Quanex Building Products (NX) Q4 2021 Earnings Call Transcript

Quanex Building Products (NX 3.15%)
Q4 2021 Earnings Call
Dec 17, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the fourth quarter and full year 2021 Quanex Building Products Corporation earnings conference call. [Operator instructions] After the presentation, there will be a question-and-answer session. [Operator instructions] Please be advised, today's conference may be recorded.

[Operator instructions] I'd now like to hand the conference over to your host today, Scott Zuehlke, SVP, CFO, and treasurer. Please go ahead.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Thanks for joining the call this morning. On the call with me today is George Wilson, our president and CEO. This conference call will contain forward-looking statements and some discussion of non-GAAP measures. Forward-looking statements and guidance discussed on this call and in our earnings release are based on current expectations.

Actual results or events may differ materially from such statements and guidance, and Quanex undertakes no obligation to update or revise any forward-looking statement to reflect new information or events. For a more detailed description of our forward-looking statement disclaimer and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures, please see our earnings release issued yesterday and posted to our website. I'll now discuss the financial results. Net sales increased by 14.2% and 25.9% during the fourth quarter and full year of 2021 respectively.

Record growth for both periods. As a reminder, both of our manufacturing facilities in the U.K. were shut down in late March of 2020 and did not resume operations until mid to late May last year. The increases in revenue were mostly due to improved demand across all product lines and operating segments, combined with higher prices primarily related to the pass-through of raw material cost inflation.

More specifically, for the fourth quarter and full year, we posted net sales growth of 10.1% and 19.6% respectively in our North American fenestration segment, 15.9% and 17.1% respectively in our North American cabinet components segment, and 17.6% and 45.6% respectively in our European fenestration segment, excluding the foreign exchange impact. We reported net income of 20.9 million, or $0.62 per deluded share, for the three months ended October 31, 2021, compared to net income of 22.2 million, or $0.67 per diluted share, during the three months ended October 31, 2020. For fiscal 2021, we reported net income of 57 million, or $1.70 per diluted share, compared to net income of 38.5 million, or $1.17 per diluted share, for fiscal 2020. On an adjusted basis, net income was 20.8 million, or $0.62 per diluted share, during the fourth quarter of '21, compared to 22 million, or $0.67 per deluded share, during the fourth quarter of 2020.

Adjusted net income was 58.6 million, or $1.75 per diluted share, for fiscal 2021, compared to 40.7 million, or $1.24 per diluted share, for fiscal 2020. The adjustments being made to EPS are for restructuring charges, certain executive severance charges, foreign currency transaction impacts, and transaction and advisory fees. On an adjusted basis, EBITDA decreased by 5.3% to 37.3 million in the fourth quarter of 2021, compared to 39.4 million in the fourth quarter of last year. For the full year 2021, adjusted EBITDA increased by 21.3% to 126.8 million, compared to 104.5 million in 2020.

The decrease in earnings for the quarter was mainly due to inflationary pressures and supply chain challenges. The increase in earnings for the 12 months ended October 31, 2021, was largely due to higher volumes, improved operating leverage, and better pricing. This increase was somewhat offset by higher raw material costs and an increase in selling, general, and administrative expenses. I'll now move on to cash flow and the balance sheet.

Cash provided by operating activities was 78.6 million for the 12 months ended October 31, 2021, compared to 100.8 million for the 12 months ended October 31, 2020. We generated a free cash flow of 54.6 million in 2021, compared to 75.1 million in 2020. The decrease was primarily driven by an increase in working capital, more specifically, the value of our inventory due to inflation. We were able to repurchase 11.2 million in stock, and we repaid 65 million of bank debt during fiscal 2021, 20 million of which was repaid in fourth quarter.

Our balance sheet is strong. Our liquidity position is solid. And our leverage ratio of net debt to last 12 months adjusted EBITDA improved to 0.1 times as of October 31, 2021, which is a half-turn lower than where we exited fiscal 2020. As for 2022 and as noted in our outlook section in the earnings release, we have chosen not to issue guidance just yet.

