Q4 2020 Masonite International Corp Earnings Call
Welcome to the Masonite fourth quarter of 2020 earnings Conference call.
During the presentation, all participants will be and listen only mode. After the manage its proper prepared remarks investors are invited to participate in a question and answer session. Please note that this compensate the call is being recorded I would not liked it till the call over to Joann Freiburger, Vice President and Treasurer. Please go ahead ma'am.
[laughter].
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President.
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Uh-huh.
Financial adviser Tony here.
Moving residential is also joining us for Q&A.
We issued a press release.
Presentation market closed yesterday sharing or for the corner and full of your 2020 resolve these documents are available on our website at me my Dot com.
Before we begin let me remind you of that this call will include forward looking statement.
Forward looking statements contained in the call is subject to risks and uncertainties that could cause of actual results to differ materially from those projected in such statement.
No information regarding the factors appears in the section entitled forward looking statements in the press release, we issued yesterday.
More information about risks can be found under the heading risk factors and make my annual report on form 10-K to be filed with the SEC. Shortly after this call and in our other SEC filings, which are available at the center.
And it makes the highest dot com.
The forward looking statements in this call speak only as of today and we undertake no obligation to update or a drive any of these statements earnings release in today's discussion include certain non-GAAP financial measures. Please refer to the reconciliation which are in the press release of the appendix of the wax presentation.
Our agenda for today's call includes a business overview from power of review of of the fourth quarter and full of your results from Ross along with our 2021 financial outlook Howard will provide closing remarks ample host of question and answer session and with that let me turn the call over to our.
Thanks, Joanne good morning, and welcome everyone.
I am pleased to be joining you again to update you on masonite fourth quarter results and the current state of our business.
If you look at the strength of the quarter, it's easy to forget how much the world's changed in 2020, and what our organization and all of the risk of navigated.
Accordingly, I thought it appropriate to revisit some of our strategic operational and financial accomplishments from what can only be described as an extraordinary year.
During the first quarter of the year, we successfully implemented are previously announced north American residential pricing strategy and with our plan to reinvest roughly $100 million in the business over five years with the focus on service and quality product innovation and down channel marketing.
The pricing strategy was a success and we realized more price than originally anticipated do the strong market demand throughout the first quarter.
At the same time, we began to invest more heavily in service and quality as planned although we ultimately curtailed spending near the end of the first quarter to preserve liquidity in the face of uncertainty from COVID-19.
The health and safety of our employees was our highest priority in in early March we had already formed a COVID-19 response team designed to proactively identify potential business impacts and implement mitigation strategies.
These actions served as well as we were able to navigate operational challenges and maintain strong margins in the second quarter. Despite our UK in Ireland operations being shutdown for approximately half third quarter, we reported our highest quarterly consolidated adjusted EBITDA since becoming NYSE listed company in 2013.
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We also took steps designed to ensure we positioned ourselves to emerge stronger following the pandemic.
In April we created of growth and momentum team that was task to prioritize investments and resources with the goal of building upon the momentum we enjoyed in the first quarter of the year following of steep decline in April demand strengthened the sequentially through the second quarter, and we resumed investment spending in key areas of the business in order.
The position ourselves to support growth.
Conditions improved and our largest and markets during the third quarter and we experienced growth an average unit price or AEP across all three of our segments.
The strength of of the recovery in our North American residential in Europe segments exceeded our expectations, resulting in better than anticipated performance and continued year on year adjusted EBITDA margin expansion.
Our employees did an exceptional job stabilizing our operations as we navigated pockets of higher absenteeism and capacity constraints from Covid.
We held an increasing number of the <unk> events from the third quarter to improve operational efficiencies and sharpen our focus on safety.
We saw of volume growth accelerated across our residential businesses in the fourth quarter. We believe we exited the year well positioned to capitalize on the current market strength and have more momentum than at any other point in my time of masonite.
This year was challenging in many ways and we performed exceptionally well. The result was of year on year increase in adjusted EBITDA of $80 million, which resulted in adjusted EBITDA margin of 16, 1% for the full year up 310 basis points from 2019.
Now, let's move to slide five for a more detailed review of our fourth quarter performance.
The accelerating volume growth I mentioned in a residential businesses coupled with strong.
Across all three business segments drove of 16% year on year increase in net sales. We are pleased with the recovery of our Europe segment as they return to year on year base volume growth in the fourth quarter.
The favourable volume and continued growth and AEP, primarily driven by our previously implemented North American pricing strategy drove year on year adjusted EBITDA margin expansion in the quarter of of 140 basis points. Despite some anticipated cost headwinds and planned investments for future growth Russell.
Revived more detail on this later.
The largest investments in our future growth, where those related to our North American investment plan spending in the quarter was in line with our expectations as we invested in service quality and innovation.
We had another year of strong free cash flow from operations 2020 marks our fourth consecutive year of free cash flow conversion in excess of 100%.
Shifting to the right of the slide I'll touch on business and operational highlights for the quarter.
