplined price realization is delivering market share gains and margin expansion.

The disciplined approach of using price to offset inflation has now led to nine consecutive quarters of favorable price cost.

Likewise, we've made significant progress in our footprint rationalization and modernization initiatives, having completed projects. The represented the first third of our $100 million targeted annual savings execution is now underway on the next phase of the program and associated savings.

Youll recall that the rationalization and modernization programs reduce rooftops and cost, while adding manufacturing capacity and enhancing the ability to serve customers.

Across the rest of our sites, Jim is driving productivity savings through more efficient labor utilization material consumption and sourcing savings.

In 2020, we made great progress on these strategic levers, while also navigating the unprecedented challenges of the year, including the effects of the pandemic and other unanticipated events, including severe weather and natural disasters.

The impact of these events was felt through out the year, including in the fourth quarter. These effects included increased absenteeism supply chain disruptions and unforeseen government lockdowns.

Nonetheless, with safety always at the forefront our associates found a way to deliver for our customers our communities and our shareholders I want to extend a sincere. Thank you. So all of our associates for helping us achieve these results through such uncertain times.

In the fourth quarter, we delivered both core growth and margin expansion total revenue increased seven 7% versus prior year and adjusted EBITDA grew $29 four per cent.

Core revenue grew 5% versus last year contributing to 190 basis points of core margin expansion. This was the best quarter of year over year of core revenue growth. Since 2017 led by North America, and Europe, and the first quarter of core revenue growth for Australasia since the second quarter.

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All three segments delivered sequential improvements in volume growth and significant margin expansion versus prior year.

We continue to benefit from favorable price and while still a headwind in Q4 signs of improving product and channel mix.

In addition to these positive revenue impacts on margin each segment delivered positive net productivity further expanding our adjusted EBITDA improvement spin.

Specifically, we saw a 300 basis point margin expansion North America, 330 basis point margin expansion in Europe, and 150 basis point margin expansion in Australasia.

The execution of our commercial strategies and the benefits of Jim are showing through.

For the full year revenue declined 1.3% clearly below our expectations as we entered the year that being said the deliberate actions taken by our teams coupled with productivity benefits from footprint actions and the deployment of Jem were able to offset the impact of the pandemic to.

Deliver 100 basis points of core margin expansion.

In addition to implementing cost savings preserving cash and managing working capital. We also overcame the cost to ensure safe working environment for all of our associates increased absenteeism at certain operations the effects of the mandated governmental closures and temporary changes in product and channel.

Yes.

The strong earnings performance continued focus on working capital improvements and prudent capital allocation delivered free cash flow of 258 $8 million, a 55% increase and a record for gel with.

Further demonstrating our quality of earnings and the strength of our balance sheet, we reduced net debt leverage to 2.3 times the lowest since the IPO four years ago.

And with record liquidity of approximately $1.1 billion, we have flexibility as we evaluate strategic alternatives to further enhance shareholder value.

John will provide additional commentary on our financial performance and I will provide some thoughts on 2021 in a few minutes.

First I will share some thoughts on our markets and key drivers for each segment.

For North America housing fundamentals remain supportive we expect the recent robust increase in housing starts to continue and perhaps accelerate as strong new home orders from previous quarters charge of starts.

Police and activity of the starts may lag due to builders supply constraints, including labor and other building product availability.

We expect overall demand for R&R activity to grow by low single digits favoring larger pro driven projects over D. I y.

The pricing actions, we implemented in late 2020 are holding and we expect solid realization to more than offset increasing inflation and tariff headwinds expected during the first half of the year.

For Europe, we expect markets to be somewhat flat for the full year.

For the first half of 2021, our end markets in Europe are open and healthy across new construction project and R&R. However, we see potential for demands of moderate later in the year market share gains and continued momentum, including sequential improvements in price and mix will extend performance in the <unk>.

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For Australasia, particularly Australia residential new construction markets continue to be challenging and have yet to recover we saw signs of stabilization during the fourth quarter with accelerating single family New construction permits we expect some ongoing improvement from the benefit of governments.

Stimulus programs directed at both new home construction and remodel activity.

However, a significant portion of Australia as new housing demand comes from the immigration, which has been halted due to COVID-19. The government has yet to set a date for this to resume.

Repair and remodel demand is also expected to be challenged however, we expect the offset some of this weakness through additional market share gains.

I'm optimistic about the outlook in each of our markets for 2021, particularly housing fundamentals in North America European market dynamics of stabilization and some improvements in Australia. However.

However, the foundation for our performance has been and will be based on continuing to deliver significant margin expansion and growth through our disciplined deployment of Jem the execution of the rationalization of modernization programs and the benefits of commercial excellence, including innovation.

Segmentation and price.

John will now provide a detailed review of our financial performance for the fourth quarter and full year 2020.

Thanks, Gary and good morning, everyone I'll start on page 10, our fourth quarter financial results demonstrate continued execution in a challenging operating environment as we delivered meaningful improvements in revenue earnings margins cash flow and on the balance sheet.

The strong performance is a direct result of running our playbook consistently over multiple quarters, focusing on our strategy and the continued disciplined deployment of Jim our business operating system fourth quarter net revenue increased 7.7% to $1 2 billion.

The increase was driven primarily by an increase in core revenue as well as the favorable impact from foreign exchange.

Notably all three segments delivered core revenue growth is volume mix improve sequentially from the third quarter.

