JELD-WEN Holding Inc (JELD) 2021 Q4 法說會逐字稿

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the JELD-WEN Holding, Inc. Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) Thank you.

Chris Teachout, Director of Investor Relations, you may begin your conference.

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, which we will be referencing during this call. I'm joined today by Gary Michel, Chair, President and CEO; and John Linker, our CFO.

Before we begin, I would like to remind everyone that during this call, we will be making certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a variety of risks and uncertainties, including those set forth in our earnings release and provided in our Forms 10-K and 10-Q filed with the SEC. JELD-WEN does not undertake any duty to update forward-looking statements, including the guidance we are providing with respect to certain expectations for future results.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to their most directly comparable financial measure calculated under GAAP can be found in our earnings release and in the appendix to this presentation.

I would now like to turn the call over to Gary.

Thanks, Chris. Good morning, everyone, and thank you for joining us today.

Over the past few years, we have focused on deploying operational and commercial excellence initiatives as the strategic foundation to propel JELD-WEN's long-term growth strategy, leveraging our premier performance culture as a competitive advantage. Those efforts paid off for us in 2021 as we delivered an excellent year of financial performance with record revenue and core revenue growth.

End markets were strong, driving robust customer demand for our world-class brands; our operations were healthy, allowing us to maintain market-leading lead time; and we successfully navigated a challenging year of sharply accelerating inflation. And as we will discuss in a few minutes, we made significant progress on growth initiatives that we expect will position us for a breakout year of financial performance in 2022.

I want to thank our global associates and our channel and supply chain partners for their unwavering dedication to serving customers with the highest quality products and delivering this record-setting performance in a challenging environment.

To summarize our 2021 performance, net revenues increased 12.7%, driven by a 10% increase in core revenue, with all segments contributing to core revenue growth. Our adjusted EBITDA grew 4.2%, driven by favorable price realization and positive volume mix, which was partially offset by headwinds from inflation. We successfully offset material and freight inflation with pricing actions. However, the net impact compressed our margin rate.

We head into this fiscal year knowing that the foundation of our operations is strong, our commercial excellence initiatives are driving business and the company is primed for sustainable growth and margin expansion, which I will touch on shortly.

Please turn to Page 4 as I share a few highlights from the fourth quarter. In Q4, demand remains strong in each of our end markets, reinforcing the strength in new housing starts and replace and remodel or R&R markets. Consolidated core revenue growth accelerated to 12% with a positive core growth in each operating segment led by North America. This marked our sixth consecutive quarter of consolidated core revenue growth.

Adjusted EBITDA increased 4% to $120.1 million, driven by positive volume and productivity actions. We also progressed our capital deployment initiatives, repurchasing $45.7 million of our stock in the fourth quarter, bringing the full year total to nearly $325 million or approximately 11.5% of shares outstanding.

In North America, core revenue grew 15% from sequentially improved volume throughput and pricing-related actions. Quarter-end backlog in North America increased sequentially and year-over-year with strong order rates, book-to-bill and market-leading lead time for the majority of our product categories.

We made investments to attract and retain labor to meet strong customer demand while ensuring more long-term stability in a tight labor market. These investments, combined with our productivity initiative, drove an approximate 8% sequential increase in average shipments per day compared to the third quarter, while on a year-over-year basis, throughput accelerated as the quarter progressed. Our teams also delivered cost controls and pricing-related actions to mitigate inflation.

In Europe, core revenue grew 10%, a significant acceleration driven by sequential improvements in price realization. And in Australasia, core revenue grew 6%, and adjusted EBITDA margin was the highest of all segments at 14.7%, improving 100 basis points.

In Australia, we are capitalizing on record levels of new housing demand, although volume/mix is being tempered slightly by supply chain and builder labor constraints that have extended build lead times by more than 50%, which we expect to moderate this year.

Please turn to Page 5. We really like the setup for 2022 as all segments execute plan to accelerate top line growth through new customer-centric innovation launches, capacity expansion, throughput improvement and channel initiatives.

Across global operations, including our 14-model value stream sites, associates are focused on the rigorous deployment of our business operating system, the JELD-WEN Excellence Model, or JEM, which is a competitive advantage, enabling us to increase throughput, maintain market-leading lead times and reduce per-unit cost.

The results are greater customer satisfaction, share gain and margin expansion for JELD-WEN. Through the work done at our 14 model transformation sites, we've reduced labor requirements by an average of 25% and unlocked approximately $45 million of incremental capacity.

The benefits from these transformation efforts extend beyond throughput capacity and lower labor requirements. Of these sites that have started their transformation, associate engagement is 5x higher than at facilities that have yet to begin. This is incredibly powerful because it impacts every factor that influences our transformation, including reducing associate turnover. We expect to accelerate capacity for site transformations in the coming year, including deploying 3x the number of rapid improvement events across our global operations.