Operations performed well with capacity improving sequentially, albeit at constrained levels.
Both of our North American and European operations continue to experience operational headwinds related to Covid.
I'm very proud of the team's ability to prevent any major plant disruptions in the fourth quarter.
And vantage operating system deployment remains strong kaizen events increased 50% year on year in both the fourth quarter and the full year with increases in every business segment, our commitment and discipline in this area are having a meaningful benefit the factory productivity.
During the quarter, we completed the integration of the lows door fabrication facility, we acquired in Janesville, Wisconsin.
This transaction includes a multiyear supply agreement we.
We are pleased to say that we have been able to retain the existing workforce and we welcome. These individuals to the masonite family.
Lastly in February we hosted builders Remodelers and channel partners at the virtual International builder show Ibs X 2021.
While we prefer the in person interaction of Ibs, our marketing team did an exceptional job of creating a virtual environment to once again showcase of our products and our commitment of delivering doors that do more.
Moving over to slide six while our Investor Relations team has spoken about ESG with many of you of past conferences and in meetings I want to give this broader audience an update on this important topic.
<unk> is at the core of our company's culture and has been since inception. The company was founded in 1925 based on the concept of converting waste in the work.
William Mason establish the company to use the Westwood that was being created from sawmill operations throughout the southeast in the United States much of which was being you the burned or buried in landfills. Mr. Mason discover the process to convert wood fibers using heat RASM and pressure in the hardboard products the significantly change the dynamics of the building products and the.
<unk> for the next century.
While our history of steeped in the ESG, we're relatively early in our journey of public disclosure. We remained focused on continuing our legacy of environmental sustainability as we create a safe and engaging environment for our employees will driving accountability through good governance practices, all of which are managed and of balanced approach.
<unk> to ensure we are focused on what is relevant to our business.
Now I'll share a few of the key items, we initiated in 2020 as well as some of our results on environmental we hired a third party to help us perform our first carbon footprint assessment. This is currently in process and we're planning to create a baseline measurement and identify opportunities to set of relevant science based targets for the future.
In 2020, we prevented over 1 million tons of wood 42000 tonnes of wheat straw and 2000 tons of mineral core dust from going the landfills by using them as raw materials and fuel in our processes are selling them. The local farmers as of soil conditioner. These actions are both good for the envy.
<unk> and benefit our cost structure.
On social.
As we have consistently stated safety is our highest priority. We conducted 615 safety cousin of events, which created great employee engagement and resulted in increased awareness as we achieved of 189 total incident rate in 2020 at.
10% improvement versus the comparable basis in 2019.
We created a new position for vice President of diversity of inclusion to further shape, our diversity equity and inclusion strategy.
Our people our greatest asset and I am proud to share. The just last week Masonite was included on the Forbes 2021 list of America's Best large employers.
On the governance front, our leadership team completed the materiality assessment using the SaaS be framework and identified ESG topics that are of priority for our specific business at masonite. We believe what is measured matters and ESG metrics are incorporated in our compensation plans for the last two years we've incorporated.
Both safety and employee engagement metrics tied directly to our annual bonus.
We of engagement on ESG from the board to the plant floor, we developed and ESG Executive Steering Committee and we have cross functional teams with subject matter of experts throughout the company involved in various initiatives in.
In 2019, we published our inaugural corporate responsibility highlights report, which is located on the Investor Relations section of our web site and we are targeting of more robust ESG report to be published in 2021.
With that I'll turn the call over to Russ to provide more details on our financials Ross.
Thanks, Howard Good morning, everyone, let's turn to slide eight for a summary of our fourth quarter of financial results.
We reported net sales of $619 million up 16% as compared to the fourth quarter of 2019.
The growth was primarily due to of 9% increase in.
Which was up year on year across all three segments and a 6% increase in base volumes compared to the prior year due to growth in our North American residential and Europe segments.
The 1% increase in higher component sales and of 1% favorable impact from foreign exchange, where partially offset by on 1% decrease the volume from the impact of of divestiture.
Gross profit increased 28% two of $142 million driven by higher than our previous restructuring actions, which were partially offset by higher inflation and tariffs on raw materials increased investment in the business, including those related to our North American investment plan and.
And the impact of lower volume of architectural business segment.
We continued to benefit from strategic sourcing projects, but the related savings were outpaced by the increasingly sore and raw material costs.
Gross profit margin of expanded 200 basis points versus the fourth quarter of 2019, the 22.9%.
Selling general in administration expenses were $95 million of 23% compared to the same period last year, primarily driven by higher personnel costs, including incentive compensation and charges related to the settlement of U S class action litigation.
SG&A was 15 three per cent of net sales.
Net income was $27 million of the quarter, an increase of $25 million from the prior year due to the net impact of higher gross profit and higher SG&A and the absence of 12 million in restructuring charges that were incurred in the prior year.
Diluted earnings per share one dollar eight is.
As compared to <unk> in the fourth quarter of last year.
Adjusted earnings per share increased to $1 26.