Adjusted EBITDA margin expanded 160 basis points in the quarter to 10.0%.

While core adjusted EBITDA margin, which excludes the impact of foreign exchange and any recent acquisitions expanded 190 basis points, our third consecutive quarter of margin expansion the.

The combination of price realization execution of our structural cost reduction programs and productivity tail winds from Jim initiatives, all contributed to the strong margin performance.

11 provides the detail of our revenue drivers for the fourth quarter.

Our consolidated core revenue increased 5% comprised of a 4% benefit from pricing and of 1% contribution from volume mix.

Please move to page 12, where I'll take you through the segment performance in more detail.

Net revenue in North America for the fourth quarter increased 4.5% driven by a 6% increase in pricing, partially offset by a 1% headwind from volume mix, while the 1% headwind in volume mix is the sequential improvement from a third quarter. This is a lagging indicator the does not fully tell the story of the healthy demand backdrop in north.

America, So I'd like to spend a moment on the dynamics by product and channel.

North America demand in the quarter was generally quite strong unit volumes increased sequentially in most product areas and order activity remained healthy as well leading to strong book to bill and healthy backlogs. Unfortunately, COVID-19 related absenteeism in our manufacturing operations stepped up significantly in the quarter, which impacted our staffing levels.

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As a result of the absenteeism, we faced volume headwinds on revenue and certain products in plants, even though the underlying orders were healthy mix also remained a revenue headwind as well in North America, primarily because of inventories of stock Skus in our retail channel partners remained below both of their target levels as well as below prior year.

As we worked with our retail partners in the quarter to restore their inventories to targeted levels order activity was weighted towards lower price stock Skus and therefore, we saw reduced activity and higher price special order Skus and custom orders.

In terms of how these dynamics impacted our North America channel results in our U S retail repair and remodel channel revenue increased approximately 10% compared to prior year with growth in both doors and windows.

In our U S. Traditional wholesale channel revenue declined mid single digits due to the impact of absenteeism and Covid restrictions.

In our U S door distribution business revenue declined mid single digits demand in this channel was strong however, our ability to meet the demand was constrained due to new COVID-19 restrictions in California, where we have several large distribution locations and generally higher absenteeism across their network.

All other channels in North America, including Canada, VPI Windows and other products netted to revenue growth of approximately 10%.

Even with the absenteeism and mix headwinds, we faced in the quarter revenue growth compared to prior year accelerated meaningfully in the month of December so our exit rate was better than the full quarter.

In January the strong revenue performance continued in North America.

Given these recent trends we feel good about the setup for North America revenue growth for full year 2021, noting that first quarter comps will be impacted by fewer shipping days due to our 445 accounting calendar.

North America, adjusted EBITDA margin expanded 300 basis points to 12, 4% driven by strong pricing of net productivity, partially offset by the mix impact that I just discussed the margin improvement with nicely distributed across product lines with healthy margin expansion across doors Windows and Canada.

Europe revenue increased 14.9% overall and 8% excluding the impact of foreign exchange.

Core revenue growth was comprised of 6% volume mix and 2% pricing similar to last quarter. We believe our volume performance exceeded market growth demonstrated by mid teens local currency revenue growth in Scandinavia and high single digit revenue growth in central Europe.

For the sixth consecutive quarter Europe delivered core margin improvement with an increase of 330 basis points year over year from strong productivity cost reduction actions and leverage on volume growth.

Australasia revenue in the quarter increased 7.6% overall and 2% in local currency versus prior year.

Our revenue performance benefited from the reopening of Victoria from the 112 day Covid Lockdown the impact of government stimulus and profitable share gain is.

This is the first quarter of core revenue growth in Australia since the second quarter of 2018 due to the ongoing housing market headwinds.

We're pleased with the fourth quarter revenue performance and continue to see near term improvements in early 'twenty 'twenty. One is the result of the government stimulus programs that said demand visibility for full year 'twenty. One remains quite limited in Australia, given the immigration restrictions that are still in place, which was a meaningful driver of population growth and housing demand.

Dan.

On the back of this improved revenue performance, our Australasia segment delivered margin expansion of 150 basis points from solid productivity and volume leverage.

Coming back to a global consolidated results I'd like to comment on input costs, because we anticipated fourth quarter material cost inflation and freight rates did accelerate year over year and sequentially from the third quarter, However price more than offset these increases. So there was no significant impact on margin looking into early 2021.

We expect inflation in import duties the continued to increase particularly in the first half of the year.

Also as a result of the tight labor market and Covid related absenteeism labor inflation of North America as an area of increasing concern, but despite these potential headwinds we will continue to use price as needed to offset inflation to ensure that we still deliver on our goals for continued margin expansion in 2021.

SG&A increased compared to prior year, primarily due to charges taken for legacy litigation and environmental matters and certain variable compensation accruals, partially offset by cost reductions and other ongoing reductions in our fixed cost structure.

One item to note on taxes in the quarter as you may recall, our book tax rate has been negatively impacted for the last two years due to the guilty provisions of U S tax reform late 'twenty 'twenty. The U S. Treasury finalized regulations for a high tax exclusion option for guilty retroactive for 2018 in 2019.

We elected the newly issued high taxes collusion under guilty in the fourth quarter, which allowed us to restore certain net operating loss carryforwards to our balance sheet that had previously been utilized as a result of guilty after consideration of additional tax planning measures. We were able to restore approximately $100 million of net operating loss carryforwards, which will have a fade.