Demand remains strong, but ongoing supply chain disruptions continue to create uncertainty. With this backdrop, we believe it would be premature to give guidance at this time. We do believe that we should be able to realize margin expansion on a consolidated basis in fiscal 2022, but we also think that margin expansion will be second-half loaded. As we sit here today and to set appropriate expectations for the first quarter of 2022, we currently expect mid-single-digit net sales growth for the first quarter, mostly due to price increases, but margins will be pressured compared to the first quarter of 2021.

We hope to provide an update on full year guidance when we report earnings for the first quarter of 2022. As a reminder, there is a fair amount of seasonality to our business. The first quarter of each year is typically the low watermark, with the second half contributing most of our earnings and free cash flow. I'll now turn the call over to George for his prepared remarks.

George Wilson -- President and Chief Executive Officer

Thanks, Scott. We are extremely pleased to announce that 2021 was a record year for Quanex despite numerous challenges. We reported record revenue and earnings, and return on invested capital continued to improve. In addition, we reported another year with solid free cash flow.

In fact, cumulative free cash flow over the past five years is approximately 325 million. Also, as Scott mentioned, we were able to pay down 65 million of debt and returned 11.2 million to shareholders through share repurchases during the year. While we are very pleased with these results, we're not surprised. In an environment with strong demand, the operational improvements we've made in our manufacturing facilities over the past four years, combined with the systemic and permanent changes we've made to our working capital management, continue to yield strong results.

I am very proud of the entire Quanex team for the energy, effort, and performance they continued to deliver to our customers, communities, and shareholders. Before providing comments on segment results, I will give some additional color on our view of the events of 2021, the markets we serve, and the macroeconomic environment we currently face. As we entered 2021, there was optimism and hope that the COVID pandemic would soon be under control and that operating environments would return to some level of normalcy. As different variants spread and vaccine uptake proved lower than expected, the optimism was soon replaced by the reality that the battle against COVID is far from over and that measures to contain or minimize the spread of the virus will continue around the world.

The year also ushered in a new and, in some respects, more significant challenge, supply chain stress and disruption. With the infusion of COVID relief payments into our economy, demand for goods in the building products segment increased at record rates. At the same time, the supply chain's ability to ramp up was continually impeded by labor constraints, plant shutdowns or slowdowns, freight issues, and significant weather events. As a result, backlogs for finished goods dramatically increased over the year to record levels and suppliers have been unable to close the gap.

All these factors have worked together to add an unprecedented amount of stress to the entire chain. And as a result, everyone around the world is now seeing high levels of inflation, sporadic deliveries, and unexpected back orders or stockouts with little or no notice. This last piece, limited to no visibility on the delivery of goods, is currently our biggest challenge. All told, the planning and operational environment we see today is significantly more challenging than in 2020 when our primary concern was the labor disruption caused by the pandemic.

When looking at the markets we serve, demand continues to be strong across all segments. Low existing housing inventory and low mortgage rates continue to support strong housing demand, and R&R remains healthy due to high levels of back orders and continued strong consumer confidence. Although we continue to watch for a pullback in demand due to inflationary pressures, we are not seeing signs of this at this time. I will now discuss segment results.

Our North American fenestration segment reported revenue of 156.3 million in the fourth quarter, which was 10.1% better than prior-year fourth quarter. Solid demand across all product lines, combined with higher index pricing, additional surcharges, and permanent price increases, accounted for the stronger revenue performance. Adjusted EBITDA of 20.2 million in this segment was 15% less than prior-year fourth quarter. Volume-related benefits were more than offset by increases in material costs, normalized medical costs, and higher SG&A, driven by incentive compensation.

As a reminder, approximately 80% of our North American fenestration business has contractual raw material pricing index mechanisms. The timing lag of these indices are typically 60 and 90 days, and therefore, we are in arrears and chasing price until the rate of inflation flattens or reverses. At such time, we would expect to see a period of margin improvement or catch up. For the full year, this segment had revenue of 578.3 million and adjusted EBITDA of 75.4 million, which represents a 20-basis-point margin decrease from prior year in a very challenging inflationary environment.

