JELD-WEN Holding, Inc. (JELD) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to JELD-WEN Holding, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Chris Teachout, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, which we will be referencing during this call. I'm joined today by Gary Michel, our CEO; and John Linker, our CFO. Before we begin, I would like to remind everyone that during this call, we will make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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 or statements regarding the expected outcome of pending litigation. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the 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 deployed the strategic foundation to propel JELD-WEN’s premier performance. We are executing a disciplined plan to accelerate organic growth, expand margin and improve cash flow, while effectively allocating capital to optimize shareholder returns. And we're making good progress in each of these areas. The underpinning of our strategy deployment is our business operating system JEM, the JELD-WEN Excellence Model. JEM is a systematic way that our people work within the company to deliver our strategy globally. This holistic approach is anchored in the very essence of a lean problem-solving culture, the practice of continuous improvement, development and respect for people and the identification and elimination of waste. While still in the early stages, we are seeing consistent outperformance in the areas where JEM has been deployed, and we are seeing progress in the strategic growth drivers. In previous calls, we've highlighted our commercial work focused on customer and channel segmentation, innovation and unleashing the vast opportunities to expand distribution of JELD-WEN products and services across geographies and channels. This combination of commercial strategies and disciplined price realization is delivering market share gains and margin expansion. The disciplined approach of using price to offset inflation has now led to 9 consecutive quarters of favorable price/cost. Likewise, we've made significant progress in our footprint rationalization and modernization initiatives, having completed projects that represented the first 1/3 of our $100 million targeted annual savings. Execution is now underway on the next phase of the program and associated savings. You'll recall that the rationalization and modernization programs reduce rooftops and costs while adding manufacturing capacity and enhancing the ability to serve customers. Across the rest of our sites, JEM is driving productivity savings through more efficient labor utilization, material consumption and sourcing savings. In 2020, we made great progress on these strategic levers while also navigating the unprecedented challenges of the year, including the effects of the pandemic and other unanticipated events including severe weather and natural disasters. The impact of these events was felt throughout the year, including in the fourth quarter. These effects included increased absenteeism, supply chain disruptions and unforeseen government lockdowns. Nonetheless, with safety always at the forefront, our associates found a way to deliver for our customers, our communities and our shareholders. I want to extend a sincere thank you to all our associates for helping us achieve these results through such uncertain times. In the fourth quarter, we delivered both core growth and margin expansion. Total revenue increased 7.7% versus prior year, and adjusted EBITDA grew 29.4%. Core revenue grew 5% versus last year, contributing to 190 basis points of core margin expansion. This was the best quarter of year-over-year core revenue growth since 2017, led by North America and Europe and the first quarter of core revenue growth for Australasia since the second quarter of 2018. All 3 segments delivered sequential improvements in volume growth and significant margin expansion versus prior year. We continue to benefit from favorable price, and while still a headwind in Q4, signs of improving product and channel mix. In addition to these positive revenue impacts on margin, each segment delivered positive net productivity, further expanding our adjusted EBITDA improvement. Specifically, we saw a 300 basis point margin expansion in North America, 330 basis point margin expansion in Europe and 150 basis point margin expansion in Australasia. The execution of our commercial strategies and the benefits of JEM are showing through. For the full year, revenue declined 1.3%, clearly below our expectations as we entered the year. That being said, the deliberate actions taken by our teams, coupled with productivity benefits from footprint actions and the deployment of JEM, were able to offset the impact of the pandemic to deliver 100 basis points of core margin expansion. In addition to implementing cost savings, preserving cash and managing working capital, we also overcame the cost to ensure safe working environments for all of our associates, increased absenteeism in certain operations, the effects of mandated governmental closures and temporary changes in product and channel mix. This strong earnings performance, continued focus on working capital improvements and prudent capital allocation, delivered free cash flow of $258.8 million, a 55% increase and a record for JELD-WEN. Further demonstrating our quality of earnings and the strength of our balance sheet, we reduced net debt leverage to 2.3 times, the lowest since the IPO 4 years ago. And with record liquidity of approximately $1.1 billion, we have flexibility as we evaluate strategic alternatives to further enhance shareholder value. John will provide additional commentary on our financial performance, and I will provide some thoughts on 2021 in a few minutes. First, I will share some thoughts on our markets and key drivers for each segment. For North America, housing fundamentals remain supportive. We expect the recent robust increase in housing starts to continue and perhaps accelerate as strong new home orders from previous quarters turn to starts. Completion activity of these starts may lag due to builder supply constraints, including labor and other building product availability. We expect overall demand for R&R activity to grow by low single-digits, favoring larger pro-driven projects over DIY. The pricing actions we implemented in late 2020 are holding, and we expect solid realization to more than offset increasing inflation and tariff headwinds expected during the first half of the year. For Europe, we expect markets to be somewhat flat for the full year. For the first half of 2021, our end markets in Europe are open and healthy across new construction, project and R&R. However, we see potential for demand to moderate later in the year. Market share gains and continued momentum, including sequential improvements in price and mix will extend performance in the segment. For Australasia, particularly Australia, residential new construction markets continue to be challenging and have yet to recover. We saw signs of stabilization during the fourth quarter with accelerating single-family new construction permits. We expect some ongoing improvement from the benefit of government stimulus programs directed at both new home construction and remodel activity. However, a significant portion of Australia's new housing demand comes from immigration, which has been halted due to COVID-19. The government has yet to set a date for this to resume. Repair and remodel demand is also expected to be challenged. However, we expect to offset some of this weakness through additional market share gains. I'm optimistic about the outlook in each of our markets for 2021, particularly housing fundamentals in North America, European market dynamics and stabilization and some improvements in Australia. However, the foundation for our performance has been and will be based on continuing to deliver significant margin expansion and growth through our disciplined deployment of JEM, the execution of the rationalization and modernization programs and the benefits of commercial excellence, including innovation, segmentation and price. John will now provide a detailed review of our financial performance for the fourth quarter and full year 2020.

