Masonite International Corporation

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

Thank you, Jerry, and good morning, everyone. We appreciate you joining us today. With me on the call today are Howard Heckes, President and Chief Executive Officer, and Rex Tejima, Executive Vice President and Chief Financial Officer. Tony Herr, President of Global Residential, is also joining us for our Q&A session. We issued a press release and WebEx presentation after market closed yesterday, sharing our fourth quarter and full year 2020 results. These documents are available on our website at maintenance.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 annual report on Form 10-K to be filed with the SEC shortly after this call and in our other SEC filings, 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 in today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliations which are in the press release and the attendance of the WebEx presentation. Our agenda for today's call includes a business overview from Howard, a review of the fourth quarter and full year results from us, along with our 2021 financial outlook. Howard will provide closing remarks and will host a question and answer session. And with that, let me turn the call over to Howard.

Thanks, Joanne. Good morning and welcome, everyone. I'm pleased to be joining you again and to update you on Masonite's fourth quarter results and the current state of our business. If you look at the strength of the quarter, it's easy to forget how much the world changed in 2020 and what our organization and others have navigated. Accordingly, I thought it appropriate to revisit some of our strategic, operational and financial accomplishments from what can only be described as an extraordinary year. During the first quarter of the year, we successfully implemented our previously announced North American residential pricing strategy, and with it, our plan to reinvest roughly $100 million in the business over five years with a focus on service and quality, product innovation, and down-channel marketing. The pricing strategy was a success, and we realized more price than originally anticipated due to strong market demand throughout the first quarter. At the same time, we began to invest more heavily in service and quality as planned, although we ultimately curtailed spending near the end of the first quarter to preserve liquidity in the face of uncertainty from COVID-19. The health and safety of our employees was our highest priority, and in early March, we had already formed a COVID response team designed to proactively identify potential business impacts and implement mitigation strategies. These actions served us well as we were able to navigate operational challenges and maintain strong margins in the second quarter. Despite our UK and Ireland operations being shut down for approximately half that quarter, we reported our highest quarterly consolidated adjusted EBITDA since becoming a NYSE listed company in 2013. We also took steps designed to ensure we positioned ourselves to emerge stronger following the pandemic. In April, we created a growth and momentum team that was tasked to prioritize investments and resources with the goal of building upon the momentum we enjoyed in the first quarter of the year. Following a steep decline in April, demand strengthened sequentially through the second quarter, and we resumed investment spending in key areas of the business in order to position ourselves to support growth. Conditions improved in our largest end markets during the third quarter, and we experienced growth in average unit price, or AUP, across all three of our segments. The strength of the recovery in our North American residential and Europe segments exceeded our expectations, resulting in better-than-anticipated performance and continued year-on-year adjusted EBITDA margin expansion. Our employees did an exceptional job stabilizing our operations as we navigated pockets of higher absenteeism and capacity constraints from COVID. We held an increasing number of Kaizen events in the third quarter to improve operational efficiencies and sharpen our focus on safety. We saw volume growth accelerate across our residential businesses in the fourth quarter. We believe we exited the year well-positioned to capitalize on the current market strength and have more momentum than at any other point in my time at Masonite. This year was challenging in many ways, and we performed exceptionally well. The result was a year-on-year increase in adjusted EBITDA of $80 million, which resulted in adjusted EBITDA margins of 16.1% for the full year, up 310 basis points from 2019. Now let's move to slide five for a more detailed review of our fourth quarter performance. The accelerating volume growth I mentioned in our residential businesses, coupled with strong AUP across all three business segments, drove a 16% year-on-year increase in net sales. We are pleased with the recovery of our Europe segment as they return to year-on-year base volume growth in the fourth quarter. The favorable volume and continued growth in AUP, primarily driven by our previously implemented North American pricing strategy, drove year-on-year adjusted EBITDA margin expansion in the quarter of 140 basis points, despite some anticipated cost headwinds and planned investments for future growth. Russ will provide more detail on this later. The largest investments in our future growth were those related to our North American investment plan. Spending in the quarter was in line with our expectations as we invested in service, quality, and innovation. We had another year of strong free cash flow from operations. 