Masonite International Corporation [DOOR] Conference call transcript for 2023 q1
2023-05-14 15:56:05
Fiscal: 2023 q1
Operator: Welcome to Masonite's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, that this conference call is being recorded. I would now like to turn the call over to Rich Leland, Vice President, Finance and Treasurer.
Rich Leland: Thank you and good morning, everyone. We appreciate you joining us for today's call. With me here this morning are Howard Heckes, President and Chief Executive Officer; and Russ Tiejema, Executive Vice President and Chief Financial Officer. Also joining us today for Q&A is Chris Ball, our President of Global Residential. We issued a press release and earnings presentation yesterday reporting our first quarter 2023 financial results. These documents are available on our website at masonite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued yesterday. More information about risks can be found under the heading Risk Factors in Masonite's most recently filed annual report on form 10-K and our subsequent from 10-Q which are available at sec.gov and at masonite.com. The forward-looking statements in this call speak only as of today. And we undertake no obligation to update or revise any of these statements. Our earnings release and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations which are in the press release in the appendix of the earnings presentation. Our agenda for today's call includes a business overview from Howard, followed by a review of the first quarter financial results from Russ and then Howard will provide some closing remarks and will begin the question-and-answer session. And with that, let me turn the call over to Howard.
Howard Heckes: Thanks, Rich. Good morning and welcome, everyone. Beginning on Slide 4; I'm pleased to report that Masonite is off to another solid start in 2023. First quarter net sales and adjusted EBITDA came in ahead of our expectations although down year-on-year given softer end demand and versus the exceptionally strong first quarter we had last year. Order volumes remained stable through the quarter and early success on our 2023 playbook initiatives further supported our Q1 adjusted EBITDA. Swift implementation of working capital reduction initiatives also gave us a head start on free cash flow for the year. As a reminder, we typically see lower operating cash flow in the first quarter due to seasonality impacts. In Q1, we generated $56 million of operating cash flow, a $94 million improvement over the prior year period. Based on our positive cash flow and healthy balance sheet, we were able to repay $100 million of bank debt in the quarter and repurchased $15 million worth of common stock while we still -- while still maintaining our strong liquidity position. With respect to the business and operations highlights for the quarter, I'd start by noting that end market demand trends overall are playing out roughly in line with the planning assumptions we used when preparing our full year 2023 financial outlook. U.S. housing starts which we expected to be down 20% year-on-year, have been marginally better than expected thus far, down 18% through March. While retail POS in North America was slightly weaker, down low double digits on average in Q1 as compared to our full year outlook for a high single-digit decrease. In Europe, the U.K. housing market is somewhat weaker than we were expecting, with starts down 28% year-over-year and builders commenting that they could see completions down between 30% and 40% for the full year. Demand in the Architectural segment has fluctuated from month-to-month but we were encouraged to see the Architecture Billings Index increased to above 50 again in March. Across all our business segments, we have been flexing variable costs to align with demand. At the same time, we have continued to execute network optimization and fixed cost reduction projects that will lead to leaner and more efficient operations. I'll speak more about this when I address execution of our 2023 playbook on the next slide. Rounding on our highlights this quarter is the positive performance we saw in the Architectural segment. While we continue to explore strategic alternatives, the team has been actively addressing the challenges that have faced this business. In Q1, we were able to deliver over $5 million in adjusted EBITDA on a combination of sequentially higher output, improved operational performance and strong price cost management. We believe these results are a positive indication of the potential this business has to return to prior levels of profitability. All in all, this was a good quarter that positions us well to achieve the results outlined in our full year outlook. More importantly, I'm encouraged by the momentum we are gaining across the organization on our initiatives related to margins, cash flow and long-term value creation that will increasingly benefit all stakeholders through the balance of the year and into 2024. Let's turn to Slide 5. On our last earnings call, we presented our 2023 playbook to illustrate how we plan to thoughtfully manage costs, while staying focused on margin expansion opportunities and continuing to activate our doors that do more growth initiatives. The playbook is summarized on the right-hand side of this slide. Planning for these initiatives started in 2022 and our teams did a great job of executing quickly to begin realizing some of the benefits already in Q1. Among our margin-related initiatives, maintaining price cost discipline remains a top priority. We continue to benefit from prior year pricing actions with consolidated AUP up 