Thanks, Gary, and good morning, everyone. I'll start on Page 10. Our fourth quarter financial results demonstrate continued execution in a challenging operating environment as we delivered meaningful improvements in revenue, earnings, margins, cash flow and on the balance sheet. This strong performance is a direct result of running our playbook consistently over multiple quarters, focusing on our strategy and the continued disciplined deployment of JEM, our business operating system. Fourth quarter net revenue increased 7.7% to $1.2 billion. The increase was driven primarily by an increase in core revenue as well as a favorable impact from foreign exchange. Notably, all 3 segments delivered core revenue growth as volume mix improved sequentially from the third quarter. Adjusted EBITDA margin expanded 160 basis points in the quarter to 10.0%, while core adjusted EBITDA margin, which excludes the impact of foreign exchange and any recent acquisitions, expanded 190 basis points, our third consecutive quarter of margin expansion. The combination of price realization, execution of our structural cost reduction programs and productivity tailwinds from JEM initiatives all contributed to the strong margin performance. Page 11 provides detail of our revenue drivers for the fourth quarter. Our consolidated core revenue increased 5%, comprised of a 4% benefit from pricing and a 1% contribution from volume mix. Please move to Page 12, where I'll take you through the segment performance in more detail. Net revenue in North America for the fourth quarter increased 4.5%, driven by a 6% increase in pricing, partially offset by a 1% headwind from volume mix. While the 1% headwind in volume mix is a sequential improvement from the third quarter, this is a lagging indicator that does not fully tell the story of a healthy demand backdrop in North America. So I'd like to spend a moment on the dynamics by product and channel. North America demand in the quarter was generally quite strong. Unit volumes increased sequentially in most product areas and order activity remained healthy as well, leading to strong book-to-bill and healthy backlogs. Unfortunately, COVID-related absenteeism in our manufacturing operations stepped up significantly in the quarter, which impacted our staffing levels and throughput capacity in key plants. As a result of the absenteeism, we faced volume headwinds on revenue in certain products and plants, even though the underlying orders were healthy. Mix also remained a revenue headwind as well in North America, primarily because inventories of stock SKUs at our retail channel partners remained below both their target levels as well as below prior year. As we worked with our retail partners in the quarter to restore their inventories at targeted levels, order activity was weighted towards lower-priced stock SKUs, and therefore, we saw reduced activity and higher-priced special order SKUs and custom orders. In terms of how these dynamics impacted our North America channel results. In our U.S. retail repair and remodel channel, revenue increased approximately 10% compared to prior year, with growth in both doors and windows. In our U.S. traditional wholesale channel, revenue declined mid-single-digits due to the impact of absenteeism and COVID restrictions. In our U.S. door distribution business, revenue declined mid-single-digits. Demand in this channel was strong, however, our ability to meet the demand was constrained due to new COVID restrictions in California, where we have several large distribution locations and generally higher absenteeism across our network. All other channels in North America, including Canada, VPI Windows and other products netted to revenue growth of approximately 10%. Even with the absenteeism and mix headwinds we faced in the quarter, revenue growth compared to prior year accelerated meaningfully in the month of December. So our exit rate was better than the full quarter. In January, the strong revenue performance continued in North America. Given these recent trends, we feel good about the setup for North America revenue growth for full year 2021, noting that first quarter comps will be impacted by fewer shipping days due to our 4-4-5 accounting calendar. North America adjusted EBITDA margin expanded 300 basis points to 12.4%, driven by strong pricing and net productivity, partially offset by the mix impact that I just discussed. The margin improvement was nicely distributed across product lines with healthy margin expansion across doors, windows and Canada. Europe revenue increased 14.9% overall and 8% excluding the impact of foreign exchange. Core revenue growth was comprised of 6% volume mix and 2% pricing. Similar to last quarter, we believe our volume performance exceeded market growth, demonstrated by mid-teens local currency revenue growth in Scandinavia, and high single-digit revenue growth in Central Europe. For the sixth consecutive quarter, Europe delivered core margin improvement with an increase of 330 basis points year-over-year from strong productivity, cost reduction actions and leverage on volume growth. Australasia revenue in the quarter increased 7.6% overall and 2% in local currency versus prior year. The revenue performance benefited from the reopening of Victoria from 112-day COVID lockdown, the impact of government stimulus and profitable share gain. It's the first quarter of core revenue growth in Australia since the second quarter of 2018 due to the ongoing housing market headwinds. We're pleased with the fourth quarter revenue performance and continue to see near-term improvements in early 2021 as a result of the government stimulus programs. That said, demand visibility for full year '21 remains quite limited in Australia, given the immigration restrictions that are still in place, which is a meaningful driver of population growth and housing demand. On the back of this improved revenue performance, our Australasia segment delivered margin expansion of 150 basis points from solid productivity and volume leverage. Coming back to our global consolidated results, I'd like to comment on input costs. As we anticipated, fourth quarter material cost inflation and freight rates did accelerate year-over-year and sequentially from the third quarter. However, price more than offset these increases. So there was no significant impact on margin. Looking into early 2021, we expect inflation and import duties to continue to increase, particularly in the first half of the year. Also, as a result of the tight labor market and COVID-related absenteeism, labor inflation in North America is an area of increasing concern. But despite these potential headwinds, we will continue to use price as needed to offset inflation to ensure that we still deliver on our goals for continued margin expansion in 2021. SG&A increased compared to prior year, primarily due to charges taken for legacy litigation and environmental matters and certain variable compensation accruals, partially offset by cost reductions and other ongoing reductions in our fixed cost structure. One item to note on taxes in the quarter. As you may recall, our book tax rate has been negatively impacted for the last 2 years due to the GILTI provisions of U.S. tax reform. Late in 2020, the U.S. Treasury finalized regulations for a High Tax Exclusion option for GILTI. Retroactive for 2018 and 2019, we elected the newly issued High Tax Exclusion under GILTI in the fourth quarter, which allowed us to restore certain net operating loss carryforwards to our balance sheet that had previously been utilized as a result of GILTI. After consideration of additional tax planning measures, we were able to restore approximately $100 million of net operating loss carryforwards, which will have a favorable impact on our cash taxes in the future. We recorded a one-time P&L benefit of approximately $10.8 million in the fourth quarter to reflect the restoration of these NOLs, offset by the net reduction of certain deferred tax assets related to foreign tax credit carryforwards from which we will no longer be able to benefit. Please turn to Page 13, where you can see the details of our strong cash flow performance in 2020, which led to a reduction in net leverage to 2.3 times, the lowest point since the IPO. Operating cash flow increased 17% compared to prior year, and free cash flow increased 55%. While our 2020 operating cash flow did benefit from certain COVID-related assistance programs, such as temporary payroll tax deferrals, most of which will be repaid in 2021, overall, the 2020 improvement was driven by stronger high-quality earnings and more efficient working capital utilization. Page 14 highlights the longer-term trend data on both cash flow and net leverage. As you can see, we have generated sustained improvements in free cash flow for the last few years, which has benefited our balance sheet and capital allocation opportunities. And lastly, on Page 15, I'll highlight our current liquidity of $1.1 billion. This level of liquidity is the highest ever for the company and gives us flexibility to create shareholder value during these uncertain times. With that, I'll turn it back over to Gary, who'll provide closing comments. Gary?