2020 marks our fourth consecutive year of free cash flow conversion in excess of 100%. Shifting to the right of the slide, I'll touch on business and operational highlights for the quarter. Operations performed well, with capacity improving sequentially, albeit at constrained levels. Both our North American and European operations continue to experience operational headwinds related to COVID. I'm very proud of the team's ability to prevent any major plant disruptions in the fourth quarter. mVantage operating system deployment remains strong. Kaizen events increased 50% year-on-year in both the fourth quarter and the full year, with increases in every business segment. Our commitment and discipline in this area are having a meaningful benefit to factory productivity. During the quarter, we completed the integration of the Lowe's door fabrication facility we acquired in Janesville, Wisconsin. This transaction includes a multi-year supply agreement. We are pleased to say that we have been able to retain the existing workforce, and we welcome these individuals to the Masonite family. Lastly, in February, we hosted builders, remodelers, and channel partners at the Virtual International Builder Show, IBSX 2021. While we prefer the in-person interaction of IBS, our marketing team did an exceptional job of creating a virtual environment to once again showcase our products and our commitment of delivering doors that do more. Moving over to slide six. While our investor relations team has spoken about ESG with many of you at past conferences and in meetings, I want to give this broader audience an update on this important topic. ESG is at the core of our company's culture and has been since inception. The company was founded in 1925 based on the concept of converting waste into worth. William Mason established the company to use the waste wood that was being created from sawmill operations throughout the southeastern United States, much of which was being either burned or buried in landfills. Mr. Mason discovered a process to convert wood fibers using heat, resin, and pressure into hardboard products. This significantly changed the dynamics of the building products industry for the next century. While our history is steeped in ESG, we are relatively early in our journey of public disclosure. We remain focused on continuing our legacy of environmental sustainability as we create a safe and engaging environment for our employees while driving accountability through good governance practices, all of which are managed in a balanced approach to ensure we are focused on what is relevant to our business. Now I'll share a few of the key items we initiated in 2020, as well as some of our results. On environmental, we hired a third party to help us perform our first carbon footprint assessment. This is currently in process and we're planning to create a baseline measurement and identify opportunities to set a relevant science-based targets for the future. In 2020, we prevented over 1 million tons of wood, 42,000 tons of wheat straw, and 2,000 tons of mineral core dust from going to landfills by using them as raw materials and fuel in our processes or selling them to local farmers as a soil conditioner. These actions are both good for the environment and benefit our cost structure. On social... As we have consistently stated, safety is our highest priority. We conducted 615 safety Kaizen events, which created great employee engagement and resulted in increased awareness as we achieved a 1.89 total incident rate in 2020, a 10% improvement versus the comparable basis in 2019. We created a new position for Vice President of Diversity and Inclusion to further shape our diversity, equity, and inclusion strategy. Our people are our greatest asset, and I am proud to share that just last week, Masonite was included on the Forbes 2021 list of America's best large employers. On the governance front, our leadership team completed a materiality assessment using the SASB framework and identified ESG topics that are a priority for our specific business. At Masonite, we believe what is measured matters, and ESG metrics are incorporated in our compensation plans. For the last two years, we've incorporated both safety and employee engagement metrics tied directly to our annual bonus. We have engagement on ESG from the board to the plant floor. We developed an ESG executive steering committee, and we have cross-functional teams with subject matter experts throughout the company involved in various initiatives. In 2019, we published our inaugural Corporate Responsibility Highlights Report, which is located on the Investor Relations section of our website, and we are targeting a more robust ESG report to be published in 2021. With that, I'll turn the call over to Russ to provide more details on our financials. Russ? Thanks, Howard. Good morning, everyone. Let's turn to slide eight for a summary of our fourth quarter financial results. We reported net sales of $619 million, up 16% as compared to the fourth quarter of 2019. The growth was primarily due to a 9% increase in AUP, which was up year on year across all three segments, and a 6% increase in base volumes compared to the prior year, due to growth in our North American residential and Europe segments. A 1% increase in higher component sales and a 1% favorable impact from foreign exchange were partially offset by a 1% decrease in volume from the impact of a divestiture. Gross profit increased 28% to $142 million, driven by higher AUP and our previous restructuring actions, which were partially offset by higher inflation and tariffs on raw materials, increased investment in the business, including those related to our North American investment plan, and the impact of lower volume in our architectural business segment. We continue to benefit from strategic sourcing projects, but the related savings were outpaced by the increase we saw in raw material costs. Gross profit margin expanded 200 basis