We generated revenue of 69.7 million in our European fenestration segment in Q4, which was 12.9 million, or 22.7% higher than prior year, or up 17.6% after excluding the foreign exchange impact. Strong demand in the U.K. and continental Europe, combined with price increases, resulted in record revenue levels for the segment. Adjusted EBITDA of 12 million in the quarter was 10.1% less than prior-year Q4.

The drop in margin percent for the quarter was driven by material inflation, normalization of SG&A expenses, and increases for incentives. On a full year basis, this segment had revenue of 251.6 million and adjusted EBITDA of 50 million, which equates to margin expansion of 160 basis points versus prior year. Our North American cabinet components segment reported net sales of 66.6 million in Q4, which was 15.9% better than prior year. Strong demand, combined with higher index pricing and additional permanent price increases, were the drivers for higher performance.

Adjusted EBITDA for the segment was 5.4 million, which represents an increase of 16.3% compared to prior-year fourth quarter. Volume benefits, combined with pricing actions, improved wood yields, and normalized expenses, all contributed to the favorable performance by largely neutralizing inflationary pressures during the quarter. For the full year, this segment had revenue of 246.1 million and adjusted EBITDA of 14.2 million, which was an improvement of 17.1% and 22.5% respectively. We were able to realize margin expansion of approximately 30 basis points in this segment even though we chased price all year.

And as a reminder, 100% of our cabinet business has contractual raw material pricing index mechanisms. Finally, unallocated corporate and SG&A costs were 2.1 million lower than prior-year fourth quarter. The primary drivers of the lower expenses were true-ups for stock-based compensation expense and lower than planned medical expenses in the quarter. For the full year, unallocated corporate and SG&A costs were 12.8 million, which returned to normalized levels versus 2020, which was a year impacted by COVID.

As Scott mentioned in his financial commentary, cash flow generation remains solid despite a significant increase in the value of our inventory due to inflation, and our balance sheet is strong. Our board of directors recently authorized a new $75 million share repurchase program, and we will continue to utilize this authority in the open market and on an opportunistic basis. We have positioned ourselves well, and we will continue to evaluate all opportunities to create value for our shareholders. As we look forward into 2022, we remain very optimistic on the demand environment.

Our customers are reporting record levels of backlogs. And this, combined with current favorable housing in R&R markets, should translate into continued strong demand. Operationally, we feel we have made progress on our hiring needs by raising starting wages by an average of $1.80 per hour in our manufacturing facilities. Outside of the index pricing and the associated time lags, we have been able to implement surcharges and permanent price increases to help offset inflation.

The major challenge we currently face is supply chain and freight uncertainty. And it is for this reason alone that we have decided not to provide specific financial guidance for 2022 at this time. Due to continuing supply chain disruptions, we have very little, if any, visibility into our short-term delivery schedules. In this environment, it is extremely difficult to predict the cadence for shipments over the next few months or the potential costs associated with sudden changes in schedules.

And therefore, we think it is prudent to not provide guidance until such time as we can gain some forward visibility. In summary, we continue to execute on our strategy and are proud to have delivered a record year in a very challenging environment. Demand remains strong. And if the global supply chain stabilizes and our businesses continue their excellent operational performance, then we believe it will translate into revenue and earnings growth in another solid year in 2022.

We will continue to stay focused on executing on our strategic plan, and we look forward to reaching a point where we can give more definitive guidance. And with that, operator, we are now ready to take questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Daniel Moore with CJS Securities.

Dan Moore -- CJS Securities -- Analyst

Good morning, George. Good morning, Scott. Thanks for all the color and for taking the questions. 

George Wilson -- President and Chief Executive Officer

Good morning.

Dan Moore -- CJS Securities -- Analyst

I wanted to start with maybe just kind of price versus quantity in Q4. Is it possible to give us a sense of how much of the revenue growth, and in the case of Europe, ex, you know, currency revenue growth, came from price adjustments versus quantity?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

I don't have a specific breakdown, but unlike prior quarters, I can say that price slash surcharge had -- was really the driver more so than volume, although volume was up as well.

