Earnings Call Transcript - JELD Q4 2021

Operator, Operator

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. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Chris Teachout, Director of Investor Relations, you may begin your conference.

Chris Teachout, Director of Investor Relations

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.

Gary Michel, Chair, President, and CEO

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 times. And we successfully navigated a challenging year of sharply accelerating inflation. 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 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 prime for sustainable growth and margin expansion, which I will touch on shortly. Please turn to page four as I share a few highlights from the fourth quarter. In Q4, demand remained 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 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 on 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 initiatives 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 lead times by more than 50%, which we expect to moderate this year. Please turn to page five. We really like the setup for 2022 as all segments execute plans 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. At these sites that have started their transformations, associate engagement is five times 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 three times 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 geography, 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 UK 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 Australia 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 to 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 state-zone North Carolina, which at full utilization doubles our capacity to serve multi-family and commercial customers. Our exterior fiberglass doors are poised for growth as we further broaden our industry-leading style options, innovated to make our fiberglass doors even more wood-like in appearance, brought value to our builder partners by creating integrated door systems, 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 product also supports consumers' desire for more sustainable material options and helps 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 market increases, employee engagement scores, diversity measures, and overall safety metrics. This past quarter, our team in the UK was honored for its safety innovation when it received the prestigious British Wood Working Federation Health and 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 remained 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.

John Linker, CFO

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 was 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. 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 for 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 the 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 will 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 diluted to margin rate, partially offsetting this volume mix and manufacturing efficiencies, which 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 and December COVID surge across Europe. Europe adjusted EBITDA declined 370 basis points, which was below the expectations 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 the prior year. Volume benefited from the lifting of COVID operating restrictions against a 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 by 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 converts to revenue. Adjusted free cash flow declined $87.5 million to $188.7 million while capital expenditures remained relatively unchanged compared to the 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 2.8 times, 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 2.5 times 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 our growth and margin expansion. With that, I'll turn it back over to Gary, who will provide the closing comments.

Gary Michel, Chair, President, and CEO

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 home ownership 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, hopefully alleviating 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 multi-year 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 our performance this year. Given the recent strength in housing starts, we expect some moderation of growth from these peak levels towards 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 three 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 the 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, Operator

At this time, I would like to remind everyone that your first question comes from the line of John Lovallo from UBS. Your line is open.

John Lovallo, Analyst

Good morning, guys. And thank you for taking my questions. 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 the same lines, is there any change in the cadence that you're expecting to hit the 2025 margin targets?

Gary Michel, Chair, President, and CEO

Thank you, John. Good morning and I appreciate your questions. They are very insightful. Let's discuss 2022. We are witnessing sequential improvement in pricing that is helping to counter inflation, and we observed this in the fourth quarter, so we anticipate this trend will continue to gain momentum throughout the year. The key factors driving our growth and guidance for 2022 include robust market conditions, the capability to implement pricing that offsets inflation, and specific returns from our investments in growth, particularly in capacity expansion. For instance, we have recently opened a new facility on the East Coast for our VPI multi-family business, which could potentially double our capacity in this area. We are also expanding our exterior door business, which has seen significant growth in recent years and is expected to continue this year. Additionally, we are excited about introducing our composite window and patio door product this year, which is also expected to contribute positively to our margins and show significant growth. The other products mentioned earlier in Europe and Australasia also contribute positively to our margins. So, if we consider that our pricing strategy is more than compensating for inflation throughout the year while our growth initiatives and capacity expansions in margin-enhancing products are on the rise, we have a solid foundation for 2022.

John Lovallo, Analyst

Okay, that's helpful. And then, my second question, could 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?

Gary Michel, Chair, President, and CEO

There will be some carryover, John. We did have some price increases that took effect in the last half of the year, as we talked about, as part of that third round of pricing actions. But what I'm saying at this point is we've got visibility to the price that's embedded in our outlook. We've either already taken 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 at this point, we don't need to take any additional action to achieve the pricing that's embedded in our outlook. But in terms of quantifying 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 mix or trade down; we're definitely not seeing any notable trade down in terms of lower-priced products. It seems to be an environment where manufacturers who have products and inventory and who can meet the demand is more critical than the price of products, because consumers and builders are looking for new products and are showing less sensitivity towards price.