points versus the fourth quarter of 2019 to 22.9%. Selling general and administration expenses were $95 million, up 23% compared to the same period last year, primarily driven by higher personnel costs, including incentive compensation, and charges related to the settlement of U.S. class action litigation. SG&A was 15.3% of net sales. Net income was $27 million in the quarter, an increase of $25 million in the prior year due to the net impact of higher gross profit and higher SG&A and the absence of $12 million in restructuring charges that were incurred in the prior year. Diluted earnings per share were $1.08 as compared to $0.06 in the fourth quarter of last year. Adjusted earnings per share increased to $1.26, which excludes charges related to our previously announced restructuring plans and the settlement of U.S. class action litigation. This compares to 69 cents per share in the fourth quarter of 2019, which excluded charges related to restructuring actions and a pension settlement. Adjusted EBITDA increased 30% to $81 million, while adjusted EBITDA margin expanded 140 basis points to 13.1%. This marks the eighth consecutive quarter of year-on-year adjusted EBITDA margin expansion. On the right-hand side of the slide, we have more detail on our adjusted EBITDA performance, which benefited from accelerated volume growth in our residential businesses, along with strong year-on-year gains in AUP. In addition to the anticipated impact of anti-dumping duties we commented on during our third quarter call, we also saw meaningful increases in inbound freight costs. In total, we incurred an $11 million year-on-year increase in material costs for the quarter. We've previously discussed our two-pronged strategy to mitigate anti-dumping duties where possible. Our global sourcing team continues to work diligently to qualify alternative suppliers, and at the same time, we have sought relief through temporary surcharges where appropriate. Given the implementation timing of these surcharges, we realized minimal benefit from them in the fourth quarter. Factory costs increased $14 million in the fourth quarter due to increased investment spending, primarily in our North American segment, and negative volume leverage in the architectural segment. Savings from our previously implemented restructuring initiatives largely offset wage and benefit inflation in the quarter. Distribution costs were $6 million higher compared to the prior year due to the impact of COVID and our use of suboptimal plant locations to support customers as our capacity varied across their manufacturing network. Lastly, on an adjusted EBITDA basis, SG&A was $11 million higher due to increased personnel costs, largely due to incentive compensation. Turning to slide nine in our North American residential segment. Net sales increased 26% in the prior year to $453 million, primarily due to a 13% increase in base volumes, aided by a 53rd operating week, and a 12% increase in AUP. Driven by our previously announced pricing actions, AUP for the full year of 2020 was up 10%, slightly above our original expectations. And market demand strengthened in both our wholesale and retail channels in the fourth quarter. This accelerating demand, coupled with our constrained capacity levels, has limited our ability to rebuild channel inventory. Adjusted EBITDA in the North American residential segment was $88 million in the fourth quarter, a 62% increase over the same period last year. Adjusted EBITDA margin expanded 430 basis points to 19.3%, despite anticipated cost headwinds. The significant anti-dumping duties and tariffs I mentioned earlier resided within our North American residential segment. We also experienced higher logistics costs in the form of both inbound freight and distribution. Our North American investment plan spending was on track for the quarter, as were our previously discussed investments to improve the workplace environment for our employees. Overall, an exceptional quarter and year from our North American residential team. Turning to slide 10 in our Europe segment. Net sales increased by 4% year-on-year to $83 million. We were pleased to see base volumes turn positive in the quarter, up 4%, on the back of expected improvements in our interior business and continued strength in our exterior business. A favorable impact from foreign exchange contributed an additional 3% to growth, and gains in AUP contributed another 2%. due to pricing actions taken in the exterior door business late in the third quarter. These additional gains were offset by a 5% decrease in sales volume from the impact of a divestiture in the fourth quarter of last year. Adjusted EBITDA in the Europe segment was $17 million in the fourth quarter, a 37% increase over the same period last year. Adjusted EBITDA margin expanded 500 basis points to 20.1%. We anticipated margin headwinds from the impact of MIX due to the relative growth of interior doors, but pricing actions and better-than-anticipated factory productivity more than offset the impact. Moving to slide 11 in the architectural segment. Net sales decreased by 10% year-on-year to $77 million due to a 16% decline in base volume as commercial end markets remained weak. As mentioned on our third quarter call, we saw softening sales in October, and as expected, that trend continued through the fourth quarter. The base volume declines were partially offset by growth of 4% from AUP and 2% from the sale of components and other products. AUP growth benefited from both favorable price due to previously implemented increases and improved mix. Adjusted EBITDA margins contracted 590 basis points to 1.3% due to negative volume leverage. This includes the unfavorable impact of our 53rd operating week on this business, when minimal shipping volumes did not cover fixed costs. Before I leave