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spk03: 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.
spk00: 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.
spk03: 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.
spk01: Michael Rehout, JP Morgan. Hi, good morning. This is Elad Helman on for Mike. Thanks for taking my question. First, on North America residential volumes, they inflected much higher this quarter, which is very positive. And I was just wondering if you could talk more about your progress on the production front and how you're positioned to meet the growing market demand and how much of the impact from the 53rd week And I guess additionally, just on Tijuana and getting that plant up and running and what type of volume growth you could support in 2021. Sure, Alon.
spk03: This is Tony. Good question. Yeah, we were very pleased with the ability to increase our output as our in-demand stayed very strong in the fourth quarter. Relative to the 53rd week, we believe that was roughly a 5% lift in overall net sales for our segment. And we have been very focused to try and increase our capacity. You know, Tijuana was a little bit behind, as we mentioned in our previous calls, on its ramp up. Due to COVID, we had materials and equipment sitting across the board that couldn't get in place. As those restrictions relaxed, we were able to get it in. We still struggled to get people into Mexico to do the setup, but our team did some very interesting virtual setup activities, and we started seeing better output there. As we look forward, we are increasing shifts on our interior door plants. Our big plant, Paleo Alabama, has already started in that process, as well as in our retail door fabs. And we're continuing to invest in capital equipment in Monterey to improve the output there so we can increase capacity. We're going to add another cell in Tijuana in that operation. So we feel pretty good about the increases in capacity that we're working on right now and continue to support what we still see as a very strong end market.
spk01: Great. Thank you. Just turning to price in North America, if you could just maybe just talk a little bit about the overall pricing environment and how you're thinking about taking additional pricing actions in 2021 or what price contribute?
spk03: Yeah, thanks a lot. This is Howard. You know, we're not going to speak prospectively about future price increases. We confirmed on the Q3 call that we announced a price increase for 2021, which is effective, was effective from orders placed early in Q1. You know, additionally, we've implemented some surcharges, for example, to mitigate the impact of anti-dumping duties. because it's always our strategy to pursue favorable price costs. So if inflation becomes really burdensome, you know, we'll consider what we need to do. But for now, we're not going to talk prospectively about where we are, and we're happy with the position we're in.
spk01: Okay, thank you.
spk03: The next question is from Josh Chan, Bayard. Please go ahead, sir.
spk02: Good morning, guys. Congrats on a strong quarter and year.
spk03: Thanks, Josh.
spk02: I guess my first question is on the 21 revenue guidance. Just trying to think about how you're contemplating the cadence through the year. Clearly, you have very strong demand momentum entering into Q1, presumably, and Q2, you have a very easy comparison. So could you talk a little bit about what that means and what you're projecting for the second half?
spk03: Yeah, Josh, it's Russ.
spk02: Fair question.
spk03: I'll take that. We do expect it to be a little bit of a story of two halves here. To your point, in the first half of last year, the second quarter in particular, we saw a real downdraft in revenue. And that was driven globally, but largely by our UK operations being shut down for almost half of that second quarter. So between that and just natural blunting of demand that we even saw in the North American residential business while people kind of digested what COVID would actually mean for construction markets. That's when we saw the biggest impact in 2020. If you just step back and look at first half versus second half pacing, we would anticipate net sales probably up in the mid-teens for the first half overall, falling to probably a low single-digit growth rate for the second half. Yeah, the second part of the question, I'm sorry, I think, Josh, you asked about first quarter and how things were starting. January was terrific. We grew in excess of 20% overall at a consolidated level, and demand in February was also strong. Of course, we had this weather issue, which wreaked havoc on our operations. Over 40% of our plants were at least partially shut down during the week of that terrible weather. And in fact, we lost about 89 ships of production. So as a result, we expect February to be closer to flat. Our focus is now shifted to the supply chain. because we're aware of at least one upstream raw material supplier that has yet to resume operations from the weather. So, yeah, that's going to have an impact certainly in February, and we would expect demand – demand is still there, right? We would expect that demand to be resilient in March, and so we're planning for growth in the first quarter despite, you know, very challenging weather situation.
spk02: All right, yeah, that makes sense, and thanks for the cover there. And then I guess my second question is a little bit bigger picture – Could you talk a little bit about how you're managing sort of the plant network given these disruptions, you know, both in terms of demand and then also the absenteeism? Because I guess if you look back several years ago, I would have thought that these types of, you know, fluctuations would have caused, you know, a lot more operational disruptions, but clearly you've been able to managed through all of that very well. So could you talk about what kind of improvements you've made operationally versus, you know, several years ago and how you're able to kind of handle these types of movements?