In Europe, we plan to drive growth through increased market penetration with existing products, expanding in underserved geographies and launching new and innovative products across the region. This year, for example, we're planning to bring a new line of technical doors to the U.K. market that is already a part of our portfolio in other parts of Europe, which we expect will be a meaningful contributor to growth.

In Australasia, we've developed what we believe is an industry-leading lineup of ENERGY STAR-rated products for the Australian market as the country prepares to roll out energy efficiency standards and ENERGY STAR ratings this year. We expect our suite of energy-efficient products will contribute growth and be accretive to margins.

And in North America, we have several product lines that we expect to contribute meaningful growth with accretive margins. We're already seeing significant interest from developers up and down the East Coast from our recently opened VPI manufacturing facility in Statesville, North Carolina, which, at full utilization, doubles our capacity to serve multifamily and commercial customers.

Our exterior fiberglass doors are poised for growth as we further broadened our industry-leading style options, innovated to make our fiber glass doors even more wood-like in appearance, brought value to our builder partners by creating integrated door system and added capacity needed to satisfy this increased demand.

And this year, we will launch a full suite of our Auraline composite windows and patio doors that not only combine a wood-like appearance with the durability and thermal benefits of vinyl, but do so at an attractive price point and with more visible glass than competing options. The Auraline products also support consumers' desire for more sustainable material options and help deliver on our commitment to reduce our environmental footprint.

Our global operations are positioned to deliver increased productivity, and we expect to deliver our unique growth drivers to accelerate performance in 2022 and beyond, giving us confidence in our 2025 revenue and margin targets.

Finally, before I hand it over to John, I want to highlight the measurable progress we're making in building a values-based, premier performing culture. In 2021, we continued to advance our ESG strategy, including marked increases in employee engagement scores, diversity measures and overall safety metrics.

This past quarter, our team in the U.K. was honored for its safety innovation when it received the prestigious British Woodworking Federation Health & Safety Award. As we begin 2022, I want to emphasize that our focus on the safety and well-being of our 25,000 global associates remain at the forefront of our decision-making in all that we do.

Now I'll hand it over to John to give you more detail on the financials.

Thanks, Gary, and good morning, everyone.

I'll start on Page 7. Fourth quarter net revenue increased 11.8% to $1.3 billion, driven by a sequential improvement in both pricing and volume/mix. This is our sixth consecutive quarter of core revenue growth. Adjusted EBITDA improved 4.0% to $120.1 million, while adjusted EBITDA margin compressed due to the impact of inflation. EPS and adjusted EPS increased 7% to $0.45 and $0.48, respectively.

Relative to the outlook we provided on our last call, improved throughput and price realization drove revenue growth that exceeded our revenue outlook range, while sharply higher-than-anticipated inflation held EBITDA at the low end of our outlook range.

Full year net revenue was $4.8 billion, an increase of 12.7% overall and 10% on a core basis, excluding the impact of foreign exchange. This core growth rate exceeded the target range of 6% to 8% annualized growth established at our Investor Day in May of last year. With a healthy demand backdrop and a pipeline full of innovation, we are well positioned to continue this momentum into 2022 with above-market revenue growth.

Full year adjusted EBITDA improved 4.2% to $465.1 million. EPS increased 91% to $1.72, and adjusted EPS increased 15% to $1.80. By all accounts, 2021 was an extraordinary year as our team overcame unexpected headwinds to deliver for our channel partners and customers. The commitment of our team members enabled us to deliver these strong financial results with revenue and earnings growth against a challenging operating environment.

Page 8 provides detail of our revenue drivers. I'll highlight the record pricing realization of 11% in the quarter and 7% on a year-to-date basis. Fourth quarter pricing improved sequentially as we realized the benefit of additional rounds of price actions to offset raw material and freight inflation.

North America led the way with 14% pricing in the quarter, Europe with 10% and Australasia with 2%. The volume/mix increased 1% in the quarter as our throughput improved sequentially from the labor availability headwinds that we faced in the third quarter.

Page 9 helps dimensionalize the pace and magnitude of inflation in the year. For the full year, we successfully offset material and freight inflation with price, which required multiple rounds of increases to stay ahead of this curve. Over 75% of the inflation hit in the second half of the year, with over 40% in the fourth quarter alone.

Looking into 2022, we are well positioned to continue covering inflation with price in dollar terms. Similar to the fourth quarter, early in 2022, we expect the net price/cost impact to be dilutive to profit margin rate before transitioning to a margin rate tailwind in the second half of the year.

Please move to Page 10 where I'll highlight the segment performance focusing on the fourth quarter. Net revenue in North America increased 15.1%, driven by pricing and improved volume/mix. The pace of growth accelerated as the quarter progressed with North America exiting December with revenue growth above 20% and a book-to-bill ratio of approximately 1.07. Continued housing demand and strong orders set us up well for growth in 2022.

