Earnings Call Transcript - JELD Q4 2020

Operator, Operator

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. 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.

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, 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.

Gary Michel, CEO

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 the 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 nine 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 third 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 the 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 three segments delivered sequential improvements in volume growth and significant margin expansion versus the 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 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 four 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, projects, 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.

John Linker, CFO

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 three 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 and 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 the 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. 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 the prior year. The revenue performance benefited from the reopening of Victoria from a 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 margins. 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 the 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 two 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 the 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 Michel, CEO

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, set 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, Operator

Your first question comes from Matthew Bouley from Barclays.

Matthew Bouley, Analyst

I want to begin with a question regarding pricing and costs. Gary, you mentioned the commercial efforts that have managed to keep prices and costs favorable for several consecutive quarters. Considering that inflation may pose a stronger challenge in the first half of this year as you indicated, have you been able to implement sufficient pricing across the segments to continue this trend of positive price and cost dynamics? Or should we expect a more neutral outlook this year in light of inflation?

Gary Michel, CEO

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 up with kind of the going gone in windows. We've been able to see late, kind of mid to late last year, some good action there. We are seeing some inflation during the first half, as we mentioned. 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 offsets inflation. So it's something that we watch quite a bit. The work that we talked about really over the last 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.

John Linker, CFO

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.

Matthew Bouley, Analyst

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?

Gary Michel, CEO

Yes. If you look at production, there are really three aspects to that business. Earlier last year, we experienced the impact of absenteeism due to COVID, which affected the windows business more than the others. However, that situation has improved significantly. We are now in a strong position regarding our windows production. There is high demand for windows, and we are seeing commitments and gains in market share as we manage to deliver more consistently. The challenges related to windows production are largely behind us, and we are pleased with our recent performance in that area. On the door distribution side, we encountered increased industry absenteeism during the fourth quarter. We are making every effort to ensure we have sufficient personnel in our plants to maintain operations and manage this issue. Additionally, there are some weather-related challenges impacting certain regions. We are addressing these matters daily with focused actions and the dedication of our team to meet customer needs. We believe we will continue to gain market share. However, we faced significant challenges specifically in the California door distribution region, which we will keep an eye on going forward.

Operator, Operator

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

John Lovallo, Analyst

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?

John Linker, CFO

Yes. In the fourth quarter, a few factors impacted us that were unique occurrences. We faced additional litigation and legacy accruals that were non-operating and excluded from adjusted EBITDA. There were also adjustments for variable compensation, along with some extra expenses related to employees returning to doctors for health claims, which had been postponed earlier in the year. I wouldn’t describe the changes in spending during the fourth quarter as structural; rather, it was mainly a matter of timing as we approached the end of the year.

John Lovallo, Analyst

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?

John Linker, CFO

I believe that the essence of that remark is that in the fourth quarter, we experienced significant growth in certain parts of Europe. The order books for the first quarter look promising, both for projects and in the commercial and residential sectors. However, we are concerned about the uncertainty surrounding COVID and how consumer spending might shift away from renovations and home improvements as consumers consider other expenses, such as travel. This could potentially lead to a decline in near-term demand. We are not observing any fundamental weakening in the markets; rather, there is a lack of clarity about future developments. When we examine the economic health of many European markets we operate in, we see high unemployment and low GDP, which contributes to our cautious outlook. While our short-term visibility is positive, we have uncertainties about what the latter part of the year may hold.

Operator, Operator

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

Philip Ng, Analyst

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?

Gary Michel, CEO

I'll start by saying that the demand for our product in North America remained strong in the fourth quarter. The decline we experienced was primarily due to absenteeism and some mix variations for the quarter. Currently, we observe robust demand and growth in retail R&R. We're also seeing significant growth in other areas, such as our operations in Canada, VPI, and the commercial sector. The absenteeism we've mentioned, particularly in door distribution and the U.S. traditional door channel, has had an impact. Nevertheless, we still have a strong backlog and demand coming in from North America, and we're optimistic about our growth rates moving forward.

John Linker, CFO

I mentioned the exit rate in the prepared remarks. Revenue growth in North America in December was about 10% higher than the prior year. January presents a challenging comparison due to shipping days, so it's not completely comparable, but I would say the trend remains similar. Currently, in the first quarter, the North America backlog is more reflective of open orders since we operate as a fairly short-cycle business, and these open orders have increased significantly compared to the same time last year. If we can ensure a stable manufacturing platform and resolve the absenteeism issues, I believe we are well positioned for an acceleration in North America volume growth as the year continues.

Philip Ng, Analyst

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.

Gary Michel, CEO

Yes. We monitor it daily. We've been taking actions to ensure that all of our plants can operate. Absenteeism has been a significant issue over the last couple of quarters, particularly due to pandemic-related shifts and some shutdowns in California where we have operations. We have been either overhiring or adjusting schedules to ensure we have enough personnel at our plants. Overall, we feel we are managing this situation effectively. While there are averages we work to improve, we aim to ensure it doesn't impact our performance for customers. The work we've been doing over the past few years with JEM has really helped; we know how many staff we need, the cycle times, and have playbooks for various capabilities. Although we may be operating under a lower capacity than desired, we are confident in our ability to produce quality products consistently with the labor resources we have at each of our plants.

