Q4 2021 Aaon Inc Earnings Call
Welcome to the NN, Inc. Fourth quarter 2021 earnings conference call at this time all lines are in a listen only mode.
Later, we will conduct a question and answer session at that time. If you have a question you will be asked to press the star one on your Touchtone phone.
If you are listening to the live event via the web and would like to ask a question on the telephone. Please dial in using the instructions provided to you and then press star one.
As a reminder, this event is being recorded.
I would now like to turn the event over to our host Mr. Joseph Mondello Director of Investor Relations. Mr. Mondello. Please go ahead.
Thank you Andrew Good afternoon, everyone. A press release announcing our fourth quarter financial results was issued after the market close today and can be found on our corporate website.
Oh and dotcom.
On the call with me today are Gary fields, President and CEO , and Rebecca Thompson, CFO and treasurer.
Just kind of begin with our customary forward looking disclaimer.
That extent.
The extent any statement president presented herein deals with information that is not.
Historical including the outlook for the remainder of the year such statement is necessarily forward looking and made pursuant to the safe Harbor provisions of the Securities Litigation Reform Act of 1095, The Securities Act of $19 33, and the Securities and Exchange Act of $19 34, each as amended as such it is subject to the.
The occurrence of many events outside <unk> control that could cause <unk> results to differ materially from from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K , and our quarterly report on Form 10-Q .
With that I'll turn over the call to Rebecca.
Thank you Joe.
I'd like to begin by discussing the comparative results of the three months ended December 31, 2021 versus December 31 2020.
Net sales were up 16, 8% to $136 3 million from $116 7 million net sales for the quarter were primarily due to price increases which contributed approximately 10%.
Acquisition of basic solutions, which closed on December 10th contributed about 3%.
Our gross profit decreased 21, 7% to $26 5 million from $33 9 million as a percentage of sales gross profit was 19, 5% in the quarter just ended compared to 29, 1% in 2020. The decline in gross profit was mainly related to supply chain issues that resulted in <unk>.
<unk> constraints and operational inefficiencies.
Another contributing factor with material cost and wages rising quicker than our price increases could counteract.
Selling general and administrative expenses increased 44, 4% to $21 1 million from $14 6 million in 2020.
Excluding $4 4 million of acquisition related transaction fees SG&A expenses increased year over year 14, 4%.
As a percent of sales SG&A. Excluding these fees decreased to 12, 3% of total sales compared to $12 five in the same period in 2020.
SG&A as a percent of sales decrease mainly due to lower profit sharing expenses, which was a result of our lower pre tax earnings compared to the year ago period.
We had an income tax benefit of <unk> 8 million due to our lower earnings in the quarter and our excess tax benefit from stock awards of one 6 million.
Adjusted net income, but to the non-GAAP measure decreased 35, 5% to $9 5 million or 7% of sales compared to $14 8 million or 12, 7% of sales in the prior year period.
Adjusted diluted earnings per share, which is a non-GAAP measure decreased 35, 7% to <unk> 18 per share from 28 cents per share.
Now for the comparative results for the year ended December 31, 2021 versus December 31 2020.
Net sales in 2021 were up three 9% to $534 5 million from $514 6 million in 2020.
Net sales were permanently due net sales were up primarily due to price increases which contributed approximately 5% for the year.
Volumes were down due to our plant shutdown in January for planned maintenance weather related shut down in February and various supply chain issues in the later half of the year the acquisition of basic solutions contributed about 1%.
Our gross profit decreased 11, 6% to $137 8 million from $155 8 million.
As a percentage of sales gross profit was $25 eight in the year just ended compared to 33% in 2020.
Gross profit was down because of a handful of factors.
Production constraints due to supply chain issues and material inflation being the primary too.
Selling general and administrative expenses increased 13, 4% to six to $8 6 million from $60 5 million in 2020.
Excluding $4 4 million of acquisition related transaction fees SG&A expenses increased year over year six 1%.