That will impact on our cash taxes in the future.

We recorded a one time P&L benefit of approximately $10 $8 million in the fourth quarter to reflect the restoration of these nols offset by the net reduction of certain deferred tax assets related to foreign tax credit carryforwards from which we will no longer be able to benefit.

Please turn to page 13, where you can see the details of our strong cash flow performance in 2020, which led to a reduction in net leverage to two three times the lowest point since the IPO operating cash flow increased 17% compared to prior year and free cash flow increased 55%.

All of our 'twenty 'twenty operating cash flow did benefit from certain COVID-19 related assistance programs, such as temporary payroll tax deferrals, most of which will be repaid in 'twenty and 'twenty. One overall, the 'twenty 'twenty improvement was driven by stronger high quality earnings and more efficient working capital utilization.

Page 14 highlights the longer term trend data on both cash flow of net leverage as you can see we have generated sustained improvements in free cash flow for the last few years, which has benefited our balance sheet and capital allocation opportunities.

And lastly, the page 15, I'll highlight our current liquidity of $1.1 billion. This level of liquidity is the highest ever for the company and gives us flexibility to create shareholder value. During these uncertain times.

With that I'll turn it back over to Gary who will provide closing comments Gary.

Thanks, John.

Despite the effects of the pandemic and other unique headwinds last year, we delivered strong financial performance through disciplined deployment of our operating system Jem and the strategies, we set out to expand our capabilities to serve our customers.

The momentum in growth and margin expansion in Q4, and the strength of our balance sheet, coupled with favorable market conditions sets us up nicely to deliver in 'twenty and 'twenty one we.

We remain optimistic about the outlook in each of our markets, particularly strong housing fundamentals in North America healthy near term order books in our European markets and some signs of demand improvement for residential construction in Australia.

That being said our performance has been and will be based on continuing to deliver margin expansion and growth through our disciplined deployment of Jem the execution of the rationalization of modernization programs and the benefits of commercial excellence, including innovation segmentation and price.

Yeah.

All in we expect total consolidated revenue growth between 4% and 7% for 'twenty 'twenty, one and we expect to deliver full year adjusted EBITDA in the range of $480 million to $520 million.

This continued margin expansion is the result of volume growth and our strong pipeline of productivity and cost projects, including modernization and rationalization savings and the benefits of price increases already deployed to offset accelerating inflation and tariffs.

As we conclude I'd like to highlight that the strong results. We reported today are a direct result of the strategic work persistence and tenacity of the talented people of gel win and representative of the unique culture. We're building.

Our management team has been deliberate and effective in building the foundation to deliver sustainable Premier performance for our customers and our shareholders momentum is strong and we are excited about the year ahead as we continue to transform gel win into a premier building products company.

Thank you for your continued interest in gel win and for joining US. This morning, John and I will now be happy to take your questions.

Thank you at this time, if anybody would like to ask a question. Please press star one on your telephone keypad.

The first question comes from Matthew Bouley from Barclays. Your line is open.

Good morning, everyone.

Thanks for taking the questions.

Wanted to start out with the question on the price cost side, Gary you highlighted the commercial efforts of Donna.

A nice job keeping price cost favorable for several quarters in a row here. So I guess to the extent inflation is an increasingly greater headwind in the first half of this year. As you suggest have you taken enough price across the segments to kind of maintain.

The this recent trend of price cost positive or should we think it's more of neutral this year given the inflation. Thank you.

Thanks for the question Matt.

Yes.

What we've been we've been fortunate in that.

Had really.

Really just from pricing in the market.

Earlier, North America always seen price.

It's all across the world.

All of the markets that we've been in we've been able to take some momentum.

Price increases, particularly in the doors.

North America.

And with kind of a.

Going on to the Windows, we've been able to see kind of.

The mid late last year.

The action there we are seeing from inflation.

In the first half as we mentioned.

We are watching very closely and we do believe that.

We still have opportunities to put more price.

The 11th.

In order to maintain our strong.

All of them.

All of that price.

And more than offset inflation.

It was something that we watch quite a bit of work that we talked.

The balance really over the last kind of year end.

The two years around segmentation and of our.

Customer base and.

It's really played out.

In a lot of.

The margin expansion.

So we feel pretty good.

Weighted.

Matt This is John I'll, just add on I would say that.

Based off of what we have in place today in terms of pricing that we implemented and negotiated with our customer base and based off of where inflation. That's the day, noting that inflation is extraordinarily dynamic right now I mean, we're just being big fluctuations sort of.

As the weeks go by but the based off of what we have in place already and what we know inflation is coming yes price cost will be of tailwind for the full year, just less of a tailwind than it was in 2020.

Got it okay. That's helpful.

The second one on production rates.

Focusing on North America, I mean, obviously windows at the sort of thought of as the product in short supply of these days of it sounds like you also had some challenges in the door distribution business can you talk through kind of the ability to ramp production here does your revenue guidance assume you were able to sort of knocked down the backlog that's built.

And just what type of costs might be associated with with ramping.

The production here. Thank you.

Yes, so when we look at production.

The tax kind of really the three pieces of that business I would say earlier on last year.

We saw the kind of absenteeism COVID-19 effects affecting the windows business, a little bit more of than the other businesses on that is changing kind of flip flop.