Dan Moore -- CJS Securities -- Analyst

Across all three for the most part at least?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Yes.

George Wilson -- President and Chief Executive Officer

That's correct.

Dan Moore -- CJS Securities -- Analyst

That's helpful. And, you know, even more difficult question, but if you had to estimate kind of true underlying demand for each segment relative to quantity. In other words, yeah, how much faster revenue could have grown in the quarter had that not been for supply chain and logistics? Any color or sense there and maybe order of magnitude for -- you know, like rank order each one where the biggest challenges are if you will.

George Wilson -- President and Chief Executive Officer

Dan, you're right, it is a very difficult question, and for the reason that what we're seeing in our order pattern right now in our current orders is demand remains extremely strong across all product lines. But in some areas, we actually have our customers deciding to pull back on their schedules to give their workforce some breaks in as many hours as they're working. So, it's really hard to determine how much more value -- volume could have went through the chain because, you know, again, our customer base are making decisions to pull back. And so, I don't want to give you a number of what that would be if everybody was full out.

All these things are intertwined, and I think, right now, you have a combination of uncertain deliveries impacting it, but you also have, again, our customer base deciding that they have to give their labor forces some relief to the amount of time that they're working. So, it's really hard to determine and give you an accurate answer.

Dan Moore -- CJS Securities -- Analyst

Understood. Just trying to get a flavor of the -- you know, the relative size of kind of underlying demand, but appreciate that.

George Wilson -- President and Chief Executive Officer

What I can tell you, Dan, is in almost every case, our customers are seeing significant growth in their back orders. So, you know, as you go out and look at other companies that report publicly, you'll be able to get a good feel for what they're seeing. And, you know, there's still significant pent-up demand.

Dan Moore -- CJS Securities -- Analyst

Yup. No, that's very consistent, certainly. Maybe another one, if you -- based on the prices increases that we've put through in fiscal '21, if we didn't raise prices, you know, again from here and volumes were flat, what type of revenue growth would that ballpark roughly translate to in fiscal '22?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Yeah, I mean, if you're talking about flat volume just from a price standpoint, you're probably low-single-digit growth.

Dan Moore -- CJS Securities -- Analyst

Got it, just on what's gone through already, not additional price increases?

George Wilson -- President and Chief Executive Officer

Yeah, timing impact of the price increases because, obviously, they've been staggered throughout the year.

Dan Moore -- CJS Securities -- Analyst

Exactly. OK, that's helpful. And then the -- what are your -- well, it's probably part and parcel with the comments you've made, but do you have an outlook for the overall windows market either in North America and/or Europe as we think about, you know, fiscal or calendar '22?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

That's part of the uncertainty here, but what we have referenced in the past is -- for North America anyway, Ducker is a third party we use, and last update they showed for '22 versus '21 on window shipments was low-single-digit growth, around the two-plus percent range.

Dan Moore -- CJS Securities -- Analyst

Got it.

George Wilson -- President and Chief Executive Officer

And then Europe, I would say what our customers are predicting, again, with very little and limited visibility is relatively flat year over year on volume.

Dan Moore -- CJS Securities -- Analyst

[Inaudible] high base?

George Wilson -- President and Chief Executive Officer

Yeah, from an extremely high base.

Dan Moore -- CJS Securities -- Analyst

That's been a heck of a run. No question. Maybe shifting gears, one more, just capex expectations for fiscal '22, and then, you know, in terms of buybacks, you know, the prior repurchase authorization executed over two to three years, do you anticipate a similar timeline or, you know, maybe being more accelerating that given where we are with the balance sheet? And thanks for all the color.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Sure. On the capex front, if you recall, our guidance for 2021 for capex was, I think, 30 million to 35 million. I think we're comfortable saying around the same amount for 2022 guidance for capex. We underspent that budget last year, and it wasn't because we were pulling back on any projects, it's just lead times for equipment are such that everything's moving to the right.

Dan Moore -- CJS Securities -- Analyst

Yup.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

On the buyback question, really, there's not an answer I can give or clarity there. It's on an opportunistic basis. If we continue to feel that our stock is undervalued versus our peers, which obviously we feel that way today, we could ramp that up over the next several years. I mean, 75 million is actually considerably more in the open market than we had last time because if you recall the 60 million, half of that was purchased by one firm.