As a percentage of sales SG&A, excluding these fees increased to 12% of total sales compared to $11 eight in 2020.
Our effective tax rate decreased to 15, 1% from 22, 5%. The decrease as a result of a lower income tax rate in Oklahoma, along with increased excess tax benefit from stock awards compared to 2020.
Adjusted net income in 2021 decreased 17, 1% to $62 1 million or 11, 6% of sales compared to $74 9 million or 14, 6% of sales in 2020.
Adjusted diluted earnings per share decreased by 17, 7% to $1 16 per share from $1 41 per share.
Now looking at the balance sheet, you'll see that we had a working capital balance of $131 3 million versus $161 2 million at December 31, 2020.
Unrestricted cash totaled $2 9 million at December 31, 2021, and total debt was $40 million.
During the quarter, we used $103 $4 million of cash to finance the acquisition of basic solutions, and we drew down $40 million on our revolving line of credit to finance working capital needs.
The first quarter, we will be closing on the real estate related to the basic sale, which will cost us $22 million early in the year working capital will also be a use of cash before reversing in the second half of the year.
I anticipate net debt will come up will climb a little more at the end of the first quarter before beginning to come back down.
Our current ratio is approximately two five to one.
Capital expenditures in 2021 were $55 4 million down 18, 3% from a year ago.
Capital investments were down and were less than we expected at the beginning of the year due primarily to delay projects, which will resolve the supply chain issues and other economic factors.
We have not slowed our growth related investments at all in fact, we continue to be aggressive with our investment planning to help facilitate the robust organic growth we anticipate over the next several years.
In 2022, we expect capital expenditures to be $100 4 million.
The company had stock repurchases of $22 5 million during the year ended December 31 2021.
Shareholders' equity per diluted share is $8 68 at December 31, 2021, compared to $6 61 at December 31 2020.
I'd now like to turn the call over to our CEO and President Gary fields.
Good afternoon.
In the fourth quarter, there were three major positive achievements in the quarter.
Backlog continued to grow at a significant rate reach.
Reaching a new record level.
We closed on the acquisition of basic solutions, which was the company's first acquisition of substantial size in 20 years.
And in October we hosted our first sales of that in several years with our independent sales channel, where we introduced a package of new products. We think are going to be game changers.
Obviously, the fourth quarter financial results were disappointing.
Sales gross margin operating margin earnings were all weaker than we were even thinking when we last spoke to you in November .
However, I believe we are going to emerge from this a much stronger company, which is going to help facilitate a robust growth trajectory.
Speaking of the growth trajectory, we believe our long term outlook remains intact. So those who have listened to US recently, we have aspirational goals which include growing.
Revenue organically in the double digits per year over the next several years.
Nothing has happened over the last nine months, leading us to believe that these goals are unachievable.
Zach, whereas optimistic on the outlook as we've ever been.
Backlog reflects that we are beginning to.
Pull out of a lot of the issues that were constraining our ability to produce.
So, let's take a little deeper dive look into the quarter and then we'll talk about the outlook there.
The environment, our industry has been facing over the last 12 months is one of the most challenging ever if not the most challenging in the last 30 years.
<unk> rapid supply chain issues made managing operations extremely tough.
This is all while trying to manage the challenges of the pandemic.
Inflation pressures continued through fourth quarter.
We've been very disciplined with their pricing and are still confident we will fully recoup gross margins of 30% plus level.
We need to work faster through the lower margin backlog start producing product priced at our most recent price increases.
Fortunately supply chain issues.
<unk> this from happening in the fourth quarter.
The fourth quarter was the most challenging quarter of the year when it came to supply chain.
Tober November were particularly tough months.
These supply chain issues led to less than optimal production rates, causing operational inefficiencies unabsorbed fixed costs and an unfavorable mix of products that were priced at lower pricing than our recent price increases.
So the supply chain issues were a huge constraint production, but also exacerbated deflationary effects.
Now there were some positives in the quarter.
We're looking forward.