Ration of really good position.

And the Windows all of the Windows.

I know that's a lot.

One of them.

There is a lot of demand for windows right now.

We feel that we're in a position of our production.

Windows actually and we are seeing commitments of share.

As we're able to deliver a more steadily so that story of improving the windows of production.

Is it really kind of it.

Sure.

Hum.

Moving to Europe.

And we're actually seeing some good performance there so pretty pretty excited about windows on the day.

For.

The door distribution side.

The doors in general we saw some warehouses, where the assets he is.

Yes.

In the fourth quarter.

Obviously doing all we can to ensure that we have.

The folks that we need in our plan.

Two.

And to build that down we are working that down obviously, there were some weather issues right now in some of those areas as well.

We're seeing across the country.

We continue to work out of every single day the okay.

And of the deliberate actions and tenacity of our people and ensure the Randall the producer customers is something that we're very very focused on we do believe that.

We gained share.

To do that but one of the price.

This is where we got hit really the most of them kind of in the California region of door distribution areas.

We need to continue to watch that.

Okay. Thank you Gary Thanks Chuck.

And your next question will come from John Lovallo from Bank of America. Your line is open.

Hey, guys. Thank you for taking my questions as well here, maybe just starting off with SG&A.

Little of 15% as a percentage of sales.

The above what we were looking for and I think about 100 basis points higher year over year can you just help us with some of the drivers were of of that increase and was that tied to the absenteeism or were there other factors.

Yeah, I'd say there are a couple of things in the fourth quarter.

That did impact us that were sort of one off we did have some.

Additional litigation.

The legacy accruals that we had to make that were non operating and are.

Excluded from adjusted EBITDA.

There was some variable compensation true ups in the fourth quarter and also some a bit of a bit of additional expense.

Related to things like our employees going back to a doctor for health claims things that had been deferred earlier in the year and seeing some catch up there. So I wouldn't say it was anything sort of structural the changed John in terms of the spend in the fourth quarter, just the kind of the timing of of when things sort of hit us.

As we as we exited the year.

Okay got you understood and then I think there was a comment made about European demand in general.

And the possibility that that might moderate in the second half of the year. It was that was that comment related to more than the comps was that just structural demand might moderate and if so can you help us understand why that might be.

I think that.

The nature of that comment is right now.

You saw there in the fourth quarter of it had some pretty nice growth as Gary I called out.

And in certain areas of Europe.

Order books look pretty good here in the first quarter, both on project commercial businesses as well as residential.

I think the concern and the lack of visibility that we have as you know when if and when we sort of Covid does stabilize and consumer spending shifts away from you know of R&R and home and consumer start to think about other avenues for.

The other dollars are the euros travel or what have you of that that could be potentially of moderation on some of the near term demand. So it's not anything structural that we're seeing in terms of.

The market's weakening it's just sort of a lack of clarity on exactly what's going to happen. If you forgive me if you take a step back a lot of these European markets. We're in.

Not a really healthy from economic standpoint, theres not higher unemployment there is kind of low GDP. So.

So I think youre, just hearing a bit of cautiousness from US is as we do have near term visibility of its pretty good but sort of back half of the year.

There's a bit of a question mark on what that could look like.

Makes sense. Thank you guys.

And your next question will come from the FL, Inc. From Jefferies. Your line is open.

Congrats on the solid quarter.

Volume in North America were down about 1% in the fourth quarter appreciating you're dealing with some absenteeism how are your orders tracking and just given your view on North America resi, what type of organic volume growth do you anticipate this year.

So I'll start from that.

The actual demand from product even in the fourth quarter was pretty strong in North America.

The.

Net decline was purely based on the absenteeism at a little bit of a mix.

From the quarter, when we think about.

And what we're seeing we're seeing strong.

The demand is strong growth actually in the retail of R&R, we've seen strong growth in of some of our other businesses, including Canada.

The commercial business and some other products.

You really net.

He has been talked about in the door distribution and some you know related to.

Our U S. Traditional door channel is really the impact there. So we still have pretty strong backlog is still pretty strong demand coming in North America.

Still feel pretty good about of the growth rates.

All of them.

Yeah, So I would just say.

You mentioned the exit rate on the in the prepared remarks.

Revenue growth in North America in the month of December was about 10% up over prior year January is a bit of a tough comp because of the shipping days issue. So it's not exactly comparable but I would say the trajectory was similar.

And year over year sitting.

Sitting here in the in the first quarter North America backlog.

We're fairly short cycle business. So we kind of think about it more as open orders as opposed the true true backlog, but.

The and orders are up fairly significantly versus the same time last year. So if we can sort of make sure we have stable manufacturing platform and get the absenteeism issues sort of worked out I think we're teed up quite nicely for a and acceleration in North America volume growth this year and.

As the year progresses.

And Gary Judd you guys have a better sense on when you think you'll get the operations of the good spot to kind of capitalize on all of this growth certainly sounds very encouraging.

Yeah, we feel.

The watch it every day, obviously, but we've been doing we've been taking some action to make sure that we're able to operate all of our plants.

As of yet.

It's kind of been the storyline for for the last.

A quarter or two.

Just related to where the.

Indebtedness shifts or more and a little bit of a shutdown of obviously in California, where we got out of operations. So we've been either hiring or we're taking action to make sure that we schedule our plans around our abilities.