So, essentially, we sold 30 million in the open market over a three-year period. So, I would think that we could ramp that up.

Dan Moore -- CJS Securities -- Analyst

All right, very good. Thanks for the color again.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Sure.

Operator

Our next question comes from Reuben Garner with Benchmark Company.

Reuben Garner -- The Benchmark Company -- Analyst

Thanks. Good morning, everybody.

George Wilson -- President and Chief Executive Officer

Good morning, Reuben.

Reuben Garner -- The Benchmark Company -- Analyst

Let's see. So, I think Dan asked about the price versus volume in the fourth quarter. Scott, what about the full year in your fiscal '21? Can you give us like a ballpark, you know, how much of the 26% revenue growth was price versus volume?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

For the full year, it was more volume than price on a full year basis. Out of that 26% growth, I would say 15%, 20% is probably volume.

Reuben Garner -- The Benchmark Company -- Analyst

OK, that's helpful. And let's see. So, the supply chain issues you're having, I mean, are -- do you guys -- from what you gather from competition, are you guys doing better than your peers and being able to get product out the door? Are you seeing any different behavior from anyone on the pricing front? Does anyone have any advantages or disadvantages relative to you that you're dealing with?

George Wilson -- President and Chief Executive Officer

So, I'll answer that one, Reuben. In terms of our competition, you know, I think a lot of it is based on your size and scale, and, you know, we're unique in the space that we serve that we're larger. So, I think we're doing equal to or better than any of our competitors in acquiring raw materials that we purchase. You know, what we see in the market, there's no one that's getting crazy with price or doing anything that is putting pressure on any sort of volume.

I think everyone right now is facing significant inflationary and supply challenges, and really, where we're at in the market today is everyone's kind of protecting their base of customers and doing everything they can to fulfill those needs. So, there's not a lot of -- we're not at a point where people are wrestling with to take charge. We're kind of -- we're all trenched down because of the limits in what you can acquire. So, it's kind of a trench warfare right now is really how I would characterize it.

Reuben Garner -- The Benchmark Company -- Analyst

OK. And then a couple questions on capacity. So, two sides of the question here. The first is do you have any plans for increases in areas where you're either low or looking to expand like the springs operation or in cabinets? And then on the flip side, any updates on maybe the areas where you are, you know, underutilizing your assets and you guys have been working on trying to offer other products or services? Any progress there that you can talk about?

George Wilson -- President and Chief Executive Officer

So, on your first question, in terms of capacity expansion, I think we continue to go forward. We talked about adding some mixing and blending capacity in the U.K. for our vinyl extrusion business, that will continue, and that project is in process. Again, as Scott mentioned, the timing of such is impacted because of just the lead times to get equipments is extended, but we're looking to add capacity there.

We continue to evaluate the screen markets. And in areas where we're underserved, we will look to expand our geographical footprint, but that's also going to be predicated on not getting -- being able to get enough raw materials to be able to support it. We also have a product -- a project in our spacer business in Germany that we're adding additional capacity for our rubber extrusion for those spacers in Germany, and that continues. So, in certain pockets, we are going forward and investing and spending in the business.

The second piece of your question? 

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

On any parts of our business that are -- that we have a lot of spare capacity.

George Wilson -- President and Chief Executive Officer

You know, the --

Reuben Garner -- The Benchmark Company -- Analyst

You know, the vinyl --

George Wilson -- President and Chief Executive Officer

Yeah, the best example of that, and it is -- it's been a win, is on our vinyl extrusion business in North America. We talked a lot about focusing on return on net assets, return on invested capital. We continue to expand our capabilities and producing like parts, primarily in fence posts and fencing -- vinyl fencing components, and I think we've proven that we're a very reliable supplier in supporting that industry, and that continues. It's had a positive impact on our vinyl extrusion business in North America.

Reuben Garner -- The Benchmark Company -- Analyst

Any comments on how big of an industry or opportunity that is for you guys?