First at this point in time, we believe October and November were the worst we will see regarding supply chain issues.
December showed improvement January and now February were even better.
Margin profile of our backlog as quickly improving.
Lastly, I said earlier, we're going to emerge from this a stronger company with supply chain issues have forced us to significantly increase the number of multi source components.
Also mentioned earlier that this has been one of the most challenging environments. Our industry has faced in 30 plus years.
<unk> challenges like this almost always leads to a stronger operation and a more capable management team. If you have the right people I'm very confident we have the right people managing this company.
We feel we have gone through.
What we have gone through is going to make us a much stronger company to help us execute our growth strategy more effectively.
Now, let's look back on some of those achievements a little deeper.
Backlog.
At the end of 'twenty, one total backlog was up 250% from a year ago.
The 43% from the end of Q.
Excluding basics backlog organic backlog was up 201% year over year and 23% quarter over quarter.
Organic bookings in the quarter were up year over year, 67%.
The growth rate is consistent to what we saw in the previous two quarters of strong demand continued through the end of the year.
Order trends remained strong through the first two months of 'twenty, two including both legacy and basics.
This poor performance is remarkable, especially when compared to the industry, which is not growing nearly as fast. It tells us we have the right strategy and we're executing strategy includes focusing on customized high performance energy efficient HVAC equipment to take advantage of secular trends like de carbonization and indoor air quality.
This has been the foundation of Aon for 30 years, while much of our market is just starting to talk about manufacturing more capable equipment to meet these new demands we've mastered it over decades.
Lower cost of ownership selling a high quality product at a minimal price premium that has the longest youthful age on the market most energy efficient easiest to service and maintain.
Continuous improvement of productivity, our manufacturing operations are highly automated.
We've always had a culture of maximizing productivity, we still see many areas of improvement, though and we'll continue to focus on this.
We've been strengthening our sales channel even more we have the strongest sales channel in the industry and we're assisting our channel partners more now than ever to various ways to help improve their success.
We believe that what we're doing to support our channel partners is leading to market share gains.
Innovation and new products I'll touch on that a little more here in a minute, but leaving and innovation this quarter.
We are focused on parts and.
And service parts sales were a record for us in 'twenty, one growing 26, 3%.
Total revenue parts made up 8%, which was the highest percent of total sales in company history.
So overall the growth in backlog reassert reassures us that we have the right strategy in place.
So we measure the size of our total addressable market being 30 billion, which is about 50 times the size of our company. So we think theres a lot more potential going forward.
So in our end markets, our strength is broad based but data center.
Warehouse related to ecommerce growth facilities education manufacturing health care and retail were all strong points for us.
Hotels are weaker.
Replacement drove a lot of demand in 'twenty, one, but new construction market is beginning to pick up.
Leading indicators continue to point to a recovery in construction following the slow 'twenty one.
Dodge Index nonresidential construction starts all of these indicators are pointing positively.
So the big positive in the quarter was the backlog and new orders now, let's talk about basic solutions acquisition for us.
That was our big achievement.
First acquisition of substantial size in 20 years historically.
Not been acquisitive at all.
This was a real special deal for US, we think it will generate accelerated growth for aon and very attractive returns for our <unk>.
Shareholders.
The two and a half months.
Owned basics have been extremely pleasing.
Always.
Through all the negotiations there were many metrics that basics had projections on.
Some of which look pretty aspirational.
I'm here to tell you. They hit every one of them right on the Bull's eye of the target.
I couldnt be more pleased.
<unk>.
Collaboration with the basics group.
Bringing some opportunities for expanded opportunities that.
We always knew where possible if we have that kind of a partner they're materializing very quickly.
Myself and Dave Benson made a trip recently up into the upper Midwest to visit with some sales channel partners and some of their Oh.
End user clients.
And came away from there with some outstanding opportunities that hopefully when we talk to you next time, we'll be able to tell you a little about capitalizing on those opportunities.
In October we hosted our sales meeting in Dallas, We had of around 600 sales channel partners there.