the slide, just a quick update on our progress to optimize this business. Alex Legall, the recently hired leader in the architectural segment, and his team continue to work on reconfiguring the business with the goal of improving service levels as a platform for growth when end markets recover. Accordingly, they have rapidly taken some surgical actions, including the closure of a component plant and a sales office. These optimization efforts are ongoing, and we look forward to providing you with future updates. On slide 12, we summarize our full year financial results for 2020. Net sales were up 4% compared to 2019 due to AUP growth of over 7% for the full year, primarily driven by price in North America. This increase is partially offset by a 3% decline in base volumes, primarily due to COVID-19. Gross profit of $573 million represents an increase of 20% over the prior year. while gross profit margin expanded 350 basis points to 25.4% for the full year. The expansion was primarily due to higher AUP and prior year restructuring action, which were partially offset by the impact of lower volume, higher inflation and tariffs on raw materials, increased investment in the business, and higher manufacturing wages and benefits. While sourcing projects had offset increases in raw material costs through the third quarter, Escalating tariffs and inbound freight costs prevented us from delivering net savings for the full year. Excluding the impact of anti-dumping duties, inflation was in line with our original expectations laid out at the beginning of last year. Adjusted EBITDA increased 28% to $364 million for the full year, while adjusted EBITDA margin expanded 310 basis points from the prior year to 16.1%. in line with the expectations we shared on the third quarter call. On the right of the slide, we provide a full-year adjusted EBITDA bridge, a relatively straightforward causal for 2020, favorable volume, mix, and price, along with solid operational performance offset the impact of inflation and expenses related to our growth investments. Slide 13 summarizes our liquidity and cash flow performance for the quarter. Our balance sheet and cash flow both ended 2020 strongly, with total available liquidity of $582 million, inclusive of unrestricted cash, an accounts receivable purchase agreement, and our ABL facility, which remains undrawn. Net debt was $428 million, and we ended the fourth quarter with a net debt to adjusted EBITDA leverage ratio of 1.2 times. We repurchased approximately 106,000 shares in the quarter, bringing the 2020 total to approximately 673,000 shares repurchased for $44 million at an average price of $64.98. Full year cash flow from operations was $321 million, up from $222 million in 2019. Capital expenditures were approximately $73 million, While we curtailed second quarter spending in response to COVID, we resumed and in certain instances accelerated investments, ultimately resulting in our capital expenditures being in line with our original 2020 outlook. We ended 2020 with a full year free cash flow conversion of 162%, driven by lower year-on-year capital expenditures and strong working capital performance as we accelerated material purchases at year-end and deferred payroll tax payments. Now let's turn to slide 14. Here we outline factors that we believe will have the most significant impact on our operational and financial performance in 2021. Based on robust U.S. new housing data, modest but continued growth in the triple R market, and improving trends in the U.K., we expect to benefit from favorable residential and market conditions. Hype North American wholesale and retail channel inventories exiting 2020 are expected to provide added support for residential demand. Outside of market conditions, our North American residential segment will benefit from new business wins, specifically the previously mentioned Lowe's business in the Midwestern part of the U.S. This multi-year agreement with Lowe's will equate to roughly $60 million annually. Slab shipments began early the fourth quarter of last year, so we would expect to realize the full amount in 2021. We anticipate favorable price to continue again this year, with consolidated year-on-year growth mid to high single digits, primarily due to our North American residential business and our recently enacted increases. As Howard mentioned, we have a strong team that came together and navigated an exceptionally challenging year. With the addition of Jennifer Renaud as Chief Marketing Officer and the hiring of Alex Liddell, we believe we have the right leadership team in place. While we feel confident about 2021, we will face some headwinds. Our capacity remains constrained due to the impacts of higher absenteeism and the inability to staff additional shifts. After absenteeism hit its highest levels in April and May of this past year, we saw numbers come down and remain relatively stable, albeit at elevated levels into the fourth quarter. More recently in December and into January, we have seen absenteeism increase again. We have been fortunate that it has not approached the peak levels we experienced during the onset of COVID, but these increases act as a natural governor on our ability to service residential market growth. Similarly, we have experienced elevated impacts from COVID in our UK operations, particularly after the year end, due to this most recent wave of the virus. Leading non-residential indicators, such as the Architecture Billing Index, continues to suggest a weak end market demand for architectural segment through 2021. ABI has been below 50 since March of last year, with numbers softening as we exited 2020. We believe in the strength of this business in the long term, but the near term remains challenging. Until commercial construction activity increases in North America, we