Have people there.

We feel like.

We're keeping up with it fairly well.

We have of.

Average is here and there the work on but we try to make sure the.

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Most of our performance for our customers and.

The players as one of the benefits of the.

Of the work that we did the do it for the last year.

A few years.

John.

The benefits of that as the operating system the way the VR.

You know what I mean.

Need to have the notes.

These are we have playbooks forms of different.

Capabilities. So we may be operating out of lower plywood and lumber to the demand of as one.

We know the quality right now.

Consistently with.

Hi.

Labor day.

The plan.

That's great. That's that's really great great progress, Gary and just can I squeeze one more in.

Just given the tightness you're seeing in the Windows market North America do you expect to kind of recapture some of the share and getting some of the challenges you've seen in the last few years profitability did take a step back. So is there any way to kind of help level set us where.

The profitability can shake out this year versus maybe a few years back where margins were a little higher. Thanks, a lot guys I appreciate it.

So we've got we've made some great progress in the Windows business all of the operation side.

A little bit on we might have stepped back a little bit on share but.

To improve their margins.

Of the consistently.

Consistently there is the tightness in the market now there's probably the ban.

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While we're seeing kind.

Kind of.

Industry lead times kind of the movement and now we're actually still very commercially.

The commercial and competitive in the back very very close to what our traditional lead times have been on the dose which is turning each of our ability to recapture share.

And and recapture accounts of amount of loss.

The 24 months ago based on an average.

So the gem the gem work that we've been doing the window is kind of caught up.

And it is performing very very nicely.

Meetings of that margin expansion as well of the opportunity for share.

Just on the margin side, I mean 18 months ago, obviously, we had some margin headwinds in the North America window business. We've now I think three quarters in a row add some pretty strong margin improvement in that business. The fourth quarter was up 280 basis points 300 basis points something in that area in North America Windows. So.

Still not back to where we think the business is capable of from a margin standpoint, but the trajectory of operational improvements and margin improvements are certainly heading in the right direction.

Alright, Thanks, a lot.

And your next question will come from John Kim approaches from Baird. Your line is open.

Hey, everybody good morning, nice to see the progress.

On on margins, maybe just first question I had how should we think about margin expansion as we kind of kind of walk through the year I think the comps from margins are maybe a little bit easier in the first half, but you also have some inflation and then the comps get a little a little tougher in the second half. So just trying to better understand how we should think about margin phasing for the.

Year overall.

Yes, I think.

So your comments are correct.

The the inflation is weighted towards the first half of the year and if you think about sort of the phasing of when the price is going in that we've negotiated we're not necessarily going to get a full quarter.

The first quarter of some of the channel price increases that we've put into place in terms of offsetting the stepped up level of inflation. So.

This cost will be less of a less of a tailwind in here in Q1 of them.

The overall I'd say, we do expect margin improvement in every quarter. This year, we certainly feel like we've got the plans in place and the visibility to get there.

From price.

And volume.

And then on the productivity side as well so I think the first quarter a while it is an easy comp versus prior year, it'll probably be the lowest margin improvement of of the full year, just given the of that price cost and when the when we're getting hit with the inflation and tariffs, but you should see that accelerate throughout the year So channel.

Our consistent deployment of the John is clearly we're working on the cycle time working on the ability to meet demand.

From an operational standpoint, but the other part is of the productivity engine that we've really built were seeing that in every single area of the company.

And the ability to expand margin.

Period over period.

We are consistently there.

We had the effects of.

The accelerated inflation as John pointed out that's the piece.

The price for and you know.

We've been having a very disciplined capability of getting price.

In other products as well.

Is that those markets are strong and we've been able to get price the more than offset the inflation and take the benefit of the productivity that we're seeing through our jem deployment really across the entire company.

Okay. Okay, great. That's very helpful. I appreciate that and then I guess my follow up just on capital deployment. Your leverage is now close to two which I think is probably the lowest it's been since the IPO. So any change to how you're thinking about capital I mean, just as the M&A starts to become a little bit more.

First of all here going forward, just a little help there as you think about leverage going forward.

Yes.

Obviously been one of our target is to get the death of number down and you're correct. It is the lowest since the IPO. So so we feel pretty good about where we are we like our liquidity position as well.

That I believe is also a rare.

Revenue for the company. So we're in pretty good place of uses a lot of flexibility and we continue to have great projects internally through our rationalization of modernization program.

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Each of generating jobs.

Good reserves for the company and we will continue to focus on those.

Youre correct in assuming that as we look around.

I look around at some M&A opportunities, we will make some.

We made some choices there.

We've we've done in the past and we'll continue to look at when it makes sense.

Issue to that.

So the measure of share repurchase as appropriate.

It's one of the levers that we can pull.

Well.

Okay, Okay, great well, thanks for the color and good luck on 'twenty one guidance.

Thanks.

And your next question will come from Susan Mcclary from Goldman Sachs. Your line is open.

Thank you good morning, everyone.

My first question is around the next chapter and I know you made the comments in your remarks that on the retail inventory. It is below those targets and you're working to get that back up to their normalized levels can you give us some sense of when you expect to be completed with that and how we should be thinking about mix shift, especially in the U S coming through across the.

Yeah.

Yes, the the retail side.

The goal of lot of a lot of other happen through last year was.

Contractors customers really looking at what product they can get.