One of the things we did was we introduced a new state of the art showroom treasurer.
No other manufacturers have some showroom trailers, but none of them have anything at all like this.
This thing is just outrageously.
Wonderful.
Has.
It's a class eight truck, which is great big Kenworth trucks on a 53 foot trailer, but it expands on both sides to make 1000 square foot showroom. When it's parked does this all with hydraulics is very easy to do.
It has.
Touch screen, that's in three segments total linked up what I believe so about 26 feet.
You can show three different.
Films at the same time, our one film across the whole thing I mean, it's just wonderful we've got virtual reality in there where we are.
But the headsets on people in and show them how to build a unit a fly them through the laboratory fly them through the manufacturing plant and the process. There's just so many things that are just wonderful for people to see.
Got quite a bit of equipment in there we've got controls that we build in our Clarksville facility there.
And its booked up very nicely been traveling across the country since October when we took possession of it.
<unk> continues to do that.
Views on it from a marketing standpoint, or just wonderful.
Some game changing products that we introduced where we.
We had told you earlier about a proper configuration water source heat pump. So we had a water source heat pump.
The model labor these eco fit because it is.
Very very efficient.
The new model is called pro fit because it fits in a professional manner exactly replacing the majority of the units that are out there.
So it's very backwardly compatible reception from the sales channel partners has been great.
Then.
We've talked a lot about de carbonization. So currently about 64% of all rooftop units manufactured in the world have gas heat.
We believe that that trend will begin to reverse itself and that these units will become electric heat most efficient way to do that in a packaged rooftop units in a common application is air source heat pumps that we've manufactured these for a very long time, but what we didn't have the capability of until recently.
Was low ambient or cold climate capable units.
We were kind of limited to.
Around 25% or 30 degrees Fahrenheit being the low end of where the unit was affected we've moved that down beyond zero and have very nice deficiencies zero degrees Fahrenheit, we're working towards lower than that even.
So.
Let's talk about our marketing efforts.
What we're doing so historically has had.
It has not been.
All that focused on the marketing aspects they've they've relied on the sales channel partners too.
Have technical expertise to to make the sale.
This is not changing in that regard, but we're giving them more support tools all of that.
That trailer I talked about his considerable we're building a new customer experience center.
Going to be completed by the end of the year that we'll have a lot of dynamic features to it to show people why our fan system is better than most.
Most of our peers fan systems, a lot of the energy efficiency things.
This new customer experience center will be connected to a coupled to the Norman <unk> innovation center, otherwise known as our laboratory.
So we're going to invest more in marketing so that we can know.
It really get the story of what we're doing out there on a or b.
<unk> base, we're not the niche player we used to be.
We are moving more main stream the order book supports that and I think it's time for us to.
Get our marketing in.
Accordance with that.
So capital investments, we continue to invest in the company. Rebecca stated, we've got a budget of $100 million $100 4 million almost double what we spent in 'twenty. One we intended to spend around 70 something million, but there was some.
Supply chain constraints I mean, some of the machinery, we buy comes from Europe Didnt get here in time.
It's coming in now, but it just didnt make it on the.
For 2021 sided calendar ledger.
We do have some carryover from last year.
But we continue to invest considerably as maintenance Capex is around 35 million. So the majority of it is growth related.
We continue to target organic sales growth in the double digits for the next several years and will continue to invest in capacity.
To help service that.
Those bookings.
So as you can tell we're very optimistic on the long term. Unfortunately, there's still some uncertainties in the near term.
Supply chain issues leaves eased some.
Still not back to normal visibility with this is still quite unclear. This is something we are constantly monitoring on a day to day basis.
Inflation continues to be a challenge.
Starting to see a little softer prices of steel, but most everything else is up substantially including components raw materials wages right.
We initiated four price increases since the beginning of 2021, including the latest on January one.
We also announced another price increase earlier today that will be effective on March 30 <unk>.
We will continue to be disciplined with price and expect our margins to fully recover. This is something we are constantly monitoring.