North America adjusted EBITDA margin declined 190 basis points due to the impact of sharply higher inflation. Despite the increase, North America offset material and freight inflation with price in dollar terms, but it was dilutive to margin rate. Partially offsetting this, volume, mix and manufacturing efficiencies were all positive margin drivers in the quarter.

Europe revenue increased 7.7% overall and 10% excluding the impact of foreign exchange. Strong pricing drove the revenue growth, while volume/mix was flat. Our order books remain healthy. However, our volume throughput was limited by labor availability headwinds related to the November-December COVID surge across Europe.

Europe adjusted EBITDA declined 370 basis points, which was below the expectation we set in our last call. We achieved the pricing that we expected. However, inflation was sharply higher than planned, particularly in certain raw materials and utilities. Additionally, channel mix did not improve as expected. We continue to see greater activity in the lower-margin retail channel as compared to our higher-margin, project-oriented business.

Australasia revenue in the quarter increased 5.9% overall and 6% in local currency versus prior year. Volume benefited from the lifting of COVID operating restrictions against the healthy market backdrop. Pricing improved year-over-year and was flat sequentially. We have implemented additional price actions to mitigate inflation pressures in 2022.

Australasia adjusted EBITDA margin expanded 100 basis points in the quarter as positive volume, price and manufacturing efficiencies were partially offset by inflation. For the full year, Australasia expanded EBITDA margins by 10 basis points.

Please turn to Page 11. Adjusted operating cash flow totaled $288.4 million for 2021, a decrease of $84.7 million. The decrease in cash flow from operations was primarily due to higher cash usage for working capital from the impact of inflation on our raw material purchases as well as inventory investments to support our customers and position us for growth in 2022. We expect cash flow conversion to improve in 2022 as the impact of these working capital investments convert to revenue. Adjusted free cash flow declined $87.5 million to $188.7 million, while capital expenditures remained relatively unchanged compared to prior year.

The balance sheet and liquidity remain in fantastic shape. Our cash balance sits at $395.6 million, which is a healthy position even after using approximately $325 million in cash to repurchase our shares in 2021. Liquidity sat at $837.8 million at the end of the fourth quarter. And net debt leverage was 2.8x, which gives us the operating flexibility to invest in initiatives that will drive future revenue and earnings growth.

Net leverage stepped up slightly this year, above our target range of 2 to 2.5x due to the compelling opportunity to repurchase our shares at an attractive valuation. We remain focused on deploying our cash in a disciplined, returns-focused manner and compounding the returns on that cash over time. Looking to '22, we are well positioned for growth and margin expansion.

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

Thank you, John.

Please turn to Page 13. Let me share our outlook for market growth. We expect housing fundamentals to remain favorable in each of our end markets in 2022, driving increased demand for our products.

In North America, we expect residential new construction and R&R activity to remain robust, driven by continued strong homeownership trends and consumers' desire to improve their homes. Fundamentals remain supportive, including historically low interest rates, healthy consumer discretionary budgets and record home equity accumulation. We also expect labor availability and supply chains to improve throughout the year, allowing build times to normalize, helping to alleviate pressures on home affordability.

In Europe, we expect housing activity to remain positive, but market growth will moderate toward pre-pandemic levels in the low single digits. Economic growth remains positive and should accelerate modestly as countries continue to recover from the impact of COVID-19. We believe this will drive positive activity and will support growth in each of our end markets and channels.

And in Australasia, activity should remain robust as the market continues its recovery from a multiyear housing recession. Record housing starts and the overall strength in housing demand due to government program incentives, low interest rates and solid economic growth are a positive backdrop for performance this year. Given the recent strength in housing starts, we expect some moderation of growth from these peak levels toward year-end.

In summary, we expect that favorable housing fundamentals in each of our regions, combined with our unique growth drivers, will accelerate above-market growth in 2022.

Please turn to Page 14. We expect total consolidated revenue growth between 7% and 10% for 2022, which includes a small headwind from foreign exchange. This revenue outlook is supported by core growth from all 3 segments with North America delivering the highest growth rate.

Additionally, we expect to deliver full year adjusted EBITDA in the range of $520 million to $565 million. Our margin improvement implied by this guidance is a result of volume growth, including accretive new product launches, our strong pipeline of productivity projects and the benefit of price increases already deployed to offset continued inflation. In addition, we expect our capital expenditures to range from $130 million to $150 million.

As we look ahead, we are laser-focused on delivering new market-leading product and service innovation and growth for our customers. We believe JELD-WEN's global footprint, multifaceted growth platform, world-class brand and premier performing culture, combined with a favorable housing backdrop, will deliver more organic growth, margin expansion and compounding cash flow.

Thank you for joining us this morning. John and I will now take your questions.

(Operator Instructions) Your first question comes from the line of John Lovallo from UBS.