Instantaneously from the start.

Which is what drove that index.

Frankly, the towards the stock units rather than the special Warners.

And that kind of consistent through the years in.

In the fourth quarter from still a headwind.

It diminished somewhat and we're starting to see special orders.

Already in Q2 to increase and we would expect to see that kind of.

Half of sequentially throughout the year of books.

And the place, where we're getting the inventory back to where.

Our retail partners the likelihood.

I haven't seen them for stock and as that happens, we will be able to do.

And then more promote more of a special.

And put that through our factories as well so we would expect to see that probably start to turn.

End of this quarter in the second quarter.

To be maybe a tailwind for us as we go into the second half of the year.

I think just going onto the prior question about phasing of margin improvement throughout the year.

Just to be clear Mick mix of definitely still a headwind in Q1 based off of what we have in the open order book in the backlog that we know of mix will be of headwind in Q1, and but beyond that we think the inventories will be restored.

We will see that special order start to pick back up and that has an opportunity to be of tailwind in the back half of the year.

Okay. That's helpful and you know obviously, you've made a lot of improvements and headway in terms of your cost initiatives and gender inclination implementation, even with all of the the kind of issues that came up in 2020 can you give us some sense of where you are with that and maybe how to think about it as we go through.

True 'twenty 'twenty, one any specific projects or things that you would highlight in there.

Yes, that's a really great question on the jet side I think.

I always say, we are really in the early stages of that deployment, we continue to put tools out there, but we're starting to see.

Yes.

And how we approach problems of how we look at the standard work.

Operator.

And manage on a day to day basis in our factories and our operations, where you can see the business operating system and Jem tools being used in our functions as well.

The rationalization of modernization program, which is really kind of.

The project base, if you will that we've talked about.

We have deployed where we have reported about a third of our $100 million.

Many of the savings that we talked about you.

You will start to see that.

Therefore fully show up in our run rate in 2021.

Got another third of those projects.

In our in flight.

And those are continuing to look at the plant consolidation.

Throughput improvements and really built on the principles of channel, but now that we've gotten.

You know kind of the first third of projects. The next third kind of builds on what we've learned in modernizing our operations of one of the the other nice things about that that I talked about.

Before before last year was in the downturn, what would we do different about our rationalization and modernization programs. These are the very types of programs. We would do and we did continue to invest in in 2021, our 2020 excuse me. So we really didn't lose much time.

You know, maybe a quarter or so and delay, but we kept right through we got some really good projects going forward and they spend the extent.

All of our segments around the world. So we.

We still feel pretty good about the project deck and in our ability to achieve the $100 million.

The annual run rate that we said we would.

Okay, great. Thanks for the color and good luck.

Thank you.

And our next question will come from Michael Rehaut from J P. Morgan Your line is open.

Hi, sorry, Hi, this is a lot on a lot helmet hung from Mike. Thanks for taking my questions first.

First can you please try and give us a rough quantification of what you expect raw material inflation.

The impact the P&L in 'twenty and 'twenty, one as well as terrorists.

And also what types of the amount of price increases you're putting into effect to offset the inflation.

Sure so on the starting on the inflation side.

Again, I want to be clear of that yes, there'll be a headwind to the P&L from inflation, but price cost overall, it's still a tailwind for the for the full year based off of what we know today. So just less of a tailwind the than it was in 2020.

But the order of magnitude in terms of sort of of an impact I would say that inflation sort of materials and tariffs and freight inflation.

One 5% of sales range.

Something of that magnitude and that's actually close to double of what we saw in 2020. So it is significantly meaningful.

And then from a pricing standpoint.

I don't want to.

Ford Guide too much on the pricing standpoint, but certainly with what we have in place today and what we've negotiated.

You know I would say order of magnitude I see no reason that 2021 and can't be a similar year of our pricing and then we had in 2020 from the order of magnitude standpoint, and as the year progresses and as this inflationary environment involves we will certainly consider additional pricing actions as needed to make.

Sure we drive margin improvement.

In terms of the specifics of the inflation biggest categories for us where we're feeling of the biggest impact would be in millwork.

And then plastic or vinyl oriented components metals, which is both steel coil on aluminum for us and then logs and lumber would be sort of the biggest four categories.

And those are up year over year, and sort of of 5% to 8% range in terms of the increases on prior year spend in those categories.

Okay, great. Thanks for that and my second question is I'm, just sort of being a little bit deeper into the December exit rate and the strength you saw in January and North America I was curious if the main drivers there were more on the demand side or on the production side and the improvements in production and then also.

If you're starting to see some flow through from the stronger trends in our residential new construction or or when you think that could flow through as well.

So in terms of the December result of its both I mean, we started to normalize some of our production, but that being said, we still had some plants in the month of December that were 20 to 30 per cent absenteeism for example, and yet we were still able to drive that 10% revenue growth that I mentioned, so yeah, yes, there are certain class.

Or we got the production and labor availability of sort of stabilize but a lot of this is really more on the order demand activity and we've seen the.

Sort of sequentially for the last few months of the open orders in North America or backlog. If you will I've been healthy stable and then as I mentioned, you know a year over year, they're up as well so.

I think this is the drivers of the demand are coming from both sides.

Yeah on the housing side.

There's good demand there I think one of the pacing items for that will be.

Not so much of our ability to deliver but the availability of labor.

You too.

Two and half of those.

