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spk00: First quarter 2021 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 that this conference call is being recorded. I would now like to turn the call over to Joanne Freiberger, Vice President and Treasurer. Thank you, Maria, 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 Russ Pijma, Executive Vice President and Chief Financial Officer. Tony Hare, 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 first quarter 2021 results. These documents are available on our website at nathanite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued yesterday. More information about risks can be found under the heading Risk Factors in Masonite's most recently filed annual report on Form 10-K and our subsequent 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 includes certain non-GAAP financial measures. Please refer to the reconciliations, which are in the press release and the appendix of the WebEx presentation. Our agenda for today's call includes a business overview from Howard, a review of the first quarter from Russ, along with our updated 2021 financial outlook. Howard will provide closing remarks, and we will host a question and answer session. And with that, let me turn the call over to Howard.
spk01: Thanks, Joanne. Good morning, and welcome, everyone. I'm happy to be speaking with you all today and look forward to discussing Masonite's great first quarter results. But before I get to that, I'd like to thank those of you who were able to join us for our 2021 Virtual Investor Day. We've received a lot of positive feedback. So for those of you that couldn't join us, I'd like to revisit a few of the key highlights from the event. These are important as we believe this is how we will create value for shareholders going forward. One area I'm particularly proud of is our strong leadership team. A key goal of our investor day was to provide you with access to a broader set of the management team. Since I joined Masonite, we've established two new roles to help our company focus on growth. And we gave investors an opportunity to meet our chief marketing officer, Jennifer Renaud, and our chief innovation officer, Corey Cerise. and hear a little more about their backgrounds and how their teams are helping drive our Doors That Do More strategy. We also caught up with our business leaders to hear how they're aligned with this strategy and discuss operational plans to support growth. Moving to the center of the slide, we spoke about the three pillars of our Doors That Do More strategy. Deliver consistent and reliable product, drive specified demand, and when at the last point of sale. We've spoken at some length this past year about how our North American investment plan has been focused on quality assurance, including improved raw materials and packaging, and investments in strategic inventory to improve our lead times and service metrics. This is the first pillar and foundational for all that we do. Second, we plan to increase specified demand for our products through doors that do more. Through our research, many consumers have told us that they want more from their doors. Yet today, most demand is unspecified, indicating that they do not perceive any particular manufacturers focused on meeting their needs. Our goal is to drive demand to Masonite by developing and offering more innovative products. Examples include our new exterior smart door system and our interior switch-it product, both of which Corey showcased at our investor day. We believe we can create a strong and sustainable preference for Masonite by offering products that deliver distinct benefits to consumers when and where they need it. Third, our goal is to win at the point of sale. Our research shows that substitution is very common And 94% of homeowners will purchase what is convenient and available at the time they are in market. We believe that the work Jennifer and her team are doing in conjunction with our channel partners to focus on down-channel marketing and demand creation can change this behavior. With consistent and reliable supply, driving specified demand, and winning at the point of sale, we believe we can drive incremental growth by capturing meaningfully higher prices for innovative new products, allowing Masonite to grow in excess of what the market would naturally provide. These strategies underlie the ambitious 2025 Centennial Plan we introduced at the event, This plan aspires to nearly double the top line of our company, achieving approximately $4 billion in consolidated net sales by the end of 2025. Given the improvements in our base business AUP, along with incremental product that should be margin-accretive, we believe this will allow us to deliver adjusted EBITDA margins in excess of 20% by 2025. And this higher margin rate, coupled with our disciplined capital deployment, should allow us to attain sector-leading return on investment capital. We realize this is an ambitious plan, but we believe we have the right people and strategy in place to make it a reality. For those of you that haven't watched our Investor Day, I encourage you to take some time to visit the event link on our Investor Relations webpage, where you can view the event in its entirety. Now let's move to slide five for an overview of our first quarter. Net sales increased 17% year-on-year on higher average unit price, or AUP, and continued growth in our residential businesses, both in North America and Europe. AUP was up year-on-year across all three segments as we continued to benefit from pricing. We saw our ninth consecutive quarter of year-on-year margin expansion, with adjusted EBITDA margins up 100 basis points. This was due to continued growth in AUP, primarily driven by our previously implemented North American pricing strategy, despite some cost headwinds, largely in the form of inflation. Russ will provide an update on inflation trends when he discusses our improved outlook. We continue to invest in the quarter with the North American investment plan on schedule and in line with our expectations. Following the quarter end in April, Moody's upgraded our corporate credit rating from BA2 to BA1, reflecting their view that Masonite will benefit from residential and market tailwinds and achieve strong credit metrics. This upgrade places us just one notch below investment grade, aligned with our existing rating from S&P. It's nice to see our commitment to maintain a strong balance sheet being reflected in our credit ratings. Shifting to the right of the slide, I'll touch on business and operational highlights for the quarter. Against a challenging backdrop, our operations team continued to deliver exceptionally well. At the core of our manufacturing operations is mVantage, our lean operating system, which is helping to drive continued safety improvements. While one accident is one accident too many, we are pleased to report that our TIR did improve 15% compared to the first quarter of 2020. Additionally, mVantage has continued to help drive sequential improvements in capacity. We are making progress on our ESG initiatives. I'm pleased to say that we recently completed our first global carbon footprint assessment. This assessment has been third-party verified and will act as the baseline for our roadmap as we work towards science-based targets. In addition to completing this assessment, we've also hired a dedicated ESG manager to focus on our sustainability journey. Lastly, we continue to develop our architectural optimization plan, which has been organized around three distinct phases. Phase one is focused on components. If you recall, we mentioned on our last earnings call we had announced the closure of one of our veneer plants and would absorb its production into an existing facility. Phase two is focused on specialty doors. As part of this, we've recently announced the closure of our Springfield, Missouri style and rail door plant. Similar to our components action, we will absorb most of the production from this plant into other existing facilities. Phase 3 is focused on optimizing costs in our flush door assembly plants, and we have already begun to take some actions there. Russ will quantify some of the costs related to these actions later, along with the anticipated savings. Overall, we remain encouraged by the long-term prospects of the architectural business. We believe the actions we are taking will improve the segment's cost structure and service levels so we can support growth as commercial and market demand recovers. With that, I'll turn the call over to Russ to provide more details on our financials. Russ? Thanks, Howard, and good morning, everyone. Turning to slide seven, I'll start with a summary of our first quarter financial results. We reported net sales of $646 million, up 17% as compared to the first quarter of 2020. The growth was primarily due to a 14% increase in AUP, which was up year-on-year across all three segments due to price increases. We also benefited 2% from foreign exchange and 1% from higher component sales. Based volume growth in the North American residential and Europe segments was offset by volume declines in the architectural segment. Gross profit increased 18% to $159 million, driven by AUP, which was partially offset by higher inflation and tariffs on raw materials, rising logistics costs, higher manufacturing