spk03: Yeah, hey, Josh and Russ, maybe I'll open up a little bit and just kind of remind some, remind folks what some of the impacts were in the quarter and how that impacted our results. And then, you know, Howard can widen the lens out a little bit and talk about strategically how we think about that. We're fortunate in that we've got a network of plants across North America that we can leverage. The key often comes down to how efficiently can you do that. As you have disruptions across the network, whether it's by spikes in absenteeism due to localized COVID outbreaks or, as Howard just mentioned, disruptions due to severe weather, we can flex production of many of our products, particularly in the residential business, around that plant network to support our customers. The key is it becomes inefficient from a logistics standpoint. And we even commented that during the fourth quarter, we had a lot higher logistics costs because we were having to flex that production around. And that often means shipping products on a lot longer freight lane than you would typically to service a customer in a particular geography. Yeah, and I just add that, you know, 2020 taught us a lot about flexibility in our network, right? We were thrown into this global pandemic, and we quickly had to pivot to ensure we could do whatever we could to service our customers. And we talk a lot about our advantage operating system and Kaizen events and lean transformations and all those things, I think, have really benefited us as we learned to be more flexible in our network. And as Russ said, sometimes creates a bit of inefficiency, but generally speaking, we've been able to increase capacity sequentially. Tony mentioned some of the more strategic initiatives we're doing to continue to build capacity throughout 2021.
spk02: That's great. Thank you for the call, guys.
spk03: We have a question for Mike Dahl, RBC Capital Markets. Please go ahead, sir.
spk06: Thanks for taking my questions and for the details so far. Morning. I had another question on just framing up kind of the top-line guide for this year because, you know, I appreciate the details you've provided. If I look at it really high level with mid-single-digit to high-single-digit price plus the $60 million from the Lowe's win, I mean, that alone gets you to something like $7 million. 10%, and it would seem like your Europe and architectural may kind of offset one another, which, again, then kind of implies just no base volume growth outside of the lowest wind. So I'm just curious kind of how you're thinking through that. Is it really just the impact of the one last week this year, or if there are other moving pieces we should be cognizant of?
spk03: Yeah, hey, Mike, it's Russ. Let me try and unpack it even a little bit further for you to help kind of walk from where we ended 2020 to call it the midpoint of our guide for 2021. Now, first of all, if you look at the overall market, we're assuming a mid-single-digit market growth for NAS, and that would be comprised of high singles on the new construction side and probably a low single-digit growth on the RRR side. Remember, our business is roughly split 50-50 between those markets. Europe, we're assuming market low double digits, but architectural, we think could be down as much as 20%. You do all the math against that, and that suggests that the overall market would be low single digits, call it two-ish percent. And that's really driven down by that significant weakness that we're seeing in the non-residential markets. Then you add to that, you know, that mid to high single-digit AUP, which we referenced and you cited, about two and a half points from the new business. That leaves a gap of about two percentage points, and that would really be comprised of that 53rd operating week that won't repeat this year, and then the potential we have made in there for some spot capacity constraints here and there. That's really how you walk from 2020 to our value for 21. Does that help? Okay.
spk06: Yeah, that's very helpful. And then a quick follow-up on the revenue side before I do another question. You know, you're assuming negligible FX. If we just look at spot rates, obviously they've been moving around dramatically, but it would seem to imply that there's actually fairly significant FX tailwinds if these current rates persist. So how do you reach the kind of the point of not really assuming any FX impacts for the year? Is that just kind of a standard modeling assumption, or is there something else we should be thinking about on that as well?
spk03: It's a great question, and in a word, yes, because I love your word volatility around FX. It has been pretty significant, particularly in the last three months. You know, as we zoned in on our outlook for 2021 back in the fourth quarter, subsequent to that is when we saw our key currency pairs, specifically USD to Canadian dollar and US dollar to pound sterling, they started moving around a lot. We've seen just in the last 90 days, you know, 5% to 7% movement strengthening of both those currencies. And so trying to put a pin in the map right now on FX is pretty difficult. If we were to see the current spot rates carry off all the way through the year, it would represent a point or two of upside against what you've seen here. But we're just not trying to call that right now. So think about our sales growth as basically exclusive of any FX impacts when the dust settles end of the year.