The stars and build the homes as well as other other.

The other building materials.

Shortages or delays so we're watching that very very closely we expect that to be of tailwind for us.

We do believe that we and we know that we can keep up with the wood.

The demand of let's see on the <unk>.

Housing side, but I think it's a little more difficult question then.

And just the simple answer from US I think we'll be able to meet that but it'll be dependent on how those houses.

So I actually materialize with labor and other.

The materials side.

And one of the stages for us.

Okay. Thank you.

And your next question will come from my golf from RBC capital markets. Your line is open.

Good morning, Thanks for taking my questions.

Gary John I wanted to ask of just about a more detailed breakdown per the.

Revenue guidance for the year, if we're looking at kind of the bridge of 4% to 7%.

You note that it embeds, a small positive impact of FX, but when I'm looking at kind of spot rates on whether its euro Australian dollar.

You know, we would get the something more in the range of like 3% costs from FX.

Wins, and then the balance of the guide would be kind of like flat to plus four. So I was just hoping you know age of where are we wrong on that FX and what are you embedding and then when we think about the breakdown ex FX a lot of questions already around some of the mix volume, but just any more detail or quantification.

Of kind of what what is your aggregate volume, what's your accurate price mix embedded in that.

Sure Yeah. So the FX market has been pretty volatile as well I think if you were to just extrapolate the change just from November to December and some of our key FX rates.

It was pretty meaningful and so I agree with you that if you were to just pick a point in time and I assume that that sort of persist for the rest of the year that the FX you know revenue tailwind could be.

Could be more meaningful I'm, you know our viewpoint and this year is something kind of more averaging sort of those fourth quarter rates is probably a more normalized maybe FX is more in the 1% to 2% you know a revenue tailwind ballpark and so that leaves the rest of the guide would be more on the organic side certainly.

North America is the strongest probably above company average.

Certainly above company average with both the pricing and the volume that we expect to improve.

And then Europe.

Below company average in terms of in terms of what we're seeing from there and then you know Australia. We're just taken a pretty conservative view at this point on in the guidance I think guidance assumes some slightly negative tailwind or slightly negative headwind from Australia revenue.

Based off of what we're seeing early in the year that could prove to be wrong and that could be upsides of the guidance.

But we just don't have that visibility yet in Australia in terms of how sustainable some of this.

Near term benefit we're seeing from the government stimulus it could very well.

Sort of Peter out in the back half of the year. So there's there's certainly an opportunity for us the perform.

You know at the high end of the guidance range on the on the revenue side, but given the visibility at this point in the year that that's kind of what we baked in.

Okay got it. Thanks. That's helpful. My second question is on free cash flow it seems like there's.

A number of moving pieces, you've got some of the NOL changes you've got some of the deferred payment.

And maybe some working cap changes and then you've got a fairly.

The sizable step up in the tap.

Capex this year, how should we be thinking about free cash flow of conversion.

Yeah the.

Yes.

The payroll tax deferral items that we mentioned we took advantage of the U S. Cares Act and then sort of similar types of legislation in other countries around the world to deferred payroll tax during this COVID-19 situation. A good portion of that is required to be repaid in 2021, and a small portion of that flows through to 2002.

'twenty two.

The year over year impact of that it was a tailwind in 'twenty and it's anticipated to be of headwind in 'twenty, one and so the kind of a year over year impact of that reversing as about $45 million and so.

It's going to be a headwind to free cash flow for the full year of particularly if you look at the you know also with the Capex that you mentioned stepping up so year over year free cash flow will be we expect to be down in 'twenty, one because of those drivers but in terms of the we don't expect any change in sort of the core you know of.

Quality of earnings of our conversion of our of our earnings to.

To to cash flow. So if you were to look at sort of of the increase in earnings from 2020 of the midpoint of the guide you know I would certainly expect that the drop through at 100%.

Correct straight through to free cash flow, but there are a couple of other distinct type of mindset.

Free cash to be down in 'twenty, one versus the 20.

Okay. Thanks, great color.

And our next question will come from Keith Hughes from Truest. Your line is open.

Thank you.

Referring back to the profit improvement plan you had said you've got in the third of the $100 million I think that's a run rate youre, referring to you of any estimate of how many dollars actually impacted 2020 from the from the plan.

I would say is that you know the yes.

Yes, the third is the run rate the right.

Should be in the base going forward, but given sort of everything that happened in 2020 in terms of of the moving pieces that we had with with Covid facility shutdowns and some of the timing of the projects that we were hoping to get completed earlier in the year certainly there was only a fraction of that sort of imply 30 million.

Well actually hit the P&L.

In 2020, and so as we get into 'twenty 'twenty one.

Certainly the the year over year incremental benefit of that would be one of the tailwind of drivers to the earnings.

Okay and do you have an estimate by the end of 'twenty, one what the run rate will be based on your plans for 'twenty one.

Yeah, I would say that the full $30 million should be in the base earnings.

For you.

By the end of 'twenty one.

And we're again, we're going off of a high base.

When we first rolled out this program I guess that what sort of end of 2018, and so I'm measuring off of sort of a 2018 base and so we're saying we got about $30 million of additional earnings from the footprint program.

By the end of 'twenty and 'twenty, one in the P&L and then there'll be more to come in future years as well.

<unk> put in some of the projects that are going live this year into the base going forward.

Okay. Thank you.