Thanks, John. Despite the effects of the pandemic and other unique headwinds last year, we delivered strong financial performance through disciplined deployment of our operating system, JEM, and the strategies we set out to expand our capabilities to serve our customers. The momentum in growth and margin expansion in Q4 and the strength of our balance sheet, coupled with favorable market conditions, sets us up nicely to deliver in 2021. We remain optimistic about the outlook in each of our markets, particularly strong housing fundamentals in North America; healthy near-term order books in our European markets; and some signs of demand improvement for residential construction in Australia. That being said, our performance has been and will be based on continuing to deliver margin expansion and growth through our disciplined deployment of JEM, the execution of the rationalization and modernization programs and the benefits of commercial excellence, including innovation, segmentation and price. All-in, we expect total consolidated revenue growth between 4% and 7% for 2021 and we expect to deliver full year adjusted EBITDA in the range of $480 million to $520 million. This continued margin expansion is a result of volume growth and our strong pipeline of productivity and cost projects, including modernization and rationalization savings and the benefits of price increases already deployed to offset accelerating inflation and tariffs. As we conclude, I'd like to highlight that the strong results we reported today are a direct result of the strategic work, persistence and tenacity of the talented people at JELD-WEN and representative of the unique culture we're building. Our management team has been deliberate and effective in building the foundation to deliver sustainable premier performance for our customers and our shareholders. Momentum is strong, and we are excited about the year ahead as we continue to transform JELD-WEN into a premier building products company. Thank you for your continued interest in JELD-WEN and for joining us this morning. John and I will now be happy to take your questions.

[Operator Instructions]. Your first question comes from Matthew Bouley from Barclays.

I want to start out with a question on the price/cost side. Gary, you highlighted the commercial efforts of -- done a nice job keeping price/cost favorable for several quarters in a row here. So, I guess, to the extent inflation is an increasingly greater headwind in the first half of this year as you suggest, have you taken enough price across the segments to kind of maintain this recent trend of price/cost positive? Or should we think it's more neutral this year given the inflation?

