Masonite International Corporation

Welcome to Mason 8's third quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. After management's prepared remarks, investors are invited to participate in a question and answer session. Please note this conference call is being recorded. I would now like to turn the call over to Joanne Freiberger, Vice President and Treasurer.

Thank you, Melissa, and good morning, everyone. We appreciate you joining us today. With me on the call today are Howard Heckes, Masonite's President and Chief Executive Officer, Russ Tejima, Masonite's Executive Vice President and Chief Financial Officer, and Tony Hare, President of Global Residential, is joining us for our Q&A session. We issued a press release and WebEx presentation after market closed yesterday, sharing our third quarter 2020 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. Additional 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 Form 10-Qs, 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. The definition of adjusted EBITDA was updated this quarter to exclude other items, as these charges are not part of our underlying business performance. Other items include legal reserves related to the previously disclosed settlement of U.S. class action litigation. please refer to the reconciliations which are in the press release and in the appendix of the WebEx presentation. Our agenda for today's call includes a business overview from Howard, a review of the third quarter results from Russ, and our view on the financial drivers for the balance of the year, followed by closing remarks from Howard and a question and answer session. And with that, let me turn the call over to Howard.

Thanks, Joanne. Good morning and welcome, everyone. As Joanne mentioned, late yesterday we released our third quarter 2020 financial results. I'm pleased to report that we saw meaningful net sales and adjusted EBITDA growth in the quarter. Improving conditions in our largest end markets, along with continued growth in average unit price, or AUP, across all three of our segments, allowed us to grow net sales by 6% in the third quarter as compared to the prior year. We saw areas of strength that exceeded our original expectations, resulting in better than anticipated performance in our North American residential and Europe segments. Growth in AUP, primarily driven by our previously implemented North American pricing strategy, plus strong operational performance, allowed us to see continued year-on-year adjusted EBITDA margin expansion in the quarter. Despite operating under the overhang of COVID-19, the direct financial impact was much lower than what we experienced in the second quarter and concentrated primarily in our architectural segment. The year-to-date impact on that business, due to a decline in non-residential construction activity, along with a weaker outlook for commercial and markets, led us to record a goodwill impairment charge of $52 million in the architectural segment during the third quarter. While challenged in the present environment, we remain confident there is opportunity to meaningfully improve the performance of this business. I'll speak about that in more detail shortly. If you recall, we resumed investments in key areas of the business last quarter with the goal of regaining top-line momentum. We accelerated spending this quarter with a continued focus on service, quality, and innovation. While these investments were primarily in our North American residential segment, we remain committed to delivering service and quality excellence across the company. Moving to the right of the slide, I'll cover business and operational highlights in the quarter. It's worth noting, and I cannot stress this enough, that our performance this quarter is due to the exceptional effort and dedication of our roughly 10,000 Masonite employees globally. The organization's commitment allowed us to stabilize operations and remain focused on servicing our customers. This hasn't been without challenges. Our teams around the globe have been forced to contend with new operating protocols, pockets of higher absenteeism, and isolated plant disruptions due to COVID. While operations are running well overall, these impacts have continued to limit our production capacity. Despite this challenging environment, the organization continued to leverage the mVantage operating system. Both Kaizen events and training certifications were up year on year in the third quarter. And while we have generally discussed Kaizen events in relation to productivity, it's important to note that we also use them to drive safety improvements across our organization. For example, going into the third quarter, one of our architectural facilities had demonstrated inconsistent safety performance and had an unusually high number of incidents in the first half of the year. We made the decision to temporarily take that facility offline to address these safety issues head-on. With the support of our continuous improvement organization, the team at that facility has held numerous Kaizen events targeting safety. This endeavor was a headwind to financial performance in the quarter, but it was absolutely the right decision for our employees' health and well-being. I'm pleased to say that since operations resumed, we have experienced only one recordable safety event at that facility. And while one is still too many, it is a significant improvement over the first half of the year. During the quarter, we announced that we entered into settlement agreements on previously disclosed U.S. class action litigation. The company continues to maintain the claims are without merit and denied any liability for them and entered into these agreements to avoid the incurrence of further costs and the uncertainties and risks inherent in treble damage antitrust litigation. Finally, we named Alex Legall, Senior Vice President and Business Leader of the Architectural Segment. If we move to slide five, I'll provide more details on Alex's background and some thoughts on the non-residential market as it stands. Alex has over 25 years of global experience in sales, marketing, and expanded P&L management roles. He came to us from Owens Corning, where he most recently served as vice president and general manager of the North American technical insulation business. In this role, most of his focus was on non-residential business, so he is accustomed to building relationships with both commercial distributors and down-channel influencers. We feel his unique background is a perfect fit as we seek to better understand the commercial decision-making process and create value propositions for our distributor partners, building developers, architects, and end users to drive long-term growth in the architectural segment. While we continue to believe in the potential of this business, the near-term outlook remains soft. The two non-residential leading indicators we most closely monitor are the Architecture Billing Index, or ABI, and the Dodge Momentum Index. While both indicators have stabilized, they have remained at contractionary levels, which suggest continued end-market weakness going forward. As I mentioned earlier, this led us to record a goodwill impairment charge in the quarter. Alex and the team are aggressively working on a thorough plan to reconfigure the business with a goal of improved service and quality and ultimately growth. Concurrently, the team is looking to optimize the segment's current and future cost structure. If you recall, throughout the last year, we made several other key leadership changes in the architectural segment across multiple functions, operations, human resources, and finance. We are delighted to have Alex as part of the Masonite team and plan to have him on future calls to provide you with updates. With that, I'll turn the call over to Russ to provide more details on our financials. Russ? Thanks, Howard, and good morning, everyone.