10% in the first quarter. We are also keenly focused on unlocking savings on the cost side of the equation. Wages and benefits, rent, insurance and energy costs continue to escalate and underscore the importance of securing savings elsewhere in the business, in order to deliver margin expansion in the second half of the year. We are seeing lower rates for ocean freight but have yet to realize broad deflation in our material basket. Our team is closely monitoring market indices for all of our raw materials and actively negotiating cost improvements wherever possible. Other important margin initiatives underway include flexing variable costs to match order volumes, executing on our restructuring program and capturing expected cost synergies from the Endura acquisition. In North America Residential, for example, we reduced direct labor head count by approximately 16%, in line with the overall market decline. We've also reduced our SG&A headcount by approximately 10%. As part of the North American residential restructuring, we announced the closure of 1 of our older and less efficient door facilities located in California. The customers previously serviced out of this plant will now be serviced from other sites in our network where we have increased capacity and throughput utilizing our MVantage continuous improvement initiatives. The restructuring actions across our North American Residential segment, Architectural segment and corporate functions delivered approximately $3 million of benefit in the quarter and additional restructuring actions are underway to deliver the full $15 million to $20 million of annualized cost savings that we are expecting from this program. The combined impact of these cost actions are enabling us to coil the spring as we say, to maintain margins despite the current downdraft in the housing cycle before delivering margin growth from fixed cost leverage when volumes return. But we're doing a lot more this year than just leaning out our organization. We're also moving forward with the implementation of our Doors That Do More growth initiatives that are enhancing our competitive advantage and category leadership with consistent and reliable supply, product leadership and deeper customer engagement. With regard to reliable supply, our operations team achieved another significant milestone this quarter. In March, they completed the startup of a second interior door production line in our new Fort Mill, South Carolina plant which brings additional technologically advanced capacity and flexibility to our production network in the Eastern United States. In terms of product leadership, we continue to see the impact of educating our channel partners and homeowners about the value of upgrading their doors. Solid corridors are a great example of the life and living benefits you can get from upgrading to this quieter solution. In Q1, we realized another quarter of growth in the mix of solid corridors as a percent of our total interior door sales. We also launched new nationwide distribution of Barn door kits with one of our major retail partners. Barn doors have become very popular due to the added privacy and style they can add to a home as part of a weekend project that takes the average DIY or only 90 minutes to complete. The typical Barn Door kit retails for $200 to $300 which also makes for a strong positive contribution to AUP for Masonite and our customers. This new Barn Door program is a great example of the win-win solutions we bring to the table to create benefits for homeowners, channel partners and Masonite-like. This is the essence of the when the pillar -- when the sales pillar of our Doors That Do More strategy and the reason why we are focused on developing deeper engagement with our customers. We believe there continues to be tremendous untapped demand and we are eager to work with our channel partners to service that demand. To this end, we have started joint business planning initiatives with several of our largest partners to map out the most significant growth opportunities available to them and to identify how we can most effectively support them in capturing these win-win opportunities. Our 2023 playbook is detailed, comprehensive and focused on reducing our cost structure and preserving margins while continuing to selectively invest in strategic priorities to fuel long-term growth. It was a busy first quarter for our team and we have no intention of slowing down the pace of our progress. We will continue to work with urgency to achieve all the goals we have set for ourselves this year and we look forward to updating you on our progress as we achieve more milestones each quarter. Turning to Slide 6; underpinning our initiatives across Masonite is a focus on sustainability and responsibility which has been core to our company for almost 100 years. We recognize that our long history of success is directly connected to our commitment to taking care of our employees, our communities and our environment. In April, we released our 2022 environmental, social and governance report which outlines our ESG priorities and highlights the progress we made towards our goals during the year. These accomplishments reflect work done throughout our organization and I couldn't be prouder of the improvements we have made and the dedication shown by our employees to the principle of doing well by doing good. I hope you'll take some time to learn more about our ESG goals and achievements by reading the full 2022 report which you can find at masonite.com/esg. Now, I'd like to turn the call over to Russ to provide more details on our first quarter financial performance. Russ?