Thanks for the question, Matt. Yes, I think that we've been fortunate in that, we’ve had really disciplined pricing in the markets, primarily here in North America, but we see price benefits all across the world in all the markets that we've been in. And we've been able to take some outside price increases, particularly in doors in North America and then followed with kind of the going gone in windows. We've been able to see late -- kind of mid late last year, some good action there. We are seeing some inflation during the first half, as we mentioned. We do -- we are watching it very, very closely, and we do believe that we still have opportunities to support more price out there. That's the lever that we can pull in order to continue to maintain. I mean, our strategy has always been that price actually more than offset inflation. So it's something that we watch quite a bit. The work that we talked about really over the last kind of 1.5 years, 2 years around segmentation of our customer base and of our product base has really played out, and that's where we're seeing a lot of the outside margin expansion as the benefit of price. So we feel pretty good about our ability to pull that lever again.

And Matt, it's John. I'll just add on. I'd say that based off what we have in place today in terms of pricing that we've implemented and negotiated with our customer base, and based off of where inflation sits today, and noting that inflation is extraordinarily dynamic right now, I mean we're just seeing big fluctuations sort of as the weeks go by. But based off of what we have in place already and what we know inflation is coming, yes, price/cost will be a tailwind for the full year, just less of a tailwind than it was in 2020.

Got it. Okay. That's helpful. Second one on production rates, I guess, focusing on North America. I mean, obviously, windows, it’s sort of thought of as a product in short supply these days. It sounds like you also had some challenges in the door distribution business. Can you talk through kind of the ability to ramp production here? Does your revenue guidance assume you're able to sort of knock down this backlog that's building? And just what type of costs might be associated with ramping production here?

Yes. So if you look at production, kind of just unpack kind of really 3 pieces of that business. I'd say earlier on, last year, we saw that kind of absenteeism COVID effect, affecting the windows business a little bit more than the other businesses. That has changed in kind of flip-flop. We're actually in a really good position on the windows side. I know that there's a lot of demand for windows right now. And we feel that we're in a position on our production side of windows to actually -- and we are seeing commitments and share pickup as we're able to deliver more steadily there. So that story of improving the windows production has really -- that’s kind of in the rearview mirror for us, and we're actually seeing some good performance there. So pretty excited about windows. On the door distribution side and doors, in general, we saw some more -- industry absenteeism actually kind of hit in the fourth quarter. We're obviously doing all that we can to ensure that we have the folks that we need in our plants to operate and to build that down. We are working that down. Obviously, there are some weather issues right now in some of those areas as well that we're seeing across the country. But we continue to work that every single day and kind of deliberate actions and tenacity of our people to make sure that we're able to produce for our customers is something that we're very, very focused on. We do believe that we'll be gaining share. We'll continue to do that. But one of the places where we got hit really the most was kind of in that California region door distribution area. So we'll continue to watch that.

And your next question will come from John Lovallo from Bank of America.

Maybe just starting off with SG&A, a little over 15% as a percentage of sales above what we were looking for, and I think about 100 basis points higher year-over-year. Can you just help us, what some of the drivers were of that increase? And was that tied to the absenteeism? Or were there other factors?

Yes. I'd say there are a couple of things in the fourth quarter that did impact us that were sort of one-offs. We did have some additional litigation and legacy accruals that we had to make that were non-operating and excluded from adjusted EBITDA. There were some variable compensation true-ups in the fourth quarter and also some -- a bit of additional expense related to things like employees, going back to a doctor for health claims, things that have been deferred earlier in the year and seeing some catch-up there. So I wouldn't say it was anything sort of structural, the change, John, in terms of the spend in the fourth quarter, just it’s kind of the timing of when things sort of hit us as we exited the year.

Okay. Got you. Understood. And then I think there was a comment made about European demand in general and the possibility that, that might moderate in the second half of the year. Was that comment related to more than the comps? Was that just structural demand might moderate? And if so, can you help us understand why that might be?

I think that the nature of that comment is, right now, you saw there in the fourth quarter, we had some pretty nice growth, as Gary called out, in certain areas of Europe. The order books look pretty good here in the first quarter, both on projects, commercial business as well as residential. I think the concern and the lack of visibility that we have is when -- if and when sort of COVID does stabilize and consumer spending shifts away from R&R and home and consumers start to think about other avenues for their dollars or their euros, travel or what have you, that, that could be potentially a moderation on some of the near-term demand. So it's not anything structural that we're seeing in terms of the markets weakening. It's just sort of a lack of clarity on exactly what's going to happen. I mean, if you take a step back, a lot of these European markets we're in are not overly healthy from an economic standpoint. There's high unemployment, there's kind of low GDP. So I think you're just hearing a bit of cautiousness from us as we do have near-term visibility that's pretty good, but sort of back half of the year, there's a bit of a question mark on what that could look like.

And your next question will come from Phil Ng from Jefferies.

Congrats on a solid quarter. Your volumes in North America were down about 1% in the fourth quarter, appreciating you're dealing with some absenteeism. How are your orders tracking? And just given your view on North America resi, what type of organic volume growth do you anticipate this year?