John Lovallo, Analyst

Got it. Thank you.

Deepa Raghavan, Analyst

Hi, good morning, everyone. Thanks for taking my question. 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 on how you think the current backdrop with the interest rates being high could influence?

Gary Michel, Chair, President, and CEO

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 IBS and over the last several weeks, and we're seeing strong demand continuing in residential new 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 discretionary budgets 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 will look out for that, but what we see is the backlog of new orders is certainly there to carry us through this year. And we're looking at labor constraints and supply chain constraints loosening up in that channel in order to have those new orders journey to build.

Deepa Raghavan, Analyst

Okay, that's helpful. You mentioned labor constraints and that your sequential throughput has improved since reaching its lowest point in August. Can you share your expectations for 2022? You presumably expect labor constraints to improve, but by how much? Are you anticipating a few percentage points increase in the top line, or perhaps one percentage point in volume for 2022?

Gary Michel, Chair, President, and CEO

So in the last response to labor constraints, I was mostly referring to the residential construction and the trades and their ability to complete their work. I think that's going to start working its way through; there are challenges there, obviously. In our own operations, we saw the biggest challenges last summer, and we actually used our own JEM tools around problem-solving to look at how we can attract and retain labor within our operations. We saw sequential improvements in what we call absenteeism or our ability to staff our facilities, and that's really what helped us drive that sequential throughput in 2022. I don’t know that my fidelity is good enough to put a 2% improvement or a number on that 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.

Deepa Raghavan, Analyst

Okay, I just need a quick clarification. So, you are only considering the prices that have already been implemented in your guidance, correct? Not any future price increases.

John Linker, CFO

Yes, there are prices that have been implemented but haven't actually started being realized yet due to customer notification days 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 for the full year, if not all hitting the P&L yet in Q1.

Deepa Raghavan, Analyst

Great. Thanks so much, appreciate it. Good luck.

Gary Michel, Chair, President, and CEO

Thank you.

Operator, Operator

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

Matthew Bouley, Analyst

Morning, everyone. Thanks for taking the questions. I wanted to ask about the site transformation efforts. That was helpful color you gave up top on sort of the benefit, the capacity and labor productivity. I think I heard you say you plan to deploy three times 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 there's sort of a benchmark we can look to around annual capacity expansion that you're targeting from that program. Thank you.

Gary Michel, Chair, President, and CEO

Thanks, Matt for the question, and good morning. Yeah. We're really excited about the movement we've been talking about with JEM for well, three and a half years or so. After the first deployment of basic problem-solving tools across the entire enterprise, we've seen great benefits. In 2021, we identified our 14 model value streams, which really is an end-to-end look at portions of our business and deploying what I guess you might even call JEM 2.0, a deeper look at more narrow parts of our business that actually makes a big difference in our performance. Where you're seeing a lot of that work is around cycle time improvement in our facilities that are showing up as competitively advantageous lead times in our business. We've been able to talk about significant improvements in lead time last year and throughput compared to our competitors in areas like vinyl windows, for example, and into your next-year doors. It's really given us capacity expansion without having to deploy a lot of capital in those areas. So as we talk about taking our rapid improvement events, some might call them Kaizen events, we're deploying those across those 14 value streams at all points, from order entry all the way through to cash collection. But a lot of the 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, we'll take those 14 and expand them to further value streams across the company. We have targeted numbers for that. We know where we'll go next, but we want to ensure that we make a difference that sticks and that what we've learned in the 14 model value streams is applicable to our broader operations.

Matthew Bouley, Analyst

Got it. No, that's really helpful color there, Gary. Thank you for that. 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 any new price. But high level, is there a split between price and volume that you're assuming, and is there any cadence to the volume side through the four quarters that we should be aware of? Thank you.