Which excludes charges related to our previously announced restructuring plans and the settlement of U S class action litigation.
This compares to 69 per share in the fourth quarter of 2019, which excluded charges related to restructuring actions and a pension settlement.
Adjusted EBITDA increased 30% to $81 million, while adjusted EBITDA margin expanded 140 basis points to 13.1%.
This marks the eighth consecutive quarter of year on year, adjusted EBITDA margin expansion.
On the right hand side of the slide we of work detail on our adjusted EBITDA performance, which benefited from accelerated volume growth in a residential businesses along with strong year on year gains in AEP.
In addition to the anticipated impact of anti dumping duties. We commented on during our third quarter call. We also saw meaningful increases in inbound free costs and.
In total, we incurred and $11 million per year on year increase the material cost for the quarter.
We've previously discussed are two pronged strategy to mitigate antidumping duties where possible.
Our global sourcing team continues to work diligently to qualify alternative suppliers and at the same time, we of salt relief through temporary surcharges where appropriate.
Given the implementation timing of the surcharges, we realized minimal benefit from them in the fourth quarter.
Battery costs increased $14 million of the fourth quarter due to increased investment spending primarily in our North American segment.
And negative volume leverage and the architectural segment.
Savings from our previously implemented restructuring initiatives, largely offset we should benefit of inflation in the quarter.
Distribution costs were $6 million higher compared to the prior year due to the impact of Covid and our use of suboptimal plant locations to support customers is our capacity buried across their manufacturing network.
Lastly, on and adjusted EBITDA basis, SG&A was $11 million higher due to increased personnel costs largely due to incentive compensation.
Turning to slide nine in our North American residential segment.
Net sales increased 26% from the prior year, two $453 million, primarily due to a 13% increase in base volumes aided by of 53rd operating weak and a 12% increase in ADP.
Driven by our previously announced pricing actions AEP for the full year of 2020 was up 10% slightly above our original expectations.
And market demand strengthened in both our wholesale and retail channels in the fourth quarter.
This accelerating demand coupled with are constrained capacity levels is limited our ability to rebuild channel inventory.
Adjusted EBITDA in the North American residential segment was $88 million in the fourth quarter of a 62% increase over the same period last year of.
Just the EBITDA margin expanded 430 basis points to 19.3% despite anticipated cost headwinds.
The significant anti dumping duties and tariffs I mentioned earlier resided within our North American residential segment.
We also experienced higher logistics costs in the form of both inbound freight and distribution.
Our North American investment plans spending was on track of the quarter as where our previously discussed investments to improve the workplace environment for our employees.
Overall, an exceptional quarter and year from our North American residential team.
Turning the slide Ken and our Europe segment.
Net sales increased by 4% year on year to $83 million.
We were pleased to see base volumes turned positive in the quarter of 4% on the back of expected improvements in our interior business and continued strength and our exterior business.
A favorable impact from foreign exchange contributed an additional 3% to growth and gains of contributed.
Contributed another 2% due to the pricing actions taken the and the exterior door business late in the third quarter.
These additional gains were offset by of 5% decrease in sales volume from the impact of of divestiture in the fourth quarter of last year.
Adjusted EBITDA in the Europe segment was $17 million of the fourth quarter, the 37% increase over the same period last year.
Adjusted EBITDA margin expanded 500 basis points to 21%.
We anticipated margin headwinds from the impact of mix due to the relative growth of interior doors, the pricing actions and better than anticipated factory productivity more than offset the impact.
Moving to slide 11 in the architectural segment.
Net sales decreased by 10% year on year to $77 million due to the 16% decline of based volume as commercial and markets remained week.
As mentioned on our third quarter call. We saw softening sales in October and as expected that trend continues through the fourth quarter.
The base volume declines were partially offset by growth of 4% from ADP and 2% from the sale of components in other products.
Growth benefited from both favorable price due to previously implemented increases and improved mix.
Adjusted EBITDA margin contracted 590 basis points to one 3% due to the negative volume leverage.
This includes the unfavorable impact of our 53rd operating week on this business when minimal shipping volumes did not cover fixed costs.
Before I leave the slide just a quick update on our progress to optimize the business.
Alex look all of the recently hired leader of the architectural segment and his team continue to work on Reconfiguring the business with the goal of improving service levels as a platform for growth went and markets recover.
Accordingly, they of rapidly taken some surgical actions, including the closure of of the component of plant and the sales office.
Is optimization efforts are ongoing, but we look forward to providing you with future updates.
On slide 12, we summarize our full year financial results for 2020.
Net sales were up of 4% compared to the 2019 due to AEP growth of over 7% for the full year, primarily driven by price in North America.
This increase was partially offset by of 3% decline in base volumes, primarily due to COVID-19.
Gross profit of $573 million represented increase of 20% over the prior year, while gross profit margin expanded 350 basis points to 25, 4% of the full year.
The expansion was primarily due to higher AEP and prior year restructuring actions, which were partially offset by the impact of lower volume higher inflation and tariffs on raw materials increased investment of the business and higher manufacturing wages and benefits.