spk06: Okay. Fair enough. That makes sense. And then my follow-up question is really then more around the inflation environment. that's been dynamic as well and recently accelerating really across effectively everything you can track. So as you're looking at, you know, the 4% or greater than 4% for the year, how much of that is just relying on kind of what you see today versus also incorporating an expectation for further acceleration in costs from today's levels?
spk03: I would say both. Our sourcing team does a pretty good job, we believe, at monitoring supply conditions, monitoring pricing outlook, taking into account what they're hearing from the supply base on any potential inflationary pressures. And we think that we've captured that within the outlook that we've provided. If you step back and you unpack that in excess of 4%, the area that we've seen the most rapid escalation in commodity inflation recently has been wood. And so we could easily see that up mid to high single digits in 2021. The other areas where we're seeing more inflationary pressure are in glass and packaging. They're also probably in the mid to high single digit range. Those are obviously smaller parts of our buy. So it's the wood inflation that is the primary driver against the escalating inflationary outlook we've got for 2021. Okay, great. Thanks, Russ. That's helpful. We have a question from Jay McCandless of Woodbush. Please go ahead, sir.
spk05: Hey, good morning, everyone. Thanks for taking my questions.
spk03: Could we spend a minute on Europe and talk about how UK housing starts and UK repair and remodel seems to be going? Fourth quarter numbers look pretty positive, so would love to get y'all's thoughts on where that goes in 2021. Yeah, Jay, this is Howard. I'll start. You know, we expected to see our interior business strengthen in the quarter, and we did. That was more strength due to growth in the merchant channel than it was with home builders specifically. But, you know, we would expect that that would carry on a bit here. And our exterior business It's been strong all year. We had a bit of a challenge in the fourth quarter with some congestion at the ports and difficulty getting materials. And even so, our exterior business was up sort of low single digits. So we're pleased with the recovery of the UK business. And as Russ said, we expect that momentum to continue, certainly on the heels of a miserable second quarter 2020. I don't know, Russ, did you want to add anything to that? I would just add that we continue to see a market in the UK, a new housing market, Jason, I think that was the area you were specifically asking about, that has been underserved or underbuilt. And the new builders have been trying to get back to work. They really spent a lot of the, certainly the second half of 2020, trying to get back onto the plots and restarting new construction activity. But that has been the slowest part of our business there to recover. And we are fortunately starting to see some green shoots. And even through this latest lockdown in Europe and in the U.K. in particular, which I think some folks had some concerns early on could stall the housing recovery once again in the U.K., they seem to have tried to protect the construction trades wherever possible in recognition of the fact that we've got a housing stock picture in the U.K. that frankly is just running well. short of what organic demand should be. So overall, as Howard said, we feel good about the outlook for that business. It's just a matter of continuing to recover with it on the new build side while we continue to support the renovation market, which has stayed strong. Got it. And you caught my second question, Russ, around the essential worker aspect. What about the stamp duty that they're talking about? Is there going to be any impact to you guys if that comes back into play? You know, we've not seen much impact on the new construction side from that program. You know, that stamp duty holiday was established to incent any and all home transactions, new or existing homes. And so to the extent that it's helped people buy an existing home and maybe fund some renovation work, that may be benefiting the RRR side of our business there a little bit. On the new construction side, we haven't seen a meaningful uptick from that program specifically. Okay. Thank you. Appreciate it. Thank you. Thanks, Jack. The next question is from Ruben Gardner, the Benchmark Company. Please go ahead, sir.
spk05: Thank you. Good morning, everybody.
spk06: I remember your morning.
spk05: Maybe first just a quick clarification, if I could. I think you mentioned the first half up mid-teens, second half up low-sequel digits. Was that just a directional indicator for the whole company revenue, or was that specific to North America?
spk03: That was consolidated results.
spk05: Okay. And then maybe in North America, anything – and if you did call it out and I missed it, I apologize – but anything on the mix front, positive or negative, that hit you guys in – the fourth quarter of 2020 and then, uh, in your outlook for, for 21, anything to keep in mind?
spk03: I'll tell you what, North America. Good. Yeah. Everyone just, uh, if we look back at fourth quarter, there wasn't substantial impact to mix, um, You know, we're still seeing the retail business special orders not at the rate of appeal and increase that we see the stock program. And so there's some opportunity there. Hello? Apologies. Apologies. All right. All right. So I think that, you know, if we look at the 2021, you know, we're not indicating any significant mixed change, but there's some opportunity there to get retail special order back on track.