As you know, we don't provide earnings guidance, but I wanted to provide you with some information on how we're thinking about 'twenty two the following up though would pertain to the legacy business.
For January 'twenty, one to January 22, we initiated for our price increases across the board for accumulative, 21%.
In 2021, we only recognized about 5% of that the rest of it's in the backlog. So it wasn't realized in 'twenty, one, but it is being realized now so that that will have us at double digits in 'twenty two.
The increase.
This increase that we announced today will be a small benefit to 'twenty two really catches towards the end of the year, mostly it'll be a 2023 factor.
Unit volumes were down, 2% and 21, including a 6% reduction in our core rooftop units so depending on construction constraints, which is a question mark.
We should have a reasonably easy comp as far as volumes of the backlog is up big So we should see recovery in volume, particularly in the second half of the year.
There is no structural change in our gross margins, we're confident our gross margins will recover to our target of 30% plus question. This time at this point in time, we estimate this will be sometime in the second half of the year.
SG&A will be up this year with earnings expected up our profit sharing expense will be up higher head count wages will be the biggest driver, but also things like depreciation and investments in technology will be driving this.
Most years, we'd expect a little leverage on SG&A, but in this environment, we would expect SG&A will be up similar to revenue growth.
So for all the info pertaining to the legacy info business legs.
Legacy Aon business as far as basics goes in 2021, the business generated $80 7 million of revenue and 10 million of EBITA basics is on somewhat similar footing as legacy ion in the backlog and the orders are up significantly the supply chain issues have led to production constraints overall, though.
So they're doing a great job of working through the issues for 2022, we estimate basics will generate $95 million to $100 million of revenue and EBITDA margins will be up year over year.
Based on the backlog, though we expect profits will be weighted towards the second half of the year.
So overall, we have some macro issues, we're dealing with in the near term, but the long term outlook outlook is very positive.
Before I take any questions I'd like to thank all of our employees 2021 was a difficult period with all the challenges we face, including the issues related to the pandemic.
I'd also like to thank our channel partners, we value your business tremendously and will continue to support you.
Lastly, I just want to mentioned, we'll be attending the Jpmorgan Industrial conference in New York City on March 17th and the Sidoti Virtual conference on March 'twenty three 'twenty four.
I hope to see some of you at those events.
So now I'll open it up to questions.
Thank you the floor is now open for questions and answers if you would like to ask a question and have already Donaldson simply press star one on your telephone keypad.
If you are only listening to the live it.
Event via the web and would like to ask a question on the telephone please dial in using the instructions provided and then press star one.
And our first question is from Brent Thielman of DNA Davidson Brent go ahead, when you're ready.
Thank you good afternoon.
Yes.
Yeah, maybe maybe first it sounds like you've transitioned here into a period sort of December through February that hasn't seen a level of disruption you've seen before maybe maybe you could just help us out with what's what's improved in particular in the supply chain. That's allowed you to pick up production rates and.
We're confident youre getting from suppliers. They can kind of meet the requirements mean here in the short run.
Yeah. Good question Brett.
No.
Yeah.
While we didn't have absenteeism of any magnitude on our plant floors Q4, due to Corona virus some of our suppliers did and some of it was in late Q3, when they were manufacturing components. Some things for us. So we really saw a huge.
Choke point in October .
Began to improve a little bit November and we were able to get some additional suppliers in place for some of these items.
Those were fully in place and.
December a good bit of Janney.
January almost uninterrupted at all.
Have you already to this point well today's the last day of the month.
Interrupted we do see some.
With some electronic components coming up but there were managing real well around those.
We got some equipment in place that helps them select alternative.
Electronic components to put on those boards and so they've been very nimble and very responsive. So like I say things have improved a lot.
I don't know what this situation in Ukraine, who's going to do.
I was reading earlier today that.
Neon and.
Palladium, both of which were used in chip manufacturing.
Cranes, a huge supplier of those.
And so they're there.