And our next question will come from Adam Baumgarten from Credit Suisse. Your line is open.

Hey, good morning, everyone. Thanks for taking my question just kind of mentioned.

The completion is lagging starts I think more than usual can you maybe give us a sense from a either of months or weeks basis, what that looks like today versus maybe pre COVID-19.

Yes.

The difficult question of Bryan the answer we know that.

We expect that.

The residential new construction is a tailwind for us.

A growth lever of how much of the lag is as is typical for us the Astro <unk>.

We know that there is high demand for.

Or for both Windows and doors, maybe a little bit more of a windows at this point, but the on the.

The opportunity there is for us is to keep up with their demand.

I think the real issue is you know kind of the question of how much of the tailwind is going to be based on when they can.

Labor and other delivered years earlier building materials they need to.

To start on the stars line yet.

Is that sort of work and we're just following that I don't know if I can put a number of days or weeks on the on the delay I. Just don't think that's something we particularly now but we do know that we've got the order load at the bank.

The problem is something that we'll see.

Through the year.

Got it okay. Thank you and then John just on corporate expense for 'twenty, one embedded in your guidance here. It was up at a pretty decent amount last year, how should we think about it sounds like there might have been some one time event. So how should we think about it for 'twenty one.

Yeah, I'd say that.

Certainly with the some of the Covid related deferrals that we had in 2020.

You know there will be some step up as we get back to spending some of the discretionary marketing and sales and some other deferrals. So yeah I think the corporate expense was in the I think it was for full year. It was in the range of.

The $65 million to $70 million I believe I don't have the exact number in front of me, but I would see a.

Modest step up to that and in 'twenty, one as we bring back some of those COVID-19 related expenses.

And the 21.

Great. Thanks.

And your next question will come from Alex from <unk> from B Riley Your line is open.

Thank you is it possible to quantify the COVID-19 absenteeism impact on either revenue or EBITDA.

It's not not certainly not scientific but you know based off of just looking at you know.

The way I would think about it is.

Earlier in the year in North America on average we were averaging.

High single digits of 10% sort of absenteeism as COVID-19.

As you know sort of in its earlier stages as the second wave came up in the fourth quarter the.

The average absenteeism stepped up pretty meaningfully in the fourth quarter I mentioned that we had some plants of her 25% to 30% and the.

The fourth quarter, so I would say that a.

Very rough estimate of of sort of what volume of left on the table.

In the fourth quarter would be in the $25 million range in terms of the North America revenue, but again, that's it's really hard to say exactly on that I'm, just trying to use data points from the absenteeism to extrapolate into the sort of went back and what that could have been.

And then I believe you said that the lead times have been improving.

Any way to kind of quantify that or talk about that in light of.

Sort of.

You know obviously the impact of absenteeism most of them they've had on that.

Yes, so on the.

Particularly with the.

The windows side, we've been consistently improving our throughput and our lead.

The capability part of the outflows over the place of the last year and a half of the.

Many of our customer base.

Kind of be more be choosy, but we have improved our operations significantly and we're able to meet what we havent published commercial virtual lead times that are.

Sure.

Much of the standard range for what pre Covid kind of.

Kind of the run rates for us.

The windows, So I would definitely meeting that on the on the door side.

Japan again the out from here is probably the only only the direct their factories are operating very very well keeping all of the point of sale.

Volume for sure and as I said earlier.

Non too to affect customer deliveries, even without asking you to them. So we're probably a little more effort into.

You know, how we how the stage waters.

Again commercially commercially rely on the commercial lease up of the lead times are in the door space as well.

So we feel.

Pretty good place.

Competitively issue.

Sure.

Thank you.

Thank you. Your next question comes from Reuben Garner from benchmark. Your line is open.

Thank you good morning, everybody.

Most of my questions have been answered I just have one quick follow up so the the R&R outlook for low single digit.

Type demand and in the North America can you kind of break down what 2020 look like between pro and DIY I assume the protein channel was was.

More challenged and that the I guess is the impetus of the question is there an opportunity for that part of the market to recover this year.

The low single digit growth of maybe the DIY part is what's what's dragging the overall rate down am I thinking about the at the right way.

Yeah. So I think when we talk about the mix issues in 'twenty and 'twenty and 'twenty 'twenty of lot of that was the start.

A lot of type of R&R.

And then even even some of the pro business would be more geared towards getting products.

Let's start with the jobs more quickly. So we are starting to see is more of that from a.

The contractor business starting to come back, that's where we get more of the spiral of ore.

Frankly, a little longer lead time type of product on the better margin product as well so that that's what will contribute the mix shift and we do see that.

Actually coming through.

Great. Thank you guys congrats on the quarter and ended the year.

Thank you we really appreciate you all taking interest the gelatin and continuing.

Continuing to the.

The support our callers and of our business.

We look forward to.

Obviously sharing our results of this.

Of this quarter of order from now are we also look forward of spending time with you the answering any questions you might have.

In the coming day. So thank you again for your interest you feel that we're well positioned with the benefits of our business operating system of the job with the benefits of our productivity programs around the rationalization and modernization. The most importantly, the the.

The dedication of engagements tenacity of the.

Great photos of the half year of gel one of the culture of an adult.

So that's sort of showing our results and look forward to continuing of.

Our success based on that thank you sort of watch.

Thank you everyone. This will conclude today's conference call you may now disconnect.

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