spk05: Okay, great. And then the past, I don't know, handful of years, you know, there's been, I think, a trend both in smaller size homes, but also in maybe fewer doors per home. Are you guys starting to hear in your conversations with the builders that reverse into the other direction potentially? I don't know whether COVID had anything to do with it or not, but larger homes and or more doors in homes for a variety of reasons, whether it's to get home offices or what have you.
spk03: Yeah, Ruben, I think that's an interesting dynamic that we are very keen to follow. And I would say that, you know, as we see people trying to do more at home, whether it's work or study or, you know, any number of things that now people are doing more at home, we are seeing more of an interest in creating sanctuary spaces. And a lot of times that sanctuary space involves blocking off of of course, along with doors, perhaps upgrading to solid core doors where you need to have some quiet in order to study or work. So we are interested in watching that. We believe there's going to be a tailwind in the impact of doors, whether that is the result of larger home footprints or whether it's just more sanctuary spaces being closed off, I think remains to be seen. But we believe there's a tailwind there, and that's for us.
spk05: Perfect. Thank you, guys. Congrats on the strong close to 2020, and good luck the rest of this year.
spk03: Thanks, Reuben. We have a final question from Noah Murkowsko, Stevens. Please go ahead, sir. Hi.
spk04: Good morning, and thanks for taking my question. Just want to dig in a little bit more on the cost side. I think if I heard you correctly, you're looking for something like 4% inflation next year. Where does that fit into your guide? Does that get you to the midpoint? And I know you've been talking about, you know, improving your ability to source materials to sort of get away from the anti-duty. Is that baked into the guide at all, maybe as we move through the year?
spk03: Yeah, I know it's Ross. I'll take that. I would consider all of those items as comprehended within the outlook that we've provided. As I commented on a moment ago, that material inflation, which we think could be in excess of 4%, is going to be driven largely by wood. That's our largest commodity basket, the largest volume of material that we buy. And that's where we've seen the most rapid inflation recently. And we think that's going to continue through 2021. You're right in pointing out that we have talked about our efforts to move our supply chain where possible. The sourcing team is working constantly on projects to try to offset inflation wherever they can. A lot of those strategic projects would involve moving the supply chain, qualifying alternate or multiple suppliers, in some cases, identifying material substitution. All those efforts are ongoing. They've done a really good job recently of offsetting costs. Up until the fourth quarter this year, they were able to offset a lot of the inflation that we had seen in 2020. But that inflationary headwind is increasing, which is why we think it's going to be net unfavorable to us here in 2021. And in the range of circa 4%. So we'll continue to monitor that and update as we go.
spk04: All right, thanks. And then last one from me. Last year, we saw SG&A as a percent of sales increase a little bit. Just what are your thoughts on where that could shake out for next year?
spk03: Yeah, I can't say that. Yeah, well, first of all, if you take a look at the SG&A increase that we saw in even just during the fourth quarter, you had a fair amount of incentive compensation costs that were added, and you also had some other non-EBITDA expenses that impacted our SG&A. If you carve out the non-EBITDA items and you look at the balance, probably two-thirds of that would be incentive compensation, and the balance would be the impact of the 53rd week. and then just general wage and benefit inflation and headcount investments that we're making in the business. You know, if you look forward, we'll probably see a little bit of return in travel and entertainment expense, certainly not to historical levels, we believe, but there probably will be a little bit more travel as we start to get back out into the field and interface more directly with our customers. We're going to continue to make some investments in the business to improve our capability around product development and marketing, and that's all part of the investment plan that we announced, our North American investment plan. to reinvest $100 million into product development, service, quality, down-channel marketing over the next five years. So all in all, there's going to be some investment in the business, but we're seeing a pretty healthy return off that investment in the growth and certainly in the success of the pricing strategy that we announced last year. Thank you. I'll leave it there. All right. Thanks, Tonya. Okay, well, questions at this time. I'd like to bring the conference back over to Mr. Hex. Thank you, Jerry, and thank you all for joining us today. We appreciate your interest and continued support. This concludes our call. Operator, please provide the replay instructions. Thank you, and thank you for joining Masonite's fourth quarter and full year 2020 earnings conference call. This conference call has been recorded. The replay may be accessed until March 11th. To access the replay, please dial 877-660-6853 in the United States or 201-612-7415 outside the U. S. When you connect please enter the conference ID 13714303. That's 13714303. Thank you for joining.
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