So I'll start on that. The actual demand for product even in the fourth quarter was pretty strong in North America. Really the -- that decline was purely based on the absenteeism and a little bit of mix for the quarter. When we think about what we're seeing, we're seeing strong demand and strong growth actually in retail R&R. We've seen strong growth in some of our other businesses, including Canada, or VPI, commercial business and some other products, really that absenteeism that we talked about in door distribution and some related to our U.S. traditional door channel is really the effect there. So we still have pretty strong backlog, still pretty strong demand coming-in in North America and still feel pretty good about our growth rates going forward there.

Yes. So I'd just say, I mentioned the exit rate on -- in the prepared remarks. Revenue growth in North America in the month of December was about 10% up over prior year. January is a bit of a tough comp because of the shipping days issue. So it's not exactly comparable, but I'd say the trajectory was similar. And year-over-year, sitting here in the first quarter, North America backlog, we're a fairly short-cycle business. So we kind of think about it more as open orders as opposed to true backlog, but open orders are up fairly significantly versus the same time last year. So if we can sort of make sure we have stable manufacturing platform and get the absenteeism issues sort of worked out, I think we're teed up quite nicely for an acceleration in North America volume growth this year and as the year progresses.

And Gary and John, do you guys have a better sense on when you think you'll get the operations in a good spot to kind of capitalize on all this growth? It certainly sounds very encouraging.

Yes. We feel -- we watch it every day, obviously. But we've been doing -- we've been taking some action to make sure that we're able to operate, obviously, all of our plants. Absenteeism is kind of the story line for the last, I don't know, quarter or 2 just related to where the pandemic shifts are more and a little bit on shutdown obviously in California where we've got operations. So we've been either over hiring or taking action to make sure that we schedule our plants around our ability to have people there. So we feel like we're keeping up with it fairly well. We have averages here and there that we work on, but we try to make sure that it doesn't affect our performance for our customers. And like I said, one of the benefits of the work that we did -- had been doing for the last really few years on JEM, primarily the benefits of that business operating system the way that we operate, we know how many people we need to have, we know what the cycle times are, we have playbooks for different capabilities. So we may be operating at a lower playbook than we'd like to, to the demand, but it's one that we know that we can get quality product out consistently with the type of labor vision that we have in any of our plants.

That's great. That's really great progress, Gary. And just can I squeeze one more in? Just given the tightness you're seeing in the windows market in North America, do you expect to kind of recapture some of the share? And given some of the challenges you've seen in the last few years, profitability did take a step back. So is there any way to kind of help level set us where profitability could shake out this year versus maybe a few years back where margins were a little higher?

Yes. So we've made some great progress in the windows business on the operations side. As you know, we stepped back a little bit on -- we might have stepped back a little bit on share, but we've improved our margins fairly consistently and our throughput consistently. There is tightness in the market now. There's high demand for windows. And while we're seeing kind of the industry lead times kind of moving out, we're actually still very commercially competitive, in fact, very, very close to where our traditional lead times have been on windows, which is turning into our ability to recapture share and recapture accounts that we might have lost 18, 24 months ago based on operational issues then. So the JEM work that we've been doing on window has kind of caught up and is performing very, very nicely. So it's meeting margin expansion as well as the opportunity for share.

Yes. And just on the margin side, I mean, 18 months ago, obviously, we had some margin headwinds in the North American window business. We've now think 3 quarters in a row had some pretty strong margin improvement in that business. The fourth quarter was up 280 basis points, 300 basis points, something in that area in North America windows. So still not back to where we think the business is capable of from a margin standpoint, but the trajectory of operational improvements and margin improvements are certainly heading in the right direction.

And your next question will come from Tim Wojs from Baird.

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

Yes. I think -- so your comments are correct. The inflation is weighted towards the first half of the year. And if you think about sort of the phasing of when the price is going in that we've negotiated, we're not necessarily going to get a full quarter in the first quarter of some of the channel price increases that we put into place in terms of offsetting this stepped up level of inflation. So price/cost will be less of a tailwind here in Q1. Overall, I'd say we do expect margin improvement in every quarter this year. We certainly feel like we've got the plans in place and the visibility to get there, both from price and volume and then on the productivity side as well. So I think that the first quarter, while it is an easy comp versus prior year, it will probably be the lowest margin improvement of the full year, just given that price/cost and when we're getting hit with the inflation and tariffs, but we should see that accelerate throughout the year.

So Tim, the beauty of our consistent deployment of JEM is, clearly, we're working on cycle time, working on the ability to meet demand from an operational standpoint. But the other part is the productivity engine that we've really built. We're seeing that in every single area of the company and the ability to expand margin period-over-period, very, very consistent with it. Absolutely, we have the effect of accelerated inflation, as John pointed out, that's what we use price for. And we've been having a very disciplined capability to get price in our products as well. So as demand continues as those markets are strong, we've been able to get price to more than offset the inflation and take the benefit of the productivity that we're seeing through our JEM deployment really across the entire company.