Russell Tiejema: Thanks, Howard. Good morning, everyone. Let's turn to Slide 8 and start with a review of our consolidated financial results. First quarter net sales were $726 million, flat to last year, driven by a 10% increase in AUP that included positive impacts from both price and mix and an 8% benefit from the Endura acquisition. These increases were offset by a 16% decline in volume and a combined 2% decrease from unfavorable foreign exchange and component sales. The year-over-year volume decline reflected soft end market demand in our North American and U.K. residential markets. Gross profit in the quarter decreased 7% year-on-year to $170 million yielding gross margin of 23.5%. As we anticipated, higher AUP was more than offset by the combined impact of volume deleveraging and inflation. Selling, general and administration expenses were $102 million, up 22% year-over-year, primarily due to the addition of SG&A from Endura as well as the absence of a previous year gain on the sale of PP&E. SG&A as a percentage of sales was 14% in the quarter. First quarter net income was $38 million compared to $68 million in the first quarter of 2022. The decline resulted primarily from a charge taken as part of our previously announced restructuring plans. The lower gross profit and higher SG&A noted earlier as well as a step-up in depreciation, amortization and interest expenses. Lower tax expenses were a partial offset to these headwinds. Diluted earnings per share in the quarter were $1.71 compared to $2.89 last year. Adjusted earnings per share which exclude restructuring costs, were $1.88. Compared to the outstanding quarter we had in Q1 2022, adjusted EBITDA in the first quarter of 2023 was down 15% to $106 million and adjusted EBITDA margin contracted 260 basis points to 14.6%. Margin improved 110 basis points sequentially from our fourth quarter 2022 results. On the right-hand side of the slide, we have more detail on our adjusted EBITDA performance. Positive AUP growth from price and mix was muted by the impact of volume declines. As expected, material costs remained a headwind for us in the quarter, up high single digits as we continue to work through higher-priced raw materials remaining in inventory. We expect that inflation levels will moderate in Q2 and our full year outlook remains for low to mid-single-digit cost deflation for the year, weighted into the back half. Factory and distribution costs were also a headwind to adjusted EBITDA in the quarter, primarily due to volume deleveraging and inflation on wages and benefits, energy and other overhead costs. Regarding SG&A, we did have a positive impact of about $3 million in the quarter from headcount reductions which was enough to fully offset the inflation we incurred on wages, benefits and other administrative costs. The $2 million increase in SG&A shown here in our adjusted EBITDA bridge comes primarily from increased advertising and other investments in strategic initiatives we made during the first quarter. The contribution from Endura, inclusive of headwinds from purchase price accounting and other integration costs is reflected on the acquisition line. The integration team has line of sight to realizing the anticipated $8 million in annualized cost synergies with over half to be realized in 2023. Let's turn to Slide 9 for a review of our North American Residential segment. First quarter net sales were $569 million or flat year-over-year, supported by an 11% increase from the Endura acquisition. Organic net sales, excluding the impacts of the acquisition and foreign exchange, were down 10% year-over-year or at 8% AUP growth partially offset a 17% decline in volume and a 1% decrease in component sales. Unit volumes were down in the quarter in both our wholesale and retail channels, in line with softer demand in both the new construction and RRR end markets. We saw very little inventory destocking in the wholesale channel during the quarter. Inventories in the retail channel are slightly elevated in certain areas but our full year assumption of a high single-digit decline in the RRR market does contemplate the risk of some destocking in this channel. Adjusted EBITDA in the quarter was $108 million, down 15% from last year. Adjusted EBITDA margin of 19% was down year-over-year due to volume deleveraging and Endura dilution partially offset by the positive impact of price cost management. As Howard discussed, the North American Residential segment has multiple playbook initiatives in flight that target both cost optimization and strategic growth initiatives. In combination, these projects are shaping the segment into an even leaner, more efficient market leader with the capability to increase production with minimal incremental fixed costs upon market recovery. Although we believe it is still too soon to predict when housing demand will return to historical averages, we are encouraged by sequential improvements in single-family starts and permitting activity through the first quarter and we believe latent demand continues to grow as some buyers remain on the sidelines awaiting additional for-sale inventory and a more stable interest rate environment. Turning to Slide 10 in our Europe segment. Net sales of $64 million were down 21% year-over-year or down 13%, excluding an 8-point headwind from unfavorable foreign exchange. The organic decline in net sales was driven by a 15% decrease in volume and a 2% decrease in component sales, offset by a 4% increase in A&P. Adjusted EBITDA was $5 million in the quarter and adjusted EBITDA margin was 8.1%. While margin was down year-over-year primarily due to volume deleveraging, margins were up sequentially from Q4 2022, thanks to ongoing improvements in price cost management. The markets we serve in Europe continue to be hard hit by challenging macroeconomic factors. But as in North America, our team in Europe is using a number of Doors That Do More initiatives to strengthen our competitive position and improve our share of wallet with customers. For example, we have resolved supply chain issues to improve lead times and we are focusing our resources on promoting our high-value door kits which contribute positively to sales mix. Our progress on these initiatives is helping to offset the weaker market conditions and gives us confidence in our original full year outlook for the segment. Moving to Slide 11 in the Architectural segment. Net sales increased 24% year-over-year to $88 million, driven by a 28% increase in AUP, partially offset by a 2% decrease in volumes and a combined 2% decrease