The first one is maybe, Gary, can you get into some of the specific levers that you guys can pull in addition to pricing that could help hit that 2022 margin target? And should we expect both 1Q and 2Q margins to be down on a year-over-year basis? And maybe just along those same lines, is there any change in the cadence that you're expecting to hit the 2025 margin targets?

Thanks, John. And thanks for those questions, very, very good ones. Yes, let's talk about 2022. Obviously, we are seeing sequential improvement and price offsetting inflation. We actually kind of saw that number at parity in the fourth quarter, so accelerate third quarter to fourth quarter and into this year. We'll see that accelerate as the year goes on.

Really, what's driving our growth and our guidance here in 2022 are strong markets, for sure, the ability to get price to offset inflation and then some JELD-WEN-specific payouts for us on investments that we've made in growth, both for capacity expansion, for example, in margin-accretive businesses like our VPI multifamily business where we've just recently opened an East Coast facility, which has a potential to double our capacity for that business; continued expansion in our exterior door business, which has been growing significantly over the last couple of years and will continue to grow this year; as well as our introduction of our Auraline product this year, our composite window, patio door product, which again is also an accretive margin product and one that we're very, very excited to have out in the marketplace, and we expect significant growth there as well as margin expansion.

The other products that I talked about in the prepared remarks in Europe and Australasia are also margin accretive. So if you think about price offset -- more than offsetting inflation throughout the year, accelerating and those accretive growth initiatives and capacity expansion and margin-accretive products, we've got a real nice setup for 2022.

Okay, that's helpful. And then my second question, can you help with just the magnitude of the new price increases in 2022 and maybe how much carryover should we expect from 2021? And then are you seeing any shift in consumer preference towards lower-priced products given the amount of pricing put through?

There will be some carryover, John. This is John speaking. We did have some price increases that took effect in the late half of the year as we talked about sort of that third round of pricing actions. But I guess, what I'd say is, at this point, we've got visibility to the price that's embedded in our outlook. We either have already taken either the combination of carryover and/or new pricing actions that we've already implemented and communicated to the market. Those are all out there. And we, at this point, we don't need to take any additional actions to achieve the pricing that's embedded in our outlook.

But in terms of quantifying sort of carryover versus new price, I'm not sure we're going to parse that out of the guide. And I would say, no, on the sort of mix or trade down, we're definitely not seeing any notable sort of trade down in terms of lower-priced product. It really seems to be an environment where the manufacturers who have products, who have inventory and who can meet lead time, that seems to be sort of trumping the price of products at this point. Consumers and builders just need product, and we're seeing less sensitivity towards price.

Your next question comes from the line of Deepa Raghavan from Wells Fargo Securities.

A little bit big picture and more relevant to the interest rate backdrop currently. Are you factoring in any slowdown in the North American segment, either in the new build market or R&R activity in the second half? And any thoughts how you think the current backdrop with the interest rates being high could up with that influence?

Deepa, thank you for that question. What we're seeing is a very strong backdrop. You asked specifically about North America in residential and R&R, we're seeing a very strong backdrop. We just spent some time with customers over [IDS] and -- over the last several weeks, and what we're seeing is strong demand continuing in residential and construction, and the setup for the R&R market continues to be strong as well as there's low housing stocks across most of the country, high equity positions and strong consumer budgets right now. They continue to focus on upgrading and remodeling as well.

So we think there's a pretty strong backdrop there. We haven't seen any interest rate movements that are curtailing that at this point. Obviously, we'll look out for that. But I think on the builder side, what we're seeing is the backlog of new orders is certainly very sufficient to carry us through this year. And we're looking at and we see is labor constraints and supply chain constraints loosening up in that channel in order to have those new orders to turn into builds.

Okay. That's helpful. And just you mentioned labor constraints, so just -- and you also mentioned your sequential throughput has improved since bottoming in August. Can you talk through what your expectations are in 2022? Are you expecting that -- I mean you obviously are expecting labor constraints to improve, but how much of that could drive -- is it a couple of percentage points on the top? Or is it like 1 percentage point on the volume line that you would expect to add to 2022?

So in the last response, the labor constraints, I was mostly referring to there were residential construction and in the trades and their ability to complete there. So I think that's going to start working its way through. There's challenges there, obviously.

In our own operations, we saw the biggest challenges kind of last summer, and we started to work. We actually used our own JEM tools, our own JELD-WEN Excellence Model tools around problem solving and looking at how can we attract, develop or train people within our operations. And we saw sequential improvements in what we would call absenteeism or our ability to staff our facilities, and that's really what helped us drive that sequential throughput improvement through the remainder of last year and will continue into this year.

We watch things like the COVID-19, Omicron, which I think is mostly behind us at this point, but we're starting to continue that sequential throughput through the year. I don't know that my fidelity is good enough to put a 2% improvement or a number on that [depot] for you. But I will tell you that built into our guidance is our ability to continue to use the tools that we put out there to staff our facilities appropriately and to make sure that throughput continues to improve, which is a fundamental output of our JEM.