And then I guess my follow-up, just on capital deployment. Your leverage is now close to 2, which I think is probably the lowest it's been since the IPO. So any change to how you're thinking about capital. I mean, does M&A start to become a little bit more feasible here going forward? Just a little help there as you think about leverage going forward.

Yes. That's obviously been one of our targets to get the debt number down, and you're correct, it is the lowest since the IPO. So we feel pretty good about where we are. We like our liquidity position as well, which I believe is also a record for the company. So we're in pretty good place. We think there's a lot of flexibility. And we continue to have great projects internally through our rationalization, modernization program to generate good returns for the company, and we'll continue to focus on those. But you're correct in assuming that as we look around at some M&A opportunities, we'll make some choices there. It's something that we've done in the past, and we'll continue to look at when it makes sense. In addition to that, we'll also measure share repurchase as appropriate as one of the levers that we can pull as well.

And your next question will come from Susan Maklari from Goldman Sachs.

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

Yes. The retail side, a lot of what happened through last year was contractors, customers really looking at what the -- what product they can get instantaneously from stock, which is what drove that mix, frankly, towards the stock units rather than special orders. And that kind of persisted through the year. We saw, in the fourth quarter, while still a headwind, it did diminish somewhat, and we're starting to see special orders starting to increase, and we would expect to see that kind of happen sequentially throughout the year. We're probably in a place where we're getting those inventories back to where our retail partners are liking, and we want to see them for stock. And as that happens, we'll be able to then more -- promote more special order and put that through our factories as well. So we would expect to see that probably start to turn end of this quarter, in the second quarter and start to be maybe a tailwind for us as we go into the second half of the year.

Yes. I think just going on to the prior question about phasing of margin improvement throughout the year, I mean, just to be clear, mix is definitely still a headwind in Q1 based off of what we have in the open order book and the backlog, we know mix will be a headwind in Q1. And -- but beyond that, we think inventories will be restored, and we'll see that special order start to pick back up, and it has an opportunity to be a tailwind in the back half of the year.

Okay. That's helpful. And obviously, you've made a lot of improvements and headway in terms of your cost initiatives and JEM implementation, even with all of the kind of issues that came up in 2020. Can you give us some sense of where you are with that and maybe how to think about it as we go through 2021, any specific projects or things that you would highlight in there?

Yes. That's a really great question. On the JEM side, I think I always say we're really in the early stages of that deployment. We continue to put tools out there. But we're starting to see a real culture shift in how we approach problem solving, how we look at standard work and how we operate and manage on a day-to-day basis in our factories and our operations. We're even seeing the business operating system and JEM tools being used in our functions as well. The rationalization and modernization program, which is really kind of the project gain, if you will, that we talked about, we probably have deployed -- or we have deployed about 1/3 of our $100 million annual committed savings that we talked about. You'll start to see that. That will fully show up in our run rate in 2021. We've got another 1/3 of projects in flight and those are continuing to look at plant consolidation, throughput improvements, and really built on the principles of JEM. But now that we've gotten kind of that first 1/3 of projects, the next 1/3 kind of builds on what we've learned and modernizing our operations. One of the other nice things about that, that I talked about before last year was in a downturn what would we do different about our rationalization, modernization programs, these are the various types of programs we would do, and we did continue to invest in 2021 -- or 2020, excuse me. So we really didn't lose much time, maybe a quarter or so in delay, but we kept right through. We got some really good projects going forward. And they extend in all our segments around the world. So we still feel pretty good about the project debt and our ability to achieve the $100 million of annual run rate that we said we would.

And your next question will come from Michael Rehaut from JPMorgan.

This is Elad Hillman on for Mike. First, can you please try and give us a rough quantification of what you expect raw material inflation to impact the P&L in 2021 as well as tariffs? And also what types of amounts of price increases you're putting into effect to offset inflation?

Sure. So on the -- starting on the inflation side, again, I want to be clear that, yes, there'll be a headwind to the P&L from inflation, but price/cost overall is still a tailwind for the full year based off of what we know today. So just less of a tailwind than it was in 2020. But order of magnitude in terms of sort of an impact, I would say that inflation sort of materials and tariffs and freight inflation is in a 1.5% of sales range, something of that magnitude. And that's actually close to double what we saw in 2020. So it is significantly meaningful. And then from a pricing standpoint, don't want to forward guide too much on the pricing standpoint. But certainly, with what we have in place today and what we've negotiated, I would say, order of magnitude, I see no reason that 2021 can't be a similar year of pricing than we had in 2020 from an order of magnitude standpoint. And as the year progresses and as this inflationary environment evolves, we will certainly consider additional pricing actions as needed to make sure we drive margin improvement. In terms of the specifics of the inflation, biggest categories for us where we're feeling the biggest impact would be in millwork and then plastic or vinyl-orient components. Metals, which is both steel coil and aluminum for us and then logs and lumber would be sort of the biggest 4 categories, and those are up year-over-year in sort of a 5% to 8% range in terms of increases on prior year spend in those categories.

And my second question is, just delving a little bit deeper into the December exit rate and the strengths you saw in January in North America. I was curious if the main drivers there were more on the demand side or on the production side and maybe improvements in production? And then also, if you're starting to see some flow-through from stronger trends in residential and new construction or when do you think that could flow through as well?