Just the way this article talk electronic situation could get a little more challenging going forward, but right now I think we've seen a lot of improvements where we're in a much much better place.
Okay and would you expect to be able to run I mean provided all of that holds.
Are you able to run off kind of all of the remaining lower priced backlog here in the first quarter or is there going to be some carryover.
Second quarter. So so in December .
Well, let's just kind of dissect October November and December .
October was built completely on backlog that was booked prior to the September one price increase of 20.
'twenty one.
November was the same way December we began to see a little bit of that trickle onto the plant floor in January 76% of what we built had the September one price increase which was 5%. So we had a 4% if you do that math that'd be 4% better Maher.
<unk> profile related to the price increase.
February of course, we're just finishing up today, but the expectation was it would be built almost 100% on that 5% higher priced.
<unk> backlog, so I think starting the year like I say, we're just nearly got all better quality backlog and then the 8% that went into effect January one with the way things are flowing I don't expect to reach that until.
Probably the end of next quarter.
So we will have.
At least 4% to 5% better margin profile capability related to that price increase from September one.
And most of the pricing we've got in place for this quarter and beginning next quarter.
Already captured so I look for good margin improvement related to that Oh higher priced.
Backlog, what we're using now but in addition to that.
We're producing at a rate that's the highest rates that we've ever produced.
In both.
The.
Factory and the Texas factory.
I get a daily report on that and it's the highest numbers on a daily average that we've ever achieved.
And this is before we factor in the higher price. So it's volume improvement. So we're getting materials out there were getting units built so we're going to perform.
Good bit better Q1, I think you're going to be very pleased with what I'm seeing so far in Q1, unless something drastic happens related to the UK.
Ukraine situation next month.
We're good going forward, we're not seeing anything significant just little niche here and there but.
We're we're poised to do quite well.
Basics is kind of dealing with the same situations most of their things are flowing much better now.
But there is theres just not clarity on what I was going to happen to us.
Longer term.
Yep understood.
Maybe last one for me I mean, the organic bookings obviously.
They're strong.
Yes.
I know one of the things you talked about it.
You've had more advantageous lead times, perhaps versus some of your competition I don't know if that still stands.
This is a function of just better confidence Gary maybe among customers and the marketing efforts, maybe if you could just dissect some of those things that are driving such a substantial gain here.
Sure.
Well our lead times went out just a little bit.
We still have an advantageous position with that.
But I think the improvements we've made in the sales channel to support we've given them the tools that we've given them or helping them become more effective.
When I.
Started here nearly six years ago now running this place we.
We had regions that were very strong, but they were only a couple of them. We had multiple regions that were very weak relative to what the market capability was now the regions are fairly uniform and what they are.
Doing in meeting our expectations.
Very significantly the southeast, which should have always been a top performing region for <unk> because it fit our equipment profile. So well it was a horrible performing region.
Prior to be taken over and some of the sales channel adjustments I made there with different sales channel partners.
I have really shown merit.
They performed.
Just outstanding in 'twenty, one and beginning in 'twenty two.
So.
We have improved the sales channel that's brought more business.
Lead times are certainly advantageous.
Sure.
The utilization of indoor air quality measures that have always been a hallmark for E. On are now more widely recognized throughout the market. So it's not just a specialty vertical that's looking to have that like it was at one point in time now it's more commonplace for people to ask for these things.
Very good I'll get back in line. Thank you for taking the question.
Thank you.
Hey, So just a reminder, if you would like to ask a question and have already dialed in simply press star one on your telephone keypad. If you were only listening to the live event via the web and would like to ask a question on the telephone please dial in using the.
Got it and then press star one.
I will now open up our next question from Julio Romero from Sidoti <unk> Company LLC.
When you're ready go ahead.
Great. Thanks, Good afternoon, Gary and Rebecca.
Just staying on the the order trends the organic orders still very strong.
Above historical trends, but I think it's down a.