George Wilson -- President and Chief Executive Officer

We're pretty early into this, Reuben. So, you know, as we continue to develop it, we'll try to give a little more guidance in the future. I don't want to come out and give targets or guidance this time on the sides. We're relatively new into this space.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

I mean, I can add a little bit there. I think the main difference between the fencing sector of the industry versus the window profile sector of the industry for vinyl extrusion is that the fencing sector is bumping up against capacity. So, they're looking to add capacity where -- that's where we can come in and help. Whereas, on the windows side, there's a lot of spare capacity.

So, it's just about getting our assets up and running. We are an expert at extruding vinyl. It doesn't really matter what the product is.

Reuben Garner -- The Benchmark Company -- Analyst

Great. Thanks, guys. Congrats on the quarter. I know it's a tough time.

Happy holidays.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Yeah, thanks.

George Wilson -- President and Chief Executive Officer

Thanks. You, too.

Operator

Our next question comes from Julio Romero with Sidoti and Company.

Julio Romero -- Sidoti & Company LLC -- Analyst

Hey, good morning. Thanks for taking the questions.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Hey, Julio.

George Wilson -- President and Chief Executive Officer

Good morning.

Julio Romero -- Sidoti & Company LLC -- Analyst

Can you talk about supply chain and freight in Europe and how that differs from your U.S. operations?

George Wilson -- President and Chief Executive Officer

Yes. So, in the products that we have in Europe, the supply chain is very similar, although the logistics piece of it is a little more complicated in Europe. So, we utilize for our spacer business in Europe and in North America the exact same supply base. So, they'll face the same challenges as it relates to demand and pricing.

You know, we've seen -- anything that's being shipped internationally, it has added some additional stress, as you can imagine, with trying to get containers that are shipped or anything that's put on a boat. You know, I'm not going to rehash that story. Everyone's seen it. That's the biggest difference between what we see.

Luckily, in Europe, you know, our largest silicone supplier is located in continental Europe, so that has added some stability. But very, very similar when we compare the two, Julio.

Julio Romero -- Sidoti & Company LLC -- Analyst

OK. So, similar challenges whether Europe --

George Wilson -- President and Chief Executive Officer

Yes.

Julio Romero -- Sidoti & Company LLC -- Analyst

In Europe or the U.S. OK.

George Wilson -- President and Chief Executive Officer

Yes.

Julio Romero -- Sidoti & Company LLC -- Analyst

And I guess, you know, piggybacking on an earlier question, you talked about your supply chain issues relative to your competition, but how about relative to customers? Just given your business model, your customers are oftentimes your competitor as well. So, you know, are you seeing greater or less supply chain challenges than your customers?

George Wilson -- President and Chief Executive Officer

You know, for us, what it's done is, you know, we have such sticky relationships and long relationships with these guys. We've actually kind of partnered up with the majority of them to try to either parlay our buying power together. So, it's become more collaborative rather than adversarial in both trying to find ways to help each other and alleviate the supply chain issues that we have across the board. So, I think it's forced us to communicate more clearly.

The labor piece of it is still preventing people from insourcing. That environment is still true. So, although we're talking about supply chain challenges, in many cases, there's still -- although I think we've done a very good job of addressing the labor markets, it's still competitive, which prohibits their ability to insource to the extent where it would be a risk.

Julio Romero -- Sidoti & Company LLC -- Analyst

Understood. I'll pass it on. Thanks very much.

George Wilson -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Ken Zener with KeyBanc.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Good morning, guys.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Hi, Ken.

George Wilson -- President and Chief Executive Officer

Good morning, Ken.

Ken Zener -- KeyBanc Capital Markets -- Analyst

So, not your average quarter. The earlier question about fence posts, I -- and like products. Wasn't really where I was going to go, but, you know, your extrusion plants had real issues in the past. There was capacity.

There is still on, you know, the windows side. But one of the big things, obviously, in extrusion is just having a long cycle runs, right, where you don't have to change out the profiles, etc., etc. It seems to me -- I'm not an expert of this, but fence posts are really just wrapping around -- it's just a four edge by four edge runs. So, you not only have the growth potential at, you know, your fixed asset.