Yes. So in terms of the December results, it hits both. I mean, we started to normalize some of our production. But that being said, we still had some plants in the month of December that were 20% to 30% absenteeism, for example, and yet we were still able to drive that 10% revenue growth that I mentioned. So yes, there are certain plants where we got the production and labor availability sort of stabilized, but a lot of this is really more in the order demand activity. And we've seen sort of sequentially for the last few months, the open orders in North America or backlog, if you will, have been healthy, stable. And then as I mentioned, year-over-year, they're up as well. So I think the drivers of the demand are coming from both sides.

Yes, on the housing side, there's good demand there. I think one of the testing items for that will be not so much our ability to deliver, but the availability of labor to impact those starts and build the homes as well as other building materials shortages or delays. So we're watching that very, very closely. We expect that to be a tailwind for us. And we do believe that we -- and we know that we keep up with the demand that we see on the housing side. But I think it's a little more difficult question than just a single answer from us. I think we'll be able to meet that, but it will be depending on how those housing starts actually materialize with labor and other building materials. That will decide what the staging for us.

And your next question will come from Mike Dahl from RBC Capital Markets.

Gary, John, I wanted to ask just about a more detailed breakdown for the revenue guidance for the year. If we're looking at kind of the bridge of 4% to 7%, I think you note that it embeds a small positive impact of FX. But when I'm looking at kind of spot rates on whether it's euro or Australian dollar, we would get to something more in the range of like 3% costs from FX tailwinds and then the balance of the guide would be kind of like flat to plus 4%. So I was just hoping, A, just where are we wrong on that FX and what are you embedding? And then when we think about the breakdown ex-FX, a lot of questions already around some of the mixed volume, but just any more detail or quantification of kind of what is your aggregate volume, what's your aggregate price mix embedded in that?

Sure. Yes. So the FX market has been pretty volatile as well. I think if you were to just extrapolate the change just from November to December and some of our key FX rates was pretty meaningful. And so I agree with you that if you were to just pick a point in time and assume that, that sort of persists for the rest of the year that the FX revenue tailwind could be more meaningful. Our viewpoint that this year is something kind of more averaging sort of those fourth quarter rates is probably a more normalized. So maybe FX is more in the 1% to 2% revenue tailwind, ballpark. And so that leaves the rest of the guide would be more on the organic side. Certainly, North America is the strongest, probably above company average -- or certainly above company average, with both the pricing and the volume that we expect to improve. And then Europe below company average in terms of what we're seeing from there. And then Australia, we're just taking a pretty conservative view at this point on -- in the guidance. I think the guidance assumes some slightly negative tailwind or slightly negative headwind from Australia revenue. Based off what we're seeing early in the year, that could prove to be wrong, and that could be upside to the guidance. But we just don't have that visibility yet in Australia in terms of how sustainable some of this near-term benefit we're seeing from the government stimulus. It could very well sort of peter-out in the back half of the year. So there's certainly an opportunity for us to perform at the high end of the guidance range on the revenue side. But given the visibility at this point in the year, that's kind of what we’ve baked in.

My second question is on free cash flow. It seems like there's a number of moving pieces. You've got some of the NOL changes, you've got some of the deferred payments and maybe some working cap changes and then you've got a fairly sizable step-up in CapEx this year. How should we be thinking about free cash flow conversion?

Yes. The payroll tax deferral item that we mentioned, we took advantage of the U.S. CARES Act and then sort of similar type legislation in other countries around the world to defer payroll tax during this COVID situation. A good portion of that is required to be repaid in 2021 and a small portion of that flows through to 2022. Just the year-over-year impact of that, it was a tailwind in '20, and it's anticipated to be a headwind in '21. And so the kind of the year-over-year impact of that reversing is about $45 million. And so it's going to be a headwind to free cash flow for the full year, particularly if you look at the -- also with the CapEx that you mentioned stepping up. So year-over-year, free cash flow will be -- we expect to be down in '21 because of those drivers. But in terms of the -- we don't expect any change in sort of the core quality of earnings or conversion of our earnings to cash flow. So if you were to look at sort of the increase in earnings from 2020 to the midpoint of the guide, I would certainly expect that to drop-through at 100% straight through to free cash flow. But there are a couple of distinct headwinds that will cause free cash to be down in '21 versus '20.

And your next question will come from Keith Hughes from Truist.

Just referring back to the profit improvement plan. You'd said you've gotten 1/3 of the $100 million. I think that's a run rate you're referring to. Do you have any estimate of how many dollars actually impacted 2020 from the plan?

All I'd say is that the -- yes, the 1/3 is a run rate that should be in the base going forward. But given sort of everything that happened in 2020 in terms of the moving pieces that we had with COVID, facility shutdowns and some of the timing of the projects that we were hoping to get completed earlier in the year, certainly, it was only a fraction of that sort of implied, $30 million is what actually hit the P&L in 2020. And so as we get into 2021, certainly, the year-over-year incremental benefit of that would be one of the tailwind drivers to earnings.

Okay. And do you have an estimate by the end of '21, what the run rate will be based on your plans for '21?