Okay. Sorry, just a quick clarification question for me. So you're assuming -- just to be clear, you have only taken prices that have been implemented so far in your guide, right, not any upcoming price increases?

Yes, there's prices that have been implemented, but haven't actually started being realized yet due to customer notification dates in certain markets. But in terms of us taking the actions and making communications, that's correct. We've taken the actions that we need to deliver the pricing in the full year. It's not all hitting the P&L yet in Q1.

Your next question comes from the line of Matthew Bouley from Barclays.

Wanted to ask about the site transformation efforts. That was helpful color you gave up top on sort of the benefit to capacity and labor productivity. I think I heard you say you plan to deploy 3x the number of events across your operations this year globally. Curious if you could put a little more color around that. How many more sites will you deploy this model to? And is there sort of a benchmark we can look to around annual capacity expansion that you're targeting from that program?

Thanks, Matt, for the question. Yes, we're really excited about the movement that we made. We've been talking about JEM for, well, 3.5 years or so. And after the first kind of deployment of basic problem solving tools and some basic tools across the entire enterprise, we obviously have seen some great benefits there.

In 2021, we identified our 14 model value streams, which really is an end-to-end look at portions of our business, and deployed what I guess you might even call something like JEM 2.0, a deeper look on a more narrow part of our business that actually makes a big difference in how we perform. And where you're seeing a lot of that work is around site design improvement in our facility that are showing up as competitively advantaged lead times in our business.

We've been able to talk about significant improvements in lead time last year in throughput compared to our competitors in the area of vinyl windows, for example, and in interior and exterior doors. So it's really given us capacity expansion without having to deploy a whole lot of capital in those areas.

So as we talk about taking our what we call rapid improvement events, some might call them [titan] events, we're deploying those across these 14 value streams at all points, right, from order entry all the way through cash collection, but a lot of focus is on our operations. We take the same type of work and deploy that to other operations, but the major focus is on these 14 value streams that have the biggest push.

Once we start to get the advantage out of that math, we'll take those 14 and obviously expand the further value streams across the company. We have targeted numbers for that. We know where we'll go next. But we really want to make sure that we make a difference, that it sticks and then what we learned in the 14 model value streams is applicable, hence, and we can look across the rest of our operations to take standard work to them.

Got it. No, that's really helpful color there, Gary. Second one on -- just back to the guide and revenue guidance for the year. So the 7% to 10% revenue growth in '22, I know you're not quantifying carryover price versus kind of any new price. But high level, is there a split between price and volume that you're assuming that you can speak to? And is there any cadence to the volume side through the 4 quarters that we should be aware of?

Sure. And the 7% to 10%, as Gary mentioned in the prepared remarks, that's all-in, including FX number. So there's about a 2% estimate right now for the headwinds that we have from FX. So on a core basis, we're implying that excluding FX, that the core revenue growth is more in the 9% to 11% range if you kind of strip out that 2% -- or 9% to 12% range if you strip out the FX. And I would say, certainly, pricing is more than half of that, given the amount of pricing that we're having to put through to offset inflation, but volume/mix is definitely strong and definitely positive.

In terms of the cadence, I think Q1 will be positive on the volume/mix, but it has risk of being flat just given what we're seeing in some of our markets right now, still on labor availability in Europe and Australia related to COVID. But we are certainly hopeful that, that gets behind us so we can meet the demand we've got. And we've got a strong backlog and strong order book, just anxious to be able to push that out to customers. And so the volume will come as the year progresses.

Your next question comes from the line of Philip Ng from Jefferies.

John, I've kind of lost track the amount of price increase you guys have announced since last year. So it could be helpful kind of refresh us since the last call late last year, what incremental price increases have you announced in your bigger markets? And how does that kind of layer in? And then I guess a follow-up on the margin side of things. You said margin is up year-over-year, but should we expect it to inflect positively year-over-year by 2Q? It sounds like 1Q, you still have some catch-up.

Phil, I would say that in terms of the price increases, yes, it's a lot to keep track of just given the number of markets that we're in. We'll focus on North America, so that's probably of interest. The most recent change was in the wholesale channel, which was an all-product price increase that took effect at the beginning of the year. So that was effective as of Jan 1. And then our retail price increases are layered in. As the first quarter progresses, they're not quite as a bright line like that. So that would be the most recent round of pricing that was done. And then as you get into Europe and Australia, that the timing is different given the disparate nature of customers and channels there.

In terms of margin cadence, yes, I mean, margins, we do expect margins to be down in Q1, primarily due just to the impact of inflation. And although we're covering it in dollar terms, it's still a headwind for rate. Second quarter, probably getting closer back to flat margins and then seeing some very nice margin uplift in the second half of the year.