But it seems to me that it's essentially the same run constantly because the white, grey, or black fence post where you don't have to change out profile. Is that correct?

George Wilson -- President and Chief Executive Officer

I would say, generally, you're absolutely right. The window profiles that we do are very complex, and each customer has something different. So, the level of complexity on that extrusion is pretty significant. The fence posts, although not identical, are fairly close, and yes, they tend to be much longer runs with recycled material or more favorable to what you would think on a continuous extrusion process.

So, you know, if I would ask the guys in the plant, they would love loading up on fence posts, yes.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

And just a point of clarification, George was referring to our vinyl business here in North America. In U.K., it's completely different.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Yeah, yeah, yeah, yeah. Apologies. Can I just go deep -- further? What do you find in terms of the distribution channel requirements? I mean, it's mason for you, George, so I get it, you don't want to put numbers you're adding in the stuff. But it's clearly something that makes sense from an asset utilization perspective, that's why, right, siding -- vinyl siding is so good, right? They just have a long run, but they have a very tight distribution network.

Are there unique distribution challenges you face there versus that, you know, the window manufacturer?

George Wilson -- President and Chief Executive Officer

No, it's this --

Ken Zener -- KeyBanc Capital Markets -- Analyst

[Inaudible] now. I mean, i.e., is there a lot more SG&A? Is that -- it's very expensive to start building that relationship even though you get good gross margins? What are some of the dynamics there?

George Wilson -- President and Chief Executive Officer

You know, it's very similar for us at this point in time. We are an OE supplier to not only the window manufacturers, but now, we're an OE supplier to fencing. You know, they have a combination of manufacturing and distributing, and we are also selling to guys that just distribute fence posts. So, you know -- but at this point in time, we're 100% OE supplier to those guys and have no end distribution to the consumer.

Ken Zener -- KeyBanc Capital Markets -- Analyst

And regional distribution constraints given that you're running out of Kentucky? You know, is that -- and the Texas, and that's kind of the end of your market or is there something --

George Wilson -- President and Chief Executive Officer

No, we're showing to guys all over the country right now, so I would say what we see is that the fencing market tends to be regional with the competitors that we're selling to. But we're selling product that would cover national geographies.

Ken Zener -- KeyBanc Capital Markets -- Analyst

That's good. Nice to hear that, guys. All right. Now to the more complex part.

Appreciate your first quarter guidance. So, I think you're clearly helping us there. You did say margins would be up. You're not quantifying that for the full year with a bag -- 

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

No, hold on. 

Ken Zener -- KeyBanc Capital Markets -- Analyst

Go ahead.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

On the revenue side, we're saying we should see some revenue growth mid single-digits in the first quarter. Margins will be pressured first quarter, not --

Ken Zener -- KeyBanc Capital Markets -- Analyst

In the first half, yeah, in the first quarter.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Yeah.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Yeah, I got that. Exactly. Sorry, I misspoke. So, I do appreciate that near-term guidance realizing you're holding off on the year.

But you did say margins are up for the year was your expectations, correct?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Right. For the full year, yeah.

George Wilson -- President and Chief Executive Officer

Yeah, assuming no disasters in the supply chain, we would expect -- 

Ken Zener -- KeyBanc Capital Markets -- Analyst

Right, understood, further top. So, could we go into the sources, you did say it was the transportation issue. So, it sounds like you're having a right, there's raw material costs, which are in the index and lag, but you're seeing actually skyrocketing transportation costs, or is that transportation access in terms that you can't get trucks or your customers can't get trucks? I was a little unclear on that.

George Wilson -- President and Chief Executive Officer

I think the answer is yes and yes. I mean, there are times that, you know --

Ken Zener -- KeyBanc Capital Markets -- Analyst

OK.