While sourcing projects had offset increases in raw material costs through the third quarter escalating tariffs, an inbound break cost prevented us from delivering net savings for the full year.
Excluding the impact of anti dumping duties inflation was in line with our original expectations laid out at the beginning of of last year.
Adjusted EBITDA increased 28% to $364 million for the full year, while adjusted EBITDA margin expanded 310 basis points from the prior year 216, 1% in line with the expectations, we shared on the third quarter call.
On the right of the slide we provide a full year adjusted EBITDA bridge a relatively.
Straightforward causal for 2020 favorable volume mix and price along with solid operational performance offset the impact of inflation and expenses related to our growth investments.
Slide 13 summarizes our liquidity of cash flow of performance for the quarter of.
Our balance sheet and cash flow of both ended 2020 strongly with total available liquidity of $582 million inclusive of unrestricted cash and accounts receivable purchase agreement and our ABL facility, which remains undrawn.
Net that was $428 million and we ended the fourth quarter with the net debt to adjusted EBITDA leverage ratio of 1.2 times.
We repurchased approximately 106000 shares in the quarter, bringing the 2020 total to approximately 673000 shares repurchased for $44 million at an average price of $64 and $90.
Full year cash flow from operations was $321 million up from $222 million in 2019.
Capital expenditures were approximately $73 million.
While we curtailed second quarter spending in response to Covid, we resumed in in certain instances accelerated investments ultimately the resulting in our capital expenditures being in line with our original 2020 outlook.
We ended 2020 with a full year free cash flow conversion of of 162% driven by lower year on year capital expenditures and strong working capital performance as we accelerated material purchases of year and and deferred payroll tax payments.
Now, let's turn to slide 14.
Here, we outlined factors that we believe will have the most significant impact on our operational and financial performance in 2021.
Based on robust U S new housing data.
Modest but continued growth in the triple our market.
And improving trends in the UK.
We expect the benefit from favorable residential and market conditions.
Type of North American wholesale and retail channel inventories exiting 2020 are expected to provide added support for residential demand.
Outside of market conditions are north American residential segment will benefit from new business wins, specifically, the previously mentioned lowes business in the mid western part of the U S.
This multiyear agreements lows will equate to roughly $60 million annually.
Slab shipments began early the fourth quarter of last year. So we would expect to realize the full amount in 2021.
We anticipate favorable price to continue again this year with consolidated year on year growth of mid to the high single digits, primarily due to our north American residential business and a recently enacted increases.
As Howard mentioned, we have a strong team that came together and navigated an exceptionally challenging year with the addition of Jennifer Renaud as Chief marketing officer, and the hiring a balance of the doll. We believe we have the right leadership team of place.
While we feel confident about 2021, we will face of headwinds.
Our capacity remains constrained due to the impacts of the higher ups and theism and the inability the staff additional shifts.
After absenteeism at its highest levels in April and May of this past year, we saw of numbers from down and remained relatively stable, albeit the elevated levels and of the fourth quarter.
More recently in December and end of January we have seen absenteeism increase again.
We've been fortunate that has not approached the peak levels, we experienced during the onset of Covid, but these increases act as of natural governor on our ability to service residential market growth.
Similarly, we have experienced elevated impacts from COVID-19 in our UK operations, particularly after the year and due to this most recent ways of the virus.
Leading nonresidential indicators such as the architecture billing index continues to suggest a week and market demand for architectural segment through 2021.
Abi has been below 50 since March of last year with number of softening as we exited of 2020.
We believe in the strength of this business in the long term, but the near term remains challenging.
Until commercial construction activity increases in North America, We believe we will see pressure on this business.
Inflationary pressures are expected to increase in 2021, both on logistics and material costs I will expand on these along with the impact of tariffs and antidumping duties on the next slide.
Lastly, we expect spending on the North American investment plan will accelerate as we position of the company for future growth.
Net we believe these factors provide a positive backdrop for masonite in the year head.
Turning them to slide 15, we provide our current outlook for consolidated full year results in 2021.
Given the strength of our residential housing markets and the tailwind created by tight channel inventories, along with new business wins and favorable price. We currently expect consolidated net sales growth of 7% to 10% versus 2020.
This range contemplates the recovery from the impact of Covid, we primarily felt in the second quarter last year as well as one less week of sales due to our 53rd operating week in 2020.
With business consolidated range or growth assumptions vary greatly by segment.
The North American residential statement is expected to benefit from all of the previously mentioned drivers of net sales growth.
Accordingly, we expect to see net sales increases in the low teens for this segment.
Given the severity of last year sales declines in our Europe segment, we expect net sales growth in the mid teens for 2021 as business recovers and we benefit from recently implemented price.
And the architectural segment, we're planning for of net sales decrease in the high teens due to continue the weakness and commercial and markets.
On the net sales growth outlook, we expect adjusted EBITDA to be in the range of $415 million to $445 million.
We believe the key variable impacting adjusted EBIT of growth in 2021 will be rising material costs, which we anticipate will increase in excess of 4% year on year.