Got it. That's really great color, John. And then a question for Gary. You guys have been buying back your stock pretty proactively. Valuations are obviously pretty depressed here. Just curious, how you're thinking about capital deployment for 2022? You've kind of hinted at maybe doing more M&A as well. Curious, what are you seeing out there from a pipeline standpoint? And just any color on valuation? Certainly, in the public markets, you've seen some multiple compression here.

Yes, we -- thanks for the question, Phil. We continue to look at opportunities. As we talked about in our Investor Day, we laid out a plan for a strategy for growth in areas that we were most interested in potentially bolting on. There's a number of things in our pipeline. Without getting specific, we're always nurturing those and looking at valuations that make sense. We did a significant buyback when the opportunity presented itself last year, and we'll continue to look at that. And we've got a number of great projects internally that continue to pay out for us.

I look at 2022 a little bit as a payout year for some of those investments. We talked about earlier, both in the capacity extension side of the equation, look at VPI, the opportunity a couple of years ago, really paying out is we're about to see the benefits of doubling the capacity in that business, which is part of that strategy. So we're looking for more VPIs, more opportunities to add on to our strategy that we laid out back last year.

Your next question comes from the line of Mike Dahl from RBC Capital Markets.

It's actually Chris on for Mike. Just want to touch on your expectations on cost inflation this year, particularly in the back half of the year, realizing you guys could go out with incremental pricing. But what are you assuming in terms of year-over-year inflation and cost and the kind of cadence of that between the first half and the back half of the year?

So certainly, we'll have some favorable comps on inflation as we get into the back half of the year. And as you think about sort of what the curve looked like in 2021, we still expect inflation in Q3, Q4, but the magnitude will be much less than what we expect here in Q1, Q2. I'd say from a percent standpoint on both kind of the material and freight bucket of cost, I would say the inflation will be slightly less than 2021 on the percentage terms. But in dollar terms, in terms of the dollars we have to cover inflation, that the magnitude is pretty close to the same in 2022 in terms of 2021. So it's still a big challenge that we've got to overcome, and we're well positioned to do that.

Got it. Appreciate that. And then just a follow-up on EMEA price/cost and your outlook there. Obviously, I think you guys said you're expecting it to be positive this quarter, ended up cost in the [quarter] the other way. Obviously, it's a volatile situation there. But just your confidence on achieving price/cost favorability in that region given all the moving pieces.

And you're asking specifically about Europe?

Yes, Europe.

Yes. Yes, I think the biggest unforeseen challenge that came out of Europe is on the utility side. Utilities and natural gas sort of spiked in Q3, Q4, and we did not have visibility to the magnitude of that fully. I would say, price/cost in Q1 would be similar to our other regions in terms of being neutral in dollar terms. I wouldn't really call out anything really unique about that. It's just the magnitude of the utility inflation. We're also seeing a bit on the logs side that goes into our sawmill. And then metals continue to be an area of inflation as well just given the steel that we use in our steel doors, steel frame business.

Your next question comes from the line of Susan Maklari from Goldman Sachs.

My first question is around the special order products that you have. Can you just give us a bit more color on the order trends that you're seeing there and how things are coming together as we enter '22? And then I guess with that, can you also talk a little bit about the various channels and how you're thinking about some of the volume and mix that will flow through the retail side versus the wholesale side for this year, where those inventories stand as we come into '22?

Susan, thank you for the question. I'll start with the retail question. Retail and really R&R markets have been fairly stable and growing for the last several years. They continue to be pretty strong. We have seen a mix shift or a strong mix towards stock units, as you pointed out, over the last couple of years. That mix has been changing over 2021 and improving towards special orders, which are margin accretive for us.

We're seeing that trend continue. Stock levels are getting to be in pretty good shape. We're in that season now where we expect to true up stock units in [aisle] units in retail. So we're going to keep our eye open for that. But we are seeing special orders continue to trend more favorably. And hopefully, we'll get back to pre-pandemic levels sometime in 2022.

On the traditional channel, wholesale channel, we've actually seen significant acceleration in orders really over the last several quarters. They've really been growing in North America. Part of that is from builder and some of that is from R&R. So that's been trending in the right direction, and we've been pretty excited to see that happen as well. And just like I said earlier, general strength in both residential new construction and the R&R markets is really driving all of that.

Okay. That's very helpful color. And then when we look at the CapEx guide, the $130 million to $150 million for this year, it is somewhat of a step-up relative to where you've been in the last 2 years. And I know you kind of talked a bit about some of the projects that you're seeing in terms of capacity adds and those sorts of things. But any sort of color on anything specific to highlight within that? And how you think about the ramp that will come through in there? And what's maybe baked at the lower end versus the higher end of that range?

Sure, Sue. I mean as you think about 2021, how the year played out, our guide for CapEx at this point last year, for 2021, was actually pretty similar to what we're guiding here for 2022. As the year progressed, just like a lot of industries, lead times for equipment and things got pushed out. And so we did not accomplish all of the projects in 2021 that we had hoped to. So these are everything from automation to productivity and safety and maintenance type projects.