George Wilson -- President and Chief Executive Officer

You'll -- the -- you'll -- inflationary pressures on freight, you know, everyone is seeing it, whether it's through fuel surcharges or just absolute increases in freight prices. So, that's the reality right now, and probably will be on a go-forward basis. But, you know, the hard -- and part of the reason why we're not giving specific guidance right now is, you know, we could be at the end of a month or end of a quarter and have you know 2 million or 3 million worth of shipments that, you know, the trucker doesn't show up that day and, you know, that can be normal. And so, it's a little bit of both.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Yeah. Now, as a component supplier, you have to wait for your customer who might or might not, right? Do you think -- you know, because your extrusions coming out of Kentucky need to go somewhere. Your screens are more or less adjacent to your customers. Is that a fair statement? Obviously, your spacers is that on Ohio.

George Wilson -- President and Chief Executive Officer

That is a fair statement. Screens tend to be a very defined shipment, and we usually control our own freight and have a small fleet of our own for screens. That's the least [Inaudible] 

Ken Zener -- KeyBanc Capital Markets -- Analyst

Right. So, [Inaudible] about region part, or is this both the edges and the extrusion that we're seeing this transportation issue arise?

George Wilson -- President and Chief Executive Officer

Primarily, yeah, it's definitely more weighted toward spacers and vinyl extrusions into the freight channel.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Well, yeah, yeah. So, cost neutrality. If you think about, you know, the pricing on the lag. So, you, right, get $10 of inflation, you recover $10 of inflation.

Is that generally like what, a six-month lag due to your -- the cost indexes? Is that how it kind of works for you, guys? I mean, if there is a number, is it three months, six months?

George Wilson -- President and Chief Executive Officer

It's usually 60 to 90 days are typically the range we see. I don't think we have any indexes that are six months on line, but --

Ken Zener -- KeyBanc Capital Markets -- Analyst

OK.

George Wilson -- President and Chief Executive Officer

Sixty to 90 days is pretty standard.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Longest lag is in the cabinet business.

Ken Zener -- KeyBanc Capital Markets -- Analyst

OK. And I really appreciate you guys answering these questions. I just -- it seems like you guys are running the business well, and I don't want to be -- you know, [Inaudible] in improving. So, do you have -- if you have these costs, right, dollar cost recoveries on the indexes you just described, how do you think about that in terms of being -- having margin neutrality just to catch up for the math, right, of the ratio changing? Is that something you guys have in mind? I mean, I get the cost part, but, you know, obviously, we will get margins a lot.

How should we think about that perhaps?

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

I mean, that's a difficult question to ask. I mean, when we look at how the pricing has impacted us, raw material pricing specifically, over the last six to nine months, what we've found is that even when we think we're going to catch up with the rate of inflation where it's been heading, there have been times when we didn't catch up enough. So, we're at a point in time where we need to try to be more proactive and forward-looking and try to at least become margin neutral. 

Ken Zener -- KeyBanc Capital Markets -- Analyst

Right, which your guidance seems to suggest for 20 -- I mean, not guidance. I do want to put words in your mouth, but your comment on margins will up suggest that's where your confidence lies for FY '22.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Yeah, I mean, I think for margins to be up like we think, we expect, at some point, probably more toward the half of the -- second half of the year that the inflationary environment will at least somewhat stabilize or we can catch up.

George Wilson -- President and Chief Executive Officer

Yeah, the rate of inflation or the slope of the inflation line would flatten or decrease to such a point that we'll be able to catch up on some of the indices.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Thank you very much for your answers, gentlemen.

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

Sure.

George Wilson -- President and Chief Executive Officer

Thanks.

Operator

I'm showing no further questions in queue at this time. I'd like to turn the call back to George Wilson for closing remarks.

George Wilson -- President and Chief Executive Officer

I'd like to thank everyone for joining us today, and we look forward to providing an update on our next earnings call. Have a very safe, happy, and joyous holiday.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Scott Zuehlke -- Senior Vice President, Chief Financial Officer, and Treasurer

George Wilson -- President and Chief Executive Officer

Dan Moore -- CJS Securities -- Analyst

Reuben Garner -- The Benchmark Company -- Analyst

Julio Romero -- Sidoti & Company LLC -- Analyst

Ken Zener -- KeyBanc Capital Markets -- Analyst

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