These increases are due to inflation that is rapidly materialized in the wood category as well as strong demand that may require us to buy more steel outside of our long term contracts.
Incremental anti dumping duties expected on which shipments out of Asia and meaningful increases in recent <unk> Ocean shipping rates will further drive total material cost increases.
Our sourcing team continues to work aggressively to identify initiatives to diversify our supply chain and offset these costs were possible.
Between these efforts and our pricing actions along with temporary surcharges, we remain confident in our ability to Maine of favorable maintain a favorable price cost relationship again in 2021.
Even at the low end of our stated outlook, we anticipate a another year of meaningful adjusted EBITDA margin expansion.
We expect that adjusted of earnings per share in 2021 will be in the range of $7 40.
The $8 30.
This range incorporates of assumed tax rate of 23 of 25% and an average diluted share count of roughly 25 4 million.
We expect cash taxes to increase from $24 million from 2022 of range of $45 million to $55 million in 2021, primarily due to are largely exhausting net operating loss carryforwards.
With respect the capital expenditures in 2021, we currently expect the range of $80 million to $90 million.
This increase from reduce spending in 2020 reflects our focus on strategic investments for growth, including initiatives to improve capacity in our plants and the ability to service of our customers.
These investments in the business and higher cash tax rates are expected to negatively impact free cash flow of.
Along with natural increases in working capital that accompany rising sales volumes and the cash payment related to the settlement of use class action litigation, we anticipate free cash flow of $145 million to of $165 million in 2021.
And with that I'll turn the call back the Howard for some clothes the comments.
Thanks for us to.
To summarize we are very pleased with what turned out to be an exceptional year from masonite in 2020, we.
We finished strong with net sales increasing 16% year on year in the fourth quarter as growth accelerated in a residential and markets and we saw higher AEP across all segments.
This volume growth and strong price drove adjusted EBITDA in the quarter, which resulted in our eighth consecutive quarter of year on year, adjusted EBITDA margin expansion and full year adjusted EBITDA margins of 16, 1% of the.
310 basis point increase over the prior year this would not of been possible without the extraordinary efforts of the entire masonite team.
We're planning for another outstanding year of 2021 R. M. Vantage operating system continues to drive productivity and is helping create a safer workplace for our employees were making thoughtful and strategic investments in our business to improve service to our customers drive innovation in our products and position us for future growth straw.
<unk> demand and pricing should enable solid net sales growth and continued margin expansion for the year.
Lastly, I would like to remind all of you that we have are 2021 virtual investor day scheduled for Wednesday March 24th we invite you all to attempt as we will provide more detail on our strategy along with an updated long term growth framework Reggie.
Registration opens early next week on our Investor Relations website. So we encourage you to visit our site as well as our new digital learning center to view of doors. The do more video of ahead of Investor day, and with that I'd like to open the call the questions operator.
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The first question is from Michael Rehaut J P. Morgan. Please go ahead Sir.
Hi, Good morning. This is a lot helmet on from my thanks for taking my question.
First of all on North America any good morning first of on North America residential volume day.
<unk> much higher this carter's which is very positive and I was just wondering if you could talk more about your progress kind of on the production from and higher position to meet the growing market demand and how much of the impact from the 53rd week.
I guess Additionally, just on Tijuana, and getting that plant up and running and what type of volume growth you could support in 2021.
Sure a lot of this is Tony good question.
We were very pleased that the ability to increase our outflows are in demand and stay very strong in the fourth quarter.
Relative to the 53rd we believe that was roughly 5% lifts and overall that sales for the for our segment.
And we have been very focused the trying to increase our capacity you know Tijuana.
<unk> was a little bit behind as we mentioned in our previous call of on its ramp up due to Covid, we had materials and equipment sitting across the border of couldn't get it in place as those restrictions relax, we were able to get it and we still struggled to get people into Mexico to do the setup, but we did some of our team did some very interesting virtual set up at.
<unk> and we.
We started seeing better output there as we look forward, we are increasing shifts on our interior door plant.
Of being Clinton Hayley law of Anna has already started in that process as well as in our retail dwarf apps.
And we're continuing to invest in capital equipment in Monterey to improve the output. There. So we can increase capacity aggregate of.
Add another salad in Tijuana and.
And that operations. So we feel pretty good about the increasing capacity that we're working on right now to continue to support will be still see at the very strong in the market.
Great. Thank you and then just turning to price in North America, If you could just.
Maybe just talk a little bit about the overall pricing environment and.
How are you thinking about taking additional pricing actions in 2021 or or what price contribute.
Yeah. Thanks, a lot of this is Howard we're not going to speak of prospectively about future price increases.
Confirmed on the Q3 call that we announced the price increase for 2021, which is effective was effective promoters placed early in Q1.
Additionally, we've implemented some surcharges for example, the mitigate the impact of antidumping duties, because it's always our strategy to pursue favorable price costs. So if inflation becomes really burdensome, we will consider what we need to do but for now we're not going to talk prospectively about where we are and we're happy with.