John Linker, CFO

Sure. In the 7% to 10%, as Gary mentioned in the prepared remarks, that's all-in, including an FX headwind estimate right now for about 2%. On a core basis, that's more in the 9% to 12% range. Certainly, pricing is more than half of that, given the amount of pricing that we're needing to put through to offset inflation, but volume mix is strong and 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 regarding labor availability in Europe and Australia related to COVID. We're 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. So volume will come as the year progresses.

Matthew Bouley, Analyst

Got it. Well, thanks, John, thanks, Gary, and good luck.

John Linker, CFO

Thanks, Matt.

Operator, Operator

Your next question comes from the line of Phil Ng from Jefferies. Your line is open.

Philip Ng, Analyst

Hey, guys, John, I've lost track of the amount of price increases you guys have announced since last year. So it could be helpful to refresh us, since the last call late last year, what incremental price increases have you announced in your bigger markets and how does that layer in? And then I guess a follow-up on the margin side of things, you said margins are 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?

John Linker, CFO

Good morning, Philip. I would say that in terms of the price increases, yes, that's a lot to keep track of, just given the number of markets that we're in. We'll focus on North America because that's probably our area of interest. The most recent change was in the wholesale channel, which was an all-products price increase effective January 1. And then, our retail price increases are layered in as the first quarter progresses. They're not as clear-cut as the wholesale channel, but that would be the most recent round of pricing that was done. And then, as you get into Europe and Australia, the timing is different given the distinct nature of customers and channels there. In terms of margin cadence, yes. We expect margins to be down in Q1 primarily due to the impact of inflation. And although we're covering it in dollar terms, it’s still a headwind to rate. By the second quarter, those margins might get closer to flat, and then we could see some very nice margin uplift in the second half of the year.

Philip Ng, Analyst

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

Gary Michel, Chair, President, and CEO

Yeah. 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, and 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. We've got a number of great projects internally that continue to pay off for us. I look at 2022 as a payout year for some of those investments. We've talked about earlier, the capacity expansion side of the equation. Look at VPI; the investment we made a couple of years ago is really paying off as we're about to see the benefits of doubling our capacity in that business, which is part of that strategy. So we’re looking for more VPI and more opportunities to add to our strategy that we laid out last year.

Philip Ng, Analyst

Thanks a lot. Great color.

Operator, Operator

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

Chris Kalata, Analyst

Hi, this is actually Chris on for Mike, thanks for taking our questions. Just wanted to touch on your expectations on cost inflation this year, particularly in the back half of the year. I realize that you guys could go out with incremental pricing, but what are you assuming in terms of year-over-year inflation and costs and the cadence of that between the first half and the back half of the year?

John Linker, CFO

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

Chris Kalata, Analyst

Got it. Appreciate that. And then just to follow-up on the year price-cost in your outlook there. Obviously, you guys said you were expecting it to be positive this quarter but ended up costing the phone the other way. Obviously, the volatile situation there, but just your confidence on achieving price-cost favorability in that region.

John Linker, CFO

You're asking specifically about Europe? I think the biggest unforeseen challenge that came out of Europe was the utility side, particularly utilities and natural gas costs in Q3 and Q4, which we did not have visibility to the magnitude of that fully. Price-cost in Q1 is similar to our other regions in terms of being neutral in dollar terms. That’s still a headwind to margin rate, and we will continue to work through that.

Chris Kalata, Analyst

I appreciate the color.

Operator, Operator

Your next question comes from the line of Susan McClary from Goldman Sachs. Your line is open.

Susan Maklari, Analyst

Thank you. Good morning, everyone. 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?

Gary Michel, Chair, President, and CEO

Good morning, Sue, and thank you for the question. I'll start with the retail question. Retail and 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 towards stock units over the last couple of years. That mix has been changing over 2021 and improving toward 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 retail. So we're going to keep our eye open for that, but we are seeing special orders continue to trend more favorably, and we hope we will get back to pre-pandemic levels sometime in 2022. In the traditional channel, the wholesale channel, we've actually seen significant acceleration in orders over the last several quarters, which have been growing in North America. Part of that is from builders, 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. General trends in both residential new construction and the R&R market are really driving all of that.