Yes. I would say that full $30 million should be in the base earnings for -- by the end of '21. And we're -- again, we're going off of a -- when we first rolled out this program, I guess that was sort of end of 2018 and so I'm measuring off of sort of a 2018 base, and so we're saying we've got about $30 million of additional earnings from the footprint program by the end of 2021 in the P&L, and then there'll be more to come in future years as we put in some of the projects that are going live this year into the base going forward.

And your next question will come from Adam Baumgarten from Credit Suisse.

Just you kind of mentioned completion lagging starts, I think, more than usual. Can you maybe give us a sense from either months or weeks basis, what that looks like today versus maybe pre-COVID?

Yes, I think it's a difficult question for us to answer. We know that -- we expect that residential construction is a tailwind for us. It is a growth lever. How much the lag is, is difficult for us to ascertain. We know that there is high demand for both windows and doors. Maybe a little bit more for windows at this point. But the opportunity there is for us is to keep up with their demand. I think the real issue is kind of a question of how much of a tailwind it's going to be based on when they can get labor and other building materials earlier, building material products that they need to complete -- to start the starts, I guess, if that's a word. And we're just following that. I don't know if I could put a number of days or weeks on the delay. I just don't think that's something we particularly know, but we do know that we've got the order load that makes it a tailwind. It’s probably something that we'll see through the year.

Got it. Okay. And then, John, just on corporate expenses for '21 embedded in your guidance, it was up a pretty decent amount last year. How should we think about -- it sounds like there might have been some one-time event. So how should we think about it for '21?

Yes. I'd say that, certainly, with some of the COVID-related deferrals that we had in 2020, there will be some step-up as we get back to spending some of the discretionary marketing and sales and some other deferrals. So I think the corporate expense was in the -- I think, it was for full year, it was in the range of $65 million, $70 million, I believe. I don't have the exact number in front of me, but I would see a modest step-up to that in '21, as we bring back some of those COVID-related expenses in '21.

And your next question will come from Alex Rygiel from B. Riley.

Is it possible to quantify the COVID absenteeism impact on either revenue or EBITDA?

It's not -- certainly not scientific, but based off of just looking at -- the way I would think about it is early in the year, in North America, on average, we were averaging high single-digit to 10% sort of absenteeism as COVID was sort of in its earlier stages. As the second wave came up in the fourth quarter, the average absenteeism stepped up pretty meaningfully in the fourth quarter. I mentioned that we had some plants that were 25%, 30% in the fourth quarter. So I would say that a very rough estimate of sort of what volume was left on the table in the fourth quarter would be in the $25 million range in terms of North America revenue. But again, that's -- it's really hard to say exactly on that. I'm just trying to use data points from the absenteeism to extrapolate into sort of what that could have been.

And then I believe you said that lead times have been improving. Any way to kind of quantify that or talk about that in light of sort of -- obviously, the impact that absenteeism also may have had on that?

Yes. So on the figure we talk about on the windows side, we've been consistently improving our throughput and our lead time capability. Part of that was over the place for the last 1.5 years of segmenting our customer base and it kind of be more picky and choosy. But we have improved our operations significantly, and we're able to meet where we have published commercial lead times that are pretty much in the standard rate for what pre-COVID kind of run rates for windows. So we're definitely meeting that. On the door side, depend on the absenteeism is probably the only deterrent there. Our factories are operating very, very well. We're keeping up with point-of-sales volumes for sure. And as I said earlier, trying not to affect customer deliveries even with that absenteeism. So we're probably putting a little more effort into how we state the orders. But yes again, commercially -- a lot of commercially leads up to lead times in the door space as well. So we feel that we're in a pretty good place competitively to continue to pick up share.

And your next question comes from Reuben Garner from Benchmark.

Most of my questions have been answered. I just have one quick follow-up. So the R&R outlook for low single-digit type demand in North America, can you kind of break down what 2020 looks like between pro and DIY. I assume the pro channel was more challenged. And that, I guess, is the impetus of the question, is there an opportunity for that part of the market to recover this year beyond the low single-digit growth and maybe the DIY part is what's dragging the overall rate down? Am I thinking about that the right way?

Yes. I think when we talk about the mix issues in 2020. In 2020 a lot of that was stock DIY type R&R business. And then even some of the pro business would be more geared towards getting products to complete, start to pick up more quickly. So what we are starting to see is more of that pro contractor business starting to come back. That's where we get more of a special -- or frankly a little longer lead time type product but better margin products as well. So that's what will contribute to that mix shift, and we do see that actually coming through.

Thank you. We really appreciate you all taking interest in JELD-WEN and continuing to support our call and our business. We look forward to obviously, sharing our results of this quarter, a quarter from now. We also look forward to spending time with you and answering any questions that you might have in the coming days. So thank you again for your interest. We feel that we're well positioned with the benefits of our business operating system JEM, with the benefits of our productivity programs around our rationalization and modernization. And most importantly, the dedication, engagement and tenacity of the great folks that we have here at JELD-WEN and the culture that we've been building. So that's what's showing up in our results, and we look forward to continuing our success based on that. Thank you so much.

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