And so I think I would frame up the 2022 guide as moving up to a more normalized type of spend level where we see great opportunities to invest in ourselves, as Gary mentioned, in high IRR payback projects for productivity-type initiatives as well as some selected capacity expansion projects and target products. But outside of that, there's really nothing unique to call out in terms of the phasing other than getting back to a more normalized spend as lead times from our suppliers for these large equipment purchases get back to more normalized levels.

Your next question comes from the line of Mike Rehaut from JPMorgan.

Mike Rehaut. First question, I wanted to go back to the guidance for a second, and I appreciate the earlier color where you said that the 9% to 12% core being driven more by price. I think you said more than half of it from price. Then -- so on the volume side, I was trying to get a sense, Gary, you kind of laid out earlier in the call different types of initiatives you've been implementing, capacity expansion, investment in labor, also various new products.

Just trying to get a sense, particularly in North America, if we could zero in there for a moment, if there's any way to kind of quantify what that impact of the different either capacity expansion or new product initiatives, what that impact represents in terms of the overall thought for volume growth. Let's say, if volume growth perhaps is less than half of the 9% to 12%, so let's say maybe something in the 2% to 4% range, I'm just kind of putting a number out there, is that 2% to 4% or, let's say, 3% to 5% primarily driven by end market growth? How much is driven by these different company initiatives like capacity and new products?

Yes. So I think you've got the basic elements. Obviously, putting the price aside, we've got some unique initiatives or unique developments within JELD-WEN that are driving growth. I'd speak of it a little bit as a payout year for us on some of the investments that we have made. Clearly, gaining share in some of our categories has required us to put in some of these capacity expansions as well in the share desire and demand for our product.

So if you think about the things that we're building up at those JELD-WEN-specific growth initiatives above and beyond market, share gains, this expansion of the investment and expansion around our -- and you asked specifically about North America, so around our exterior fiberglass door business, that's been growing incredibly over the last several years, gaining share. Again, new products, new door systems that builders and customers really like because they add value in their ability to save labor, easier to install plus their modern style.

The expansion of our VPI business, we said we were going to move that business east. It's just incredible, the amount of attention and amount of demand we're now getting up and down the East Coast based on opening our new facility in Statesville, North Carolina. Again, the opportunity to ultimately double that size of that business. And then the expansion and the addition of our Auraline composite business this year will also add revenue.

All of those are accretive as well to our margin position. If you think about kind of what those -- in addition to share gain and price, probably about $100 million of additional growth just related to those initiatives alone in North -- or part of those in North America. You then add on what we're doing in Europe and Australasia and you get the additional growth of the company.

Okay. No, that's helpful. I appreciate that. I guess, secondly, kind of looking at the margin progression, when you think about this year -- or rather in the fourth quarter, you were able to neutralize material freight with price and yet you had the margin contraction driven by other factors. And you talked about the overall maybe first quarter margin is down, second quarter margin is flat and then expansion in the back half.

Ostensibly, but from a price/cost standpoint, how should we think about the first and second quarters? Should it be more neutral and then more positive in the back half? Or the other factors that you've kind of mentioned driving the margin contraction in 4Q or the last 2 or 3 quarters, those kind of also turning around?

I'd say, for the progression, price/cost in Q1 should be sort of -- in dollar terms, should be in that neutral area for pricing material and freight inflation. That's neutral in dollars. That is still a headwind for margin rates, though. And then, I'd say, getting slightly better in Q2 and then it's really Q3, Q4 where that price/cost become accretive to margins in the back half of the year.

I think in terms of our other margin drivers, I mean we've got positive productivity and manufacturing efficiencies baked into the plan from all the work we're doing on JEM. And you've also got favorability from the leverage on the volumes that Gary just outlined. And then we're anticipating this mix situation that was a headwind in Europe in Q4, was a headwind to margins, but that will, at some point, give us some relief. And so there's been a lot of visibility to the levers that will drive margin improvement. But certainly, in the first half of the year, that's getting diluted by inflation in terms of a rate standpoint.

Your next question comes from the line of Truman Patterson from Wolfe Research.

Just first, for clarity, embedded in your '22 guidance, are you all baking in costs where we sit today at the end of December or February? Or are you all expecting some further cost inflation?

I'd say we do expect year-over-year inflation throughout the year. I wouldn't say we're expecting the inflation to get worse from where we are today.

Okay. And then you all mentioned that pricing is offsetting material and freight inflation here in the fourth quarter. And I'm looking at gross margins. They, I think, fell over 400 basis points. I'm just trying to understand how much labor inflation might have impacted that number and just some of your expectations for the labor component to trend in 2022.