Susan Maklari, Analyst

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 the last two years. And I know you talked a bit about some of the projects that you're seeing in terms of capacity adds and those things. But any 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?

Gary Michel, Chair, President, and CEO

Our guide for capex at this point last year for 2021 was actually pretty similar to what we're guiding to for 2022 as the year progressed. Like a lot of industries, lead times for equipment and capital projects got pushed out, and so we did not accomplish all of the projects in 2021 that we had hoped to. These projects range from automation to productivity, safety, and maintenance side projects. 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. We're looking at 2021, but mine are simple projects and strategic projects going to drive more productivity in 2022.

Susan Maklari, Analyst

Thanks for the color and good luck with everything.

Gary Michel, Chair, President, and CEO

Thank you.

John Linker, CFO

Thank you.

Operator, Operator

Your next question comes from the line of Mike Reinhart from JP Morgan. Your line is open.

Mike Reinhart, Analyst

Hi, thanks. Good morning, everyone. Mike Reinhart. First question. I wanted to go back to the guidance for a second and appreciate the earlier color where you said that the nine to 12 core is being driven more by price. I think that more than half a bit from price. Then so on the volume side, I was trying to get a sense Gary, you laid out earlier in the call different types of initiatives you've been implemented, anything capacity expansion, investments in labor, various new products. I'm just trying to get a sense, particularly in North America, if there's any way to quantify what that impact of the different capacity expansion or new product initiatives represent in terms of the overall thought for volume growth. Let's say if volume growth is less than half of the 9-12, so maybe something in the 2-4% range. I'm just putting a number out there. Is that 2-4% or let’s say 3-5% primarily driven by end-market growth? How much is driven by these different company initiatives like capacity and new products?

Gary Michel, Chair, President, and CEO

Yes. I think you've got the basic elements, putting the price aside. We've got some unique initiatives within JELD-WEN that are driving growth. I'd speak of it a little bit as a payout year for us. You are clearly gaining share in some of our categories, which required us to put in some of these capacity expansions due to high demand for our products. If you think about some of the things building up that are JELD-WEN specific growth initiatives above and beyond market share gain: expansion, investment in labor, our exterior fiberglass door business has grown significantly, and we expect it to continue to grow this year. The expansion of our VPI business, which we moved to the East Coast recently, has created a lot of demand for our products. Adding new product lines such as our Auraline composite doors, we expect those to drive margin improvements too. If you think about what's driving growth, there's probably about $100 million of additional growth just related to those initiatives alone in North America, some of these combined with what we're doing in Europe and Australasia.

Mike Reinhart, Analyst

Okay. No, that's helpful, appreciate that. I guess, secondly, 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. You talked about the overall, maybe first quarter margins being down, second quarter margins being flat, and then expansion in the back half. How should we think about the first and second quarters? Should we expect them to be more neutral and then more positive in the back half or the other factors that you've mentioned driving the margin contraction in 4Q also turning around?

John Linker, CFO

I'd say, for the pricing-cost progression, in Q1, that should be in dollar terms, sort of in that neutral area pre-pricing material and freight inflation. That neutral in dollars is still a headwind to margin rate. Then, in Q2, probably getting closer back to flat margins, and then seeing some very nice margin uplift in the second half of the year, is how I’d break that up. I think in terms of our other margin drivers, we've got positive productivity and manufacturing efficiencies baked into the plan from all the work we're doing on JEM. You've got favorability from the leverage on the volume that Gary outlined. And we anticipate some relief on that volume mix situation which was a headwind in Europe in Q4 and should provide us some relief to margins. There’s a lot of visibility to the levers that will drive margin improvement. The first half of the year will be diluted by inflation in terms of rate.

Mike Reinhart, Analyst

Great. Thank you.