Philip Ng, Analyst

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?

Gary Michel, CEO

We have made significant progress in the windows business regarding our operations. While we may have lost some market share, we have consistently improved our margins and throughput. The market is currently tight, with high demand for windows. Although industry lead times are extending, we remain very competitive and close to our traditional lead times, allowing us to recapture market share and accounts lost 18 to 24 months ago due to previous operational challenges. The JEM work we have implemented on windows is now performing very well, leading to margin expansion and the opportunity to regain share.

John Linker, CFO

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 three 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.

Operator, Operator

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

Timothy Wojs, Analyst

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?

John Linker, CFO

Yes, your comments are accurate. The inflation impact is more significant in the first half of the year. Considering the timing of the price increases we've negotiated, we may not see a full quarter's effect from some of these channel price hikes in the first quarter, which will limit our ability to offset the heightened inflation. Therefore, the price-to-cost ratio will not provide as much support in Q1. However, I expect margin improvement in every quarter this year. We have solid plans and good visibility to achieve this through price, volume, and productivity efforts. While the first quarter presents an easier comparison to the prior year, it will likely yield the least margin improvement for the entire year due to the timing of inflation and tariffs. However, we anticipate improvements will pick up as the year progresses.

Gary Michel, CEO

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.

Timothy Wojs, Analyst

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.

Gary Michel, CEO

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 a 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.

Operator, Operator

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

Susan Maklari, Analyst

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?

Gary Michel, CEO

Yes. On the retail side, much of what occurred last year was due to contractors and customers focusing on obtaining products immediately from inventory, which shifted the preference towards stock units over special orders. This trend continued throughout the year. In the fourth quarter, although it remained a challenge, it slightly improved and we began to see an increase in special orders. We expect this trend to continue steadily throughout the year. We're likely approaching a point where our inventory aligns better with what our retail partners prefer for stock. As that alignment occurs, we’ll be in a position to promote more special orders and increase production in our factories. We anticipate this shift may start to take place by the end of the current quarter and into the second quarter, which could turn into a positive impact as we move into the latter half of the year.

John Linker, CFO

Yes. To clarify on the earlier question regarding the timing of margin improvements throughout the year, mix will indeed remain a challenge in the first quarter due to our current open order book and backlog. We expect mix to be a headwind in Q1. However, we believe that inventories will be replenished, leading to an increase in special orders, which could benefit us in the latter half of the year.

Susan Maklari, Analyst

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?

Gary Michel, CEO

Certainly. We're still in the early stages of our JEM deployment and continue to implement new tools. We're experiencing a significant cultural shift in our problem-solving approach, our view of standard work, and our daily operations in our factories. We're also seeing the JEM tools and business operating system being utilized across our functions. Regarding the rationalization and modernization program, which we refer to as project gain, we have successfully deployed about one-third of our annual target savings of $100 million. You will begin to notice the impact of this in our run rates in 2021. We have another one-third of projects currently in progress, focusing on plant consolidation and throughput improvements, all built on the principles of JEM. The next set of projects will build on our initial experiences and further modernize our operations. Importantly, despite the downturn, we maintained our investment in these rationalization and modernization programs throughout 2020, experiencing only minimal delays. We are optimistic about the projects moving forward, which span all our segments globally. Consequently, we feel confident in our ability to reach the $100 million annual run rate we committed to.

Operator, Operator

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

Elad Hillman, Analyst

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?

John Linker, CFO

Starting with inflation, I want to clarify that while there will be a negative impact on the profit and loss from inflation, overall price and cost are still favorable for the full year based on our current knowledge. Although it's not as strong a benefit as it was in 2020, the impact from inflation related to materials, tariffs, and freight is around 1.5% of sales, which is nearly double what we experienced in 2020 and is quite significant. Regarding pricing, I’m hesitant to provide too much forward guidance, but given our current agreements and negotiations, I am optimistic that 2021 can maintain a pricing level comparable to 2020. As the year progresses and the inflation environment changes, we will consider further pricing adjustments to ensure we enhance our margins. The areas where we are feeling the strongest inflation impact are millwork and plastic or vinyl components. Additionally, metals, particularly steel coil and aluminum, along with logs and lumber, represent the four main categories experiencing year-over-year increases of about 5% to 8% compared to last year’s spending.

Elad Hillman, Analyst

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?

John Linker, CFO

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.

Gary Michel, CEO

Yes, on the housing side, there is strong demand. One of the challenges we face will be the availability of labor, which can affect the start of new builds, as well as potential shortages or delays in building materials. We are monitoring this situation very closely. We expect this to be a positive factor for us, and we believe we can keep up with the housing demand we are seeing. However, the situation is complex, and our ability to meet demand will depend on how housing starts develop in relation to labor and building material availability. This will influence our overall planning.

Operator, Operator

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

Michael Dahl, Analyst

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?