The position.
Okay. Thank you.
The next question is from Josh Cheng Bird. Please go ahead Sir.
And good morning, guys, congrats strong quarter on the air.
Alright, Thanks Joshua.
I guess my first question was on the 21 revenue guidance just trying to think about how you are contemplating day of decadence through the year of clearly you have very strong demand momentum entering into the into the queue, one presumably and <unk> you have a very easy comparison. So this cat could.
Could you talk a little of about what that means and how what you're projecting kind of four of the second half.
Yes, Joshua Ross Fair question I'll take that.
We do expect it to be a little bit of of story of two half Sir to your point in the first half of last year of the second quarter of particular, we saw of real downdraft in revenue and that was that was driven globally, but largely by our UK operations being shut down for almost half of the second quarter, so between that and just natural.
Blunting of demand that we even saw it in the North American residential business, what people kind of digested, what COVID-19 would actually mean for construction of markets.
We saw the biggest the impact in 2020, if you just step back and look at first half versus second half pacing, we would anticipate net sales probably up in the mid teens for the first half overall following to probably of low single digit growth free for the second half.
Yeah of the second part of that question.
I'm sorry, Thank Josh you asked about first quarter of how things work.
Starting January was was terrific. We grew in excess of 20 per cent of overall it of consolidated level and demand. In February was also strong of course, we had this weather issue, which wreaked havoc on our operations over 40 per cent of our plants. We're at least partially shutdown during the week of that terrible weather.
And in fact, we lost about 89 shifts of production so.
As of resolve we expect February to be closer to flat. Our focus is now of shifted to the supply chain. Because we are aware of at least one upstream raw materials supplier of that has yet to resume operations from the weather. So.
Yeah, that's going to have an impact certainly of February and we would expect demand demand is still there I would expect that demand to be resilient March and so.
We're planning for growth in the first quarter despite.
Very challenging whether situation.
Alright, yeah that makes sense and nothing for the color of their and then I guess my second question of all the bigger picture could you talk a little bit about how you're managing sort of the plant network given the the these disruptions.
Both in terms of demand and then also the absenteeism is I guess, if you look back several years ago I would've thought that these types of.
The fluctuations would've caused a lot more operational disruption, but clearly you've been able to manage through all of that is very well. So could you talk about what kind of improvements you've made operationally versus several years ago, and how you're able to kind of handle. These these types of Brooklyn.
Hey, Joshua Ross, maybe I'll open up a little bit and just kind of reminds some.
Mindful with some of the impacts we're in the quarter and how that impacted our results in an hour can widen the lens out a little bit and talk about strategically how we think about that.
We're fortunate in that we've got a network of plants across North America that we can leverage the key often comes down to how efficiently can you do that as you have disruptions across the network, whether it's by spikes in the absenteeism due to the localized COVID-19 outbreaks of or is Howard just mentioned disruptions due to the severe weather.
We can flex production of many of our products, particularly in the residential business around that plant network to support our customers. The key is it becomes inefficient from the logistics standpoint, and we even commented that during the fourth quarter, we had a lot higher logistics costs, because we were having to flex that production around and that often means shipping.
Products on a lot longer free.
And then you would typically the service of customer and a particular geography.
And I would just add that in of 2020 taught us a lot of up flexibility in our network.
We're thrown into this global pandemic and we quickly had to pivot to ensure we could do whatever we could to service of our customers and we talk a lot about our own vantage operating system, the guys and events and leaned transformations of all of those things I think have really benefited us as we learn to be more flexible of our network of those rough said, sometimes creates a bit of a bit of.
Fishing seat, but generally speaking we've been able to increase capacity sequentially. Tony mentioned some of the strategic initiatives, we're going to continue to build capacity throughout 2021.
That's great. Thank you for the call guys.
We have a question from Mike Doll R. B C capital markets. Please go ahead Sir.
Hi, Thanks for taking my questions for the.
Kind of like far.
Good morning, I had another question on on just.
Framing up kind of the top line guide for this year because.
I appreciate the the details of you've provided if I look at it really high level with mid signal digitize single digit price plus the $60 million from the goes when.
I mean that alone gets you to something like seven the.
10% and it would seem like your.
Europe architectural made kind of offset one another.
Which which again kind of implies just no base volume growth outside of the outside of the lows win. So I'm just curious kind of of how you're thinking through that is it really just the impact of the.
The the one.
One last week this year or if there are other moving piece as we speak.
Cognizant of.
Yeah, Hey, Mike, It's Russell, let me try and unpacked of even a little bit further for you to help the kind of walk from where we ended 2022 called the mid point of our guys for 2021. The first of all if you look at the overall market.
We're assuming of mid single digit market growth for any of us and that would be comprised of high singles on the new construction side and probably the low single digit growth on the triple our side of the remember our business is roughly split 50 50 between those markets.
Europe, we're assuming market low double digits, but architectural we think could be down as much as 20%.