Operator, Operator

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

Truman Patterson, Analyst

Hey, good morning, everyone. Thanks for taking my questions. Just first for clarity. Embedded in your '22 guidance, are you all baking in cost where we sit today at the end of December or February, or are you all expecting some further cost inflation?

John Linker, CFO

We do expect year-over-year inflation throughout the year, but I wouldn't say we anticipate the inflation worsening from where we are today.

Truman Patterson, Analyst

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. I think they fell over 400 basis points. I'm just trying to understand how much of labor inflation might have impacted that number and just some of your expectations for the labor component to trend in 2022.

Gary Michel, Chair, President, and CEO

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. We’re doing targeted wage increases in certain plants to ensure we can attract and retain the right labor. It’s an inflation cost headwind, but we also view it as a payback on that. If you can retain the right labor, then you can get the volume throughput needed. In dollar terms, labor inflation was in the $15 million range, something like that.

Truman Patterson, Analyst

Okay. Thanks. 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, you all were able to walk it down 400 basis points or so to some of the lowest levels you 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 all are comfortable running at.

Gary Michel, Chair, President, and CEO

There are certainly a lot of areas that we'd like to invest in and use some of the pricing we've been receiving from the market to offset inflation but fund R&D, innovation, and growth. On an absolute basis, you're right; we did a good job managing cost control in 2021. But if you think about JELD-WEN relative to other peers, there is an opportunity for us to invest more in SG&A as a percent of sales. As we think about the future, we'll be looking for those highest payback investments that we can make. A lot of it is tied to funding growth. In 2022, there will be some increased SG&A year-over-year, but those will be projects that we can tag along and discuss fully depending on how the business is performing. All of these new initiatives are aimed at driving more growth in the future.

Truman Patterson, Analyst

All right, thank you.

Operator, Operator

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

Steven Ramsey, Analyst

Hi, good morning. I wanted to think about Australasia for a minute. In 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 for 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.

Gary Michel, Chair, President, and CEO

Yeah. We're pretty excited about what's going on in Australasia and Australia in particular. We've seen year 2021 was a record year in new home orders. We expect the order rates probably to be off a little bit this year, but the issue is some of the build times there in Australia are pushed out for months. There is a huge backlog of un-billed demand. We think that sequentially improvements will occur, and it will depend on how builders and contractors are able to complete their jobs. So we’re optimistic about residential construction in Australasia this year. The orders are substantial. As borders reopen, things are starting to get back to normal. They were probably hit the hardest by complete shutdowns anywhere in the world. So as that opens back up and labor availability starts to improve, those orders will turn into starts. We're pretty bullish on where we are in Australasia; performance results are improving sequentially.

Steven Ramsey, Analyst

Great. and then thinking about Europe, what are the key ways you intend to drive increased market penetration through this year? How much of the benefits hit in 2022 or does it build and have a fuller impact in 2023?

Gary Michel, Chair, President, and CEO

Yes. We've been laying out our strategy for Europe last year at our Investor Day, really surrounding a few things. One around taking the various product categories that we already make and sell in certain markets and moving those into markets where we sell other products. This will complete our product portfolio lineup over there. For example, transitioning technical doors from Central Europe into the UK market will be a dramatic driver for us. Additionally, we've got the opportunity; we are doing innovative work in Europe, particularly around sustainable products, which will lead to connectivity and more product functions, and some launches are definitely going to drive growth and will contribute to growth in 2022 and beyond. We see great opportunities in under-served markets throughout Europe where we can deploy our full product portfolio; this looks a lot like what we sell in other countries. Our overall strategy in a nutshell for Europe will benefit us in 2022 and will continue to accelerate as new innovations come along and we continue to transfer products across markets.

Operator, Operator

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.

Gary Michel, Chair, President, and CEO

Thank you all for joining us today and your continued interest in JELD-WEN. As we said earlier, our markets are strong; we like the setup 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 and freight inflation. We expect that to accelerate benefits for us in 2022. We've got a number of specific JELD-WEN initiatives that are driving growth and productivity in 2022. We're excited about 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.

Operator, Operator

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