believe we will see pressure on this business. Inflationary pressures are expected to increase in 2021, both on logistics and material costs. I will expand on these along with the impact of tariffs and anti-dumping duties on the next slide. Lastly, we expect spending on the North American investment plan will accelerate as we position the company for future growth. Now, we believe these factors provide a positive backdrop for Masonite in the year ahead. Turning then to slide 15, we provide our current outlook for consolidated full year results in 2021. Given the strength of our residential housing markets and the tailwinds created by tight channel inventories, along with new business wins and favorable price, we currently expect consolidated net sales growth of 7% to 10% versus 2020. This range contemplates the recovery from the impact of COVID we primarily felt in the second quarter last year, as well as one less week of sales due to our 53rd operating week in 2020. Within this consolidated range, our growth assumptions vary greatly by segment. The North American residential segment is expected to benefit from all the previously mentioned drivers of net sales growth. Accordingly, we expect to see net sales increases in the low teens for this segment. Given the severity of last year's sales declines in our Europe segment, we expect net sales growth in the mid teens for 2021 as business recovers and we benefit from recently implemented price. In the architectural segment, we are planning for a net sales decrease in the high teens due to continued weakness in commercial end markets. On this net sales growth outlook, we expect adjusted EBITDA to be in the range of $415 million to $445 million. We believe a key variable impacting adjusted EBITDA growth in 2021 will be rising material costs, which we anticipate will increase in excess of 4% year on year. These increases are due to inflation that is rapidly materialized in the wood category, as well as strong demand that may require us to buy more steel outside of our long-term contracts. Incremental anti-dumping duties expected on wood shipments out of Asia and meaningful increases in recent ocean shipping rates will further drive total material cost increases. Our sourcing team continues to work aggressively to identify initiatives to diversify our supply chain and offset these costs where possible. Between these efforts and our pricing actions, along with temporary surcharges, we remain confident in our ability to maintain a favorable price-cost relationship again in 2021. Even at the low end of our stated outlook, we anticipate another year of meaningful adjusted EBITDA margin expansion. We expect that adjusted earnings per share in 2021 will be in the range of $7.40 to $8.30. This range incorporates an assumed tax rate of 23 to 25% and an average diluted share count of roughly 25.4 million. We expect cash taxes to increase from $24 million in 2020 to a range of 45 to $55 million in 2021. primarily due to our largely exhausting net operating loss carry forwards. With respect to capital expenditures in 2021, we currently expect a range of $80 million to $90 million. This increase from reduced spending in 2020 reflects our focus on strategic investments for growth, including initiatives to improve capacity in our plants and the ability to service our customers. These investments in the business and higher cash tax rates are expected to negatively impact free cash flow. Along with natural increases in working capital that accompany rising sales volumes and the cash payment related to the settlement of U.S. class action litigation, we anticipate free cash flow of $145 million to $165 million in 2021. And with that, I'll turn the call back to Howard for some closing comments. Thanks, Russ. To summarize, we are very pleased with what turned out to be an exceptional year for Masonite in 2020. We finished strong with net sales increasing 16% year on year in the fourth quarter as growth accelerated in our residential end markets, and we saw a higher AUP across all segments. This volume growth and strong price drove adjusted EBITDA in the quarter, which resulted in our eighth consecutive quarter of year-on-year adjusted EBITDA margin expansion and full-year adjusted EBITDA margins of 16.1%, a 310 basis point increase over the prior year. This would not have been possible without the extraordinary efforts of the entire Masonite team. We are planning for another outstanding year in 2021. Our mVantage operating system continues to drive productivity and is helping create a safer workplace for our employees. We are making thoughtful and strategic investments in our business to improve service to our customers, drive innovation in our products, and position us for future growth. Strong demand and pricing should enable solid net sales growth and continued margin expansion for the year. Lastly, I would like to remind all of you that we have our 2021 Virtual Investor Day scheduled for Wednesday, March 24th. We invite you all to attend as we will provide more detail on our strategy along with an updated long-term growth framework. Registration opens early next week on our Investor Relations website, so we encourage you to visit our site as well as our new Digital Learning Center to view Adores the Do More video ahead of Investor Day. And with that, I'd like to open the call to questions. Operator? Thank you, Mr. Hex. If you'd like to register for a question, please press star 1 on your telephone keypad. If you are using a speakerphone, please lift your handset before entering your request. We ask that you limit yourself to one question and one follow-up. Ladies and gentlemen, as a reminder, to register, please press star 1 on your telephone at this time. The first question is from Michael Rehout, JP Morgan. Please go ahead, sir.