You do all the math against that and that suggests the the overall market would be low single digits call at two ish per cent and that's really driven down by the significant weakness that we're seeing in the non residential markets.
Then you add to that that mid this high single digit.
<unk>, we referenced the new sighted.
About two and a half points from the new business leaves the gap of of about two percentage points and that would really be comprised of the 53rd operating week. The will repeat this year and then the potential we of baked and therefore, some spot capacity of constraints here and there. That's really how you work from 2022 are value for 21 to help okay. Yeah.
That's very helpful and and then of quick follow up on on the revenue side before.
To another question, you're assuming negligible.
Perfect. If we just look at spot rates, obviously, they've been moving around dramatically but.
The would seem to imply that there is actually fairly significant FX tailwind zip. These current rates persist so how how.
How'd you reached the kind of of the point of not really assuming any effects impacts for the year is that just kind of of standard modeling assumption or is there.
There's something else, we should be thinking about on on that as well now that's a great. It's a great question and in the words, yes, because I'll look word volatility around FX. It has been pretty significant particularly in the last three months as.
As we zone in on our outlook for 2021 back in the fourth quarter.
Subsequent to that is when we saw our key currency pairs of specifically USD to Canadian dollar and U S dollar to pump Sterling. It started moving around a lot. We've seen just in the last 90 days of 5% to 7% movement strengthening of both of those currencies and so I'm trying to put a pin in the map right now in FX's pretty difficult.
If we were to see the current spot rates carry off all the way through the year. It would represent call at a point of <unk> of upside against what you've seen here, but we're just not trying to call that right. Now so think about our sales growth is basically exclusive of any FX impacts from the dust settles the end of the year.
Okay fair enough that makes sense and then my.
You don't mind my follow up question is really then more around the inflation environment and clearly that's been dynamic as well and recently accelerating really across the.
Secondly, everything you can you can track so as you are looking at the.
The 4% or greater than 4% for the year of how much of that is just relying on kind of of what you see today versus also incorporating an expectation for further acceleration and and costs from today's levels.
I would say both are sourcing team does a pretty good job, we believe it monitoring supply conditions.
Monitoring pricing outlook.
Taking into account what they are hearing from the supply bass on any potential inflationary pressures and we think that we've captured that within the outlook that we've provided if you step back and you unpack that in excess of 4% the area that we've seen the most rapid.
Galatian in commodity inflation recently has been of wood and so we could easily see that up mid to high single digits.
In 2021, the other areas where receive more inflationary pressure or in glass and packaging. They're also probably in the mid to high single digit range. Those are obviously smaller parts of our by.
So it's the wood inflation that is the primary driver against the escalating inflationary outlook, we've got for 2021.
Okay, great. Thanks for Us that's helpful.
We have a question from J J Mccandless Wedbush. Please go ahead Sir.
Hi, good morning of one thanks for taking my questions Uhm.
Could we spend a minute on Europe and talk about.
How UK housing starts in UK repair of remodel seems to be going.
Four quarter numbers like pretty positive so would love to get thoughts on where that goes in 21.
Yes. This is Howard I'll start we expected to see our interior business strengthened of the quarter and we did that was more strength due to growth in the merchant channel that it was with homebuilders specifically.
We would expect that that would carry carry on a bit here and our exterior business has been strong all year, we had a bit of the challenge of the fourth quarter was some congestion of support from difficulty getting materials and even so our exterior business was up sort of low say the digits. So.
We're pleased with the recovery of the UK business and is rough said, we expect that will let them to continue certainly on the heels of the.
Miserable second quarter 2020.
I don't know abreast did you want to add anything of that.
I would just add that we continue to see a market in the UK of new housing market Jason's I think though is the area you are specifically asking about.
That has been underserved or under built and the new builders have been trying to get back to work. They really spent a lot of the certainly the second half of 2020 trying to get back onto the plots and and restarting the new construction activity, but that has been the slowest part of our business very to recover.
And we are Fortunately starting to see some green shoots and even through this latest lockdown in Europe and in the UK in particular, which I think some folks had some concerns early on could stall of the housing recovery once again in the UK. They seem to have tried to protect the construction trades wherever possible in recognition of the fact that that we've got.
Got a housing start picture in the UK. The frankly is just running well short of organic demand should be so overall is Howard said, we feel good about the outlook for that business. It's just a matter of continuing to recover with it on the new build side, while we continue to support the renovation market, which has the strong.
Got it.
You caught my second question Russ around the the essential worker aspect what about the stamp duty that they are talking about is there gonna be any impact you guys at that comes back in the play.
We've not seen much impact on the new construction site from that program.
That stamp duty holiday was established two of sent any and all home transactions, new or existing homes and so to the extent that it has helped people buying an existing home and maybe a fund some renovation work that may be benefiting the triple of our side of our business, they're a little bit on the new construction site, we haven't seen a meaningful up.
Pick from that program specifically.
Okay. Thank you appreciate it thank.
Thank you thanks Jay.
The next question is from Rude Reuben Gardner the benchmark company. Please go ahead Sir.