A bit sequentially up from $177 million by my math, so slightly down sequentially from the last two quarters can you just talk about how orders are trending and do you see organic order trends.
Accelerating decelerating or a steady going forward.
Well first off since that price increase was January 1st we always expect that there was some pull forward and so we expect somewhere around 40 to 50 days thereafter to be a bit softer.
I've been very pleasantly surprised.
Oh it is.
Outstanding what's going on with bookings just outstanding.
I would have to say that it's every bit as strong as it's been we really began this strength.
Late first quarter, a year ago, and one of the things that I'm looking at is trailing 12 months bookings.
And the trailing 12 months bookings continues to grow.
<unk> to grow so that's why I say it.
Here I'm trying to pull it up right now so when I when I look at trailing 12 months.
Hum.
I'm, just really pleased with what I'm, saying is it continues to go up.
Got it makes sense and on that point about the price increases.
Pete do you want to announce today effective March 31.
Yes can you talk about how much of a price increase that was and is that across the board for your products.
7% across the board.
Got it Thats helpful.
Just switching gears to labor.
You talked about increased wages, new hiring initiatives.
Maybe just touch on our head count at Tulsa, and Longview are compared to last quarter.
Yeah, Let me see if I can find every Tuesday I get.
Head count so let's see here, let me go back a few days.
I'll get an updated head count tomorrow.
Got.
In general I'd say versus last quarter were up slightly.
<unk>.
The long view and up a little bit more here.
Yes, right here.
Let me look here alright so.
Ups.
Well they give me a prior 12 months changed so Oklahoma is up 11% and.
Texas is up 17% over a year ago now let me go back here that's on to 'twenty. Two so let me let me look at those headcounts real quick.
Right I got that.
Those and let me go back here to December 30.
Yes, we were up 7% and 19% at that point in time versus a year before then but then.
Absolute head count, let's see here.
1955 versus we're up about 25 people in Oklahoma over last quarter.
And.
We are up.
30 people in Longview.
Both of them have grown head count.
Our turnover ratio in Oklahoma has gone down to just a wonderful wonderful number and so a lot of the things that.
Our HR department with a new leadership put in place working with some of the individuals in our plant management.
Those were all proven concepts well that director of manufacturing that was in.
Home has it helped put all that together January 1st he became the executive Vice President and lumpy. So we carried some of those things down there, where we had been using them a little bit but not quite as thoroughly.
So he is taking those down there also some of our HR team from Oklahoma decided they wanted to live in Texas.
And so they've gone down there. So we have a very uniform approach.
That's the results of that Julio we're growing both head counts and right now our head count is not a constraining factor it's it remains materials.
That's gotten better as well so like I say, we're just doing a lot better now.
Yeah.
Got it I appreciate the color good to hear about the retention rate improving.
Just a quick clarification on the.
Gross margin commentary.
Gary did you did you say you expect gross margin challenges in the first half, but should see a recovery.
30% in the second half.
Yeah, I'm not going to call them challenges so much but you know a third 30% is is dead Center bullseye.
We gave of 28% to 32% range I think we're going to be within the range for the entire year. So far what I've seen every quarter is going to be in the range, but it's going to be strengthening throughout the year so that.
On year end I expect to be 30% plus on the the the total year, but quarter by quarter I look forward to strengthen each quarter and a lot of this is due to a price increase coming on board.
Offsetting more.
They believed the.
Pricing pressures some price cost ratios are going to be better but in addition to that.
We've really got the production side of the business streamline very well.
Competent management that's now.
Veteran at this.
I, just see improving production each day that goes by.
Reduction seems to grow just a bit more so I am very pleased with how we'll be absorbing fixed cost better.
Yes.
Great. Thanks, very much for taking the questions and best of luck in 'twenty two.
Thank you Julia.
Right. So that appears to be all the questions. They have for today's presenters do you have any final remarks.
I think we're all set for Andrea Thank you.
Perfect well. Thank you. So much. This concludes today's event you may now disconnect have a great day.
Alright, thank you.