Yes. Labor inflation in the quarter was certainly significant. I mean I think we're, from a terminology standpoint, we're thinking of that more as an investment. I mean we are doing targeted wage increases in certain plants to make sure we can attract and retain the right labor. And so it is -- and that's an inflation cost headwind, but it's also -- we view there's a payback on that, right? If you get the right labor and retain it, then you can get the volume throughput and get it out. But I'd say in Q4, in dollar terms, labor inflation was in the $15 million range, something like that, if you want to try and put a number on it, would be my best estimate.

Okay. Okay. And then final one for me, just trying to understand SG&A a little bit. As a percent of sales, it had been increasing earlier this year, but then here in the fourth quarter, I think you all were able to walk it down like 400 basis points or so to some of the lowest levels that you've had. On a blended basis for the full year, it was in the low 14% range, I believe. I'm just trying to understand your expectations for SG&A in 2022 given some of the accelerated investments or overhead spend, just trying to understand what level you are comfortable running in.

Yes. There's certainly a lot of areas that we'd like to make investments and use some of the pricing that we've been receiving from the market to not only offset inflation, but fund R&D, innovation and growth. And so I think on an absolute basis, you're right, we did a good job sort of managing cost control in 2021. But if you were to sort of think about JELD-WEN relative to other peers, there is an opportunity for us to really invest more in SG&A as a percent of sales.

And so as we think about the future, we'll be looking for the highest payback sort of investments that we can make, and a lot of it is tied to funding growth. And so we think about what's baked into the plan in 2022. There's definitely some increased SG&A year-over-year, but those are projects that we can toggle on and toggle off depending on how the business is performing and that all of them would be -- those new initiatives will be tied to sort of driving more growth in the future.

And your final question comes from the line of Steven Ramsey from Thompson Research Group.

I wanted to think about Australasia for a minute, 2021 passing the 2019 levels and getting closer to the 2018 recent peak. Do you think you reached 2018 sales levels this year? Or is that something next year? I would expect new construction activity rebounds and the progress in R&R allows you to surpass those levels in the coming years. So just any color there.

Yes, we're pretty excited about what's going on in Australasia and Australia, in particular. We've seen -- yes, 2021 was a, I believe, a record year in orders and new home orders. We do expect that order rates probably will be off a little bit this year, but the issue is some of the build time, the good cycle times there in Australia are pushed out months. I mean they are -- they have a huge backlog of unbuilt demand.

So what we're -- for the very same reasons we were talking about here, labor availability and supply chain, so we're in a really good position to supply the residential new construction market. We think that their backlog is pretty well known. We're going to see growth in starts and finishes this year. And it will be dependent on how the builders and contractors are able to stay through the job and complete them.

So I think it's kind of a smooth sailing for residential construction in Australasia this year. The borders just reopened. Things are starting to get back to normal. They still has -- it will probably hurt -- hit the most by full shutdowns anywhere in the world. So as that opens back up and labor availability starts to find its way to homebuilding, those orders are going to turn into starts. So we're pretty bullish on where we are in Australasia. The results are certainly sequentially improving. And I think after a 2-year recession, we're pretty excited about where we are.

Great. And then thinking about Europe's increased market penetration, I guess, what are the key ways you intend to do so through this year? And how much of the benefits there hit in 2022? Or does it build and have a fuller impact in 2023?

Yes. So we did -- we -- when we laid out our strategy for Europe last year at our Investor Day, really around a few things, but one, around taking the various product categories that we already make and sell in certain markets and moving those into markets that we currently sell other products so that we complete our product portfolio lineup there. I talked in the prepared remarks about technical doors or fire physical doors from Central Europe, for example, into the U.K. That will be a dramatic driver for us.

Additionally, we've got the opportunity and we've been doing some nice innovation in Europe, particularly around sustainable doors, connectivity and the like. We have some pictures there in our deck of some of that. Some of that work is definitely driving growth and will drive growth in 2022 and beyond in Europe, but it also becomes the platforms for work that we're doing around the world.

And then we've got opportunities where there's additional geographic expansion that we can do where there are markets that we under-serve today, where we can take our full product portfolio. It looks a lot like what we sell in other countries and other regions and take that across other countries in Europe. So that's our overall strategy in a nutshell for Europe. We will see growth in 2022, and it will continue to accelerate as new innovation comes along and we continue to transfer products across markets.

And this brings us to the end of our question-and-answer period. I turn the call back over to the management team for some closing remarks.

Well, thank you all for joining us today, and thank you for your continued interest in JELD-WEN. As we said earlier, our markets are strong. We like the layout for where we are in 2022. Our operations continue to be healthy, giving us competitive lead times in many of the categories and markets that we serve. Obviously, we're navigating the inflation challenges with price offsetting material freight inflation. We expect that to accelerate, be a benefit for us in 2022. And we've got a number of JELD-WEN-specific initiatives that are driving growth and productivity in 2022.

So we're pretty excited for the setup. We look forward to spending more time with you as the quarter progresses and updating you on our progress. Again, thanks for joining us today, and thank you for your great questions.

This concludes today's conference call. Thank you for your participation. You may now disconnect.