from foreign exchange and lower component sales. Adjusted EBITDA was $5 million in the quarter, up from a $3 million loss in the prior year and up $6 million sequentially from Q4 2022, driven by volume, strong price realization and improved factored performance as well as efficiencies generated by restructuring and other cost actions. The segment remains on track to deliver total full year cost savings of $5 million from these actions. End market demand for the Architectural business is expected to contract slightly in Q2 based on order patterns we have seen to date. However, customer sentiment is still positive for the full year. In Q1, we announced a formal process to assess strategic alternatives for the Architectural segment. That process remains underway and could include the divestiture of all or part of the business, subject to our ability to realize fair value. We will continue to keep you updated as the process evolves. Let's turn now to Slide 12 for a summary of our liquidity and cash flow performance. At quarter end, our total available liquidity was $542 million, inclusive of unrestricted cash and accounts receivable purchase agreement and our ABL facility. Net debt was $903 million, resulting in a net debt to adjusted EBITDA leverage ratio of 2.1x on a trailing 12-month basis. Cash provided by operations was $56 million through the end of the first quarter compared to a cash use of $38 million in the first quarter of 2022. The higher cash generation was partly attributable to enterprise-wide initiatives we have launched to optimize working capital across the business. I'll talk more about these initiatives in just a moment. Capital expenditures were approximately $28 million in the first quarter, in line with our spending assumed in the full year outlook. Finally, during the quarter, Masonite repurchased approximately 169,000 shares of stock for $15 million at an average price of $87.33. Turning to Slide 13; I want to touch briefly on the working capital initiatives we have put in place to unlock significantly improved cash flow generation in 2023 and beyond. In 2021, our core working capital, defined as accounts receivable plus inventory minus trade accounts payable was approximately 21% of net sales. Note, this excludes accruded expenses which represent a meaningful payable but can fluctuate period-to-period due to non-operating factors. In 2022, core working capital grew almost 200 basis points due in part to inflation and the increases we made to inventory to preserve service levels in a volatile supply chain environment. As conditions have improved, we have now commenced a multiyear initiative to drive working capital percentages back down to levels well below 2021. To increase the focus in this area, working capital has been added to our variable compensation program as a metric this year and our teams have several initiatives underway across all 3 components, including optimizing inventory across the network by normalizing safety stocks, standardizing components, utilizing centralized warehousing and increasing the use of vendor managed inventory. Implementing extended payment terms with our suppliers in simplifying and standardizing our customer payment terms to accelerate collections. Although we are early in the process, year-to-date, these initiatives supported a reduction in working capital that has contributed $36 million to cash flow and the reductions will accelerate throughout the year. Longer term, we believe this will be a multiyear opportunity for Masonite as we continue to implement best practices and further reduce working capital as a percentage of net sales. With that, I'll turn the call back to Howard for closing comments.
Howard Heckes: Thanks, Russ. In summary, we're off to a good start for the year and encouraged that market demand is trending generally in line with our original planning assumptions with a few puts and takes. We believe the long-term backdrop for the housing markets we serve remains very positive. The early progress we have made on our 2023 playbook is already contributing positively to our financial results and our margin and growth initiatives that are still underway have us on track to deliver the full year results we outlined in our initial guidance. Our operating philosophy of maintaining price cost favorability remains resolute along with our focus on unlocking the mix benefits from higher value products in our portfolio. This discipline will play a key role in our ability to offset inflation on wages, benefits and overhead costs as well as the impact of volume deleveraging and positions the business to accelerate margin growth with higher demand. While we are working to implement cost actions, we are simultaneously focused on generating superior cash flow conversion from a multiyear plan for working capital optimization. We are fortunate to have an exceptional team that are doing a great job of executing so far this year. Their achievements and commitment to bringing the Doors That Do More strategy to life is enabling us to deliver solid results in this challenging market and position the business for sustained long-term growth. We continue to see tremendous opportunities to evolve our business with Doors That Do More regardless of the economic cycle we are in and we are grateful to our employees and our partners for their collaborative efforts in helping us realize our mission. Now, I'd like to open the call to your questions. Operator?
Operator: [Operator Instructions] Our first question comes from the line of Michael Rehaut with JPMorgan.
Operator: Our next question comes from the line of Mike Dahl with RBC.
Operator: Our next question comes from the line of Joe Ahlersmeyer with Deutsche Bank.
Operator: Our next question comes from the line of Noah Merkousko with Stephens.
Operator: Our next question comes from the line of Steven Ramsey with Thompson Research.
Operator: Our next question comes from the line of Jay McCanless with Wedbush.
Operator: Mr. Heckes, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Howard Heckes: Thank you, Christine and thank you for joining us today. We appreciate your interest and continued support. This concludes our call. Operator, can you please provide the replay instructions?
Operator: Thank you for joining Masonite's First Quarter 2023 Earnings Conference Call. This conference call has been recorded. The replay may be accessed until May 23. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S., enter conference ID 13737354. Thank you. You may disconnect your lines at this time.