John Linker, CFO

The foreign exchange market has been quite volatile. If we look at the changes from November to December in some key FX rates, we see significant impact. I agree that if we choose a specific point in time and assume it continues throughout the year, the FX revenue benefit could be substantial. However, we believe that this year will be closer to an average of the fourth quarter rates, which we consider more normalized. Therefore, the FX impact might be around 1% to 2% revenue tailwind. The rest of our guidance will rely more on organic growth. North America is performing strongly, likely exceeding the company average, driven by improvements in both pricing and volume. In contrast, Europe is expected to fall below the company average based on current observations. As for Australia, we are adopting a cautious stance in our guidance, anticipating a slight negative impact on revenue. Early indications suggest that this outlook could change positively, but we lack clear visibility regarding the sustainability of the recent government stimulus benefits. It's possible that these benefits might diminish in the latter half of the year. While we see the potential to perform at the upper end of our revenue guidance, this assessment reflects our current visibility and understanding.

Michael Dahl, Analyst

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?

John Linker, CFO

Yes. We utilized the U.S. CARES Act and similar legislation in other countries to defer payroll taxes during the COVID situation. A significant portion of that will need to be repaid in 2021, with a small part extending into 2022. The year-over-year effects of this will create a positive impact in 2020 but are expected to present challenges in 2021, amounting to about $45 million. Therefore, free cash flow for the year will face headwinds, especially with the increase in capital expenditures. We anticipate a year-over-year decrease in free cash flow in 2021 due to these factors. However, we do not expect any deterioration in the core quality of our earnings or in converting those earnings to cash flow. If you look at the rise in earnings from 2020 to the midpoint of our guidance, I would expect that to fully translate to free cash flow. Nonetheless, there are several specific challenges that will lead to a decrease in free cash flow in 2021 compared to 2020.

Operator, Operator

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

Keith Hughes, Analyst

Just referring back to the profit improvement plan. You'd said you've gotten one-third 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?

John Linker, CFO

All I'd say is that the one-third is a run rate that should be part of the base going forward. However, considering everything that happened in 2020 with COVID, facility shutdowns, and the timing of projects we hoped to complete earlier in the year, only a small fraction of that, around $30 million, actually impacted the profit and loss in 2020. As we move into 2021, the year-over-year incremental benefit from that will certainly be one of the factors supporting earnings.

Keith Hughes, Analyst

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

John Linker, CFO

I would estimate that the full $30 million should be reflected in the base earnings by the end of 2021. We are considering the initial rollout of this program, which occurred towards the end of 2018, as our baseline. We anticipate that there will be an additional $30 million in earnings from the footprint program reported in the P&L by the end of 2021. Furthermore, there will be additional earnings in subsequent years as we implement projects that are launching this year.

Operator, Operator

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

Adam Baumgarten, Analyst

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?

Gary Michel, CEO

I think it's a tough question for us to answer. We expect that residential construction will benefit us as a growth driver. However, it's challenging to determine how significant the delays are. There is strong demand for both windows and doors, possibly a bit more for windows at this stage. Our opportunity lies in meeting that demand. The main concern is how much this benefit will depend on when labor and necessary building materials are available to begin construction. We're monitoring the situation closely. I can't specify the delay in terms of days or weeks, as that's not clear to us, but we understand that our order volume supports this benefit, which we anticipate will continue throughout the year.

Adam Baumgarten, Analyst

Got it. Okay. And then, John, regarding corporate expenses for 2021 that are included in your guidance, there was a notable increase last year. What should we consider regarding this, especially since it seems there may have been some one-time events? How should we think about it for 2021?

John Linker, CFO

Yes. I would say that, certainly, with some of the COVID-related deferrals that we experienced in 2020, there will be a slight increase as we start to spend on discretionary marketing, sales, and other deferrals. I believe the corporate expense for the full year was in the range of $65 million to $70 million. While I don't have the exact figure in front of me, I anticipate a modest increase for 2021 as we reinstate some of those COVID-related expenses.

Operator, Operator

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

Alexander Rygiel, Analyst

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

John Linker, CFO

It's not scientific, but based on my observations early in the year, North America was experiencing average absenteeism in the high single digits to around 10% as COVID was in its early stages. As the second wave hit in the fourth quarter, absenteeism increased significantly. I noted that some plants had absenteeism rates of 25% to 30% during that time. Therefore, I would estimate that the potential revenue loss in the fourth quarter for North America could be around $25 million. However, it's difficult to pinpoint that exactly. I'm just using absenteeism data to make an educated guess about the potential impact.

Alexander Rygiel, Analyst

I believe you mentioned that lead times have been improving. Can you provide some details on that or discuss it in the context of the impact that absenteeism may have had?

Gary Michel, CEO

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.

Operator, Operator

And your next question will come from Reuben Garner from Benchmark.

Reuben Garner, Analyst

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?

Gary Michel, CEO

I believe when we discuss the mix issues in 2020, a significant portion was related to the stock DIY segment and some of the professional business. This was more focused on getting products ready to complete projects more quickly. We are beginning to notice a recovery in the pro contractor sector. This segment typically involves products that have either special or longer lead times, but they also offer better margins. This shift in the mix is something we are seeing come to fruition. 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.

Operator, Operator

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