Thank you good morning, everybody.
Early in the morning Uhm.
Maybe first of all a quick clarification, if I could book I think you mentioned the first half of mid teen second half upload simple digits of that just a directional indicator for the whole company revenue or was that specific the North America.
That was consolidated results.
Okay, and then maybe on the Uhm in North America anything and if you did call it out and I missed that I apologize, but anything on the the mix front positive or negative that hit you guys and.
The fourth quarter of of 2020, and then in your outlook for 21 anything to keep in mind.
Tony of what.
North America, good yeah, but it would just.
Look back at the fourth quarter the 11th of.
Substantial impact to mix.
We're still seeing in the retail business special orders.
Not at the rate of increase that we see the stock program and so there's some opportunity of in Asia, It's for the quarter and pull you 2020 earnings conference call.
Hello.
Apologies.
Alright.
So.
As we look at the the.
Of 2021, we're not indicating any significant makes changed but there's some opportunity there to get retail special ordered back on track.
Okay, Great and then.
The past I dunno handful of the years.
There's been I think of a trend both in smaller sized homes, but also in maybe fewer doors per home are you guys starting to hearing the conversations with the builders that reversed into the other direction potentially I don't know, whether it's COVID-19 had anything to do with it or not but the larger homes and or.
More doors.
In homes for variety of reasons leather to get home offices or or what have you.
Yeah, I think that that's an interesting dynamic that we are very keen to follow and I would say that.
As we see people trying to do more at all of the whether it's worth of or study or.
Number of things that now of people are doing the water home we are seeing.
More of an interesting, creating thanks aware of spaces and a lot of times of that thanks, very space involved locking off of.
Of course of along with.
Force, perhaps upgrading the solid for the worst where you need to be half of the quiet in order to study or to work.
So we are interested in watching that we believe there's going to be a tailwind and the type of the doors, whether that is the result of of larger home footprints or whether it's just more sexually spaces baked closed off I think remains of the theme, but we believe there's a tale from there and that growth.
Perfect. Thank you guys. Congrats on the strong close to the 2020 and good luck the rest of the here.
Sure of it.
We have a final question from no all of them are Costco.
Stevens. Please go ahead Sir.
Hi, good morning, and thanks for taking my question.
Range of August 1st Sharp.
I just wanted to dig in a little bit more on the cost side I think of I heard you correctly youre looking for something like 4% of inflation next year, where does that fit into your guide does that get you to the mid point and I know you've been talking about.
Improving your ability to the source materials to sort of get away from the antique duty is that is that baked into the guide at all maybe as we move through the year.
Yeah, I know it is for us I'll I'll take that.
I would consider all of those items is comprehended within the outlook that we've provided.
As I commented on a moment ago that material inflation, which we think could be in excess of 4%.
Is going to be driven largely by woods, that's our largest commodity basket the largest volume of material that we buy and that's where we've seen the most rapid inflation recently and we think that's going to continue through 2021.
You're right in pointing out that we have talked about our efforts to move our supply chain, where possible. The sourcing teams working constantly on projects to try to offset inflation wherever they can a lot of those strategic projects would involve.
Moving the supply chain qualifying the alternate or multiple suppliers on some cases identifying material substitution all of those efforts are ongoing the done of really good job recently of offsetting costs up until the fourth quarter of this year, they were able to to offset a lot of the inflation that we had seen of 2020.
But that inflationary headwind is increasing which is why we think it's going to be.
The net unfavorable to adhere of 2021 and the range of circuit of 4%. So we will continue to monitor that an update as we go.
Alright, Thanks, and then last one from me last year, we saw SG&A as of percent of sales increase a little bit just one of your thoughts on the on where that can check out for next year.
Yes, I say us here.
Yes, well first of all if you take a look at the SG&A increase that we saw in.
You can just sort of the fourth quarter, you had a fair amount of incentive compensation costs that were added and you also had some other non EBITDA expenses that impacted.
Our SG&A dude carve out the non EBITDA items. If you look at the balance probably two thirds of that call. It would be the incentive compensation and the balance would be the impact of of the 53rd week.
And then just general wage and benefit of inflation and head count investments of or making in the business.
If you look forward.
We will probably see a little bit of a return in of traveling entertainment expense certainly not too historical levels, we believe but they'll probably will be a little bit more travel as we start to get back onto the field an interface more directly with our customers.
And we're going to continue to make some investments in the business to approve of our capability around the product development and marketing and that's all part of the investment plan that we announced our North American investment plan to reinvest of $100 million into product development service quality down channel marketing over the next five years.
So all in all of their is going to be some investment in the business, but we're seeing a pretty healthy return of that investment in the growth and certainly in the the success of the pricing strategy that we've known as last year.
Thank you all of it there.
Alright, Thanks zone.
Okay, well, especially since this time I would like to turn the conference back over to Mister Hicks.
Thank you Jerry and thank you all for joining US today. We appreciate your interest and continued support this concludes our call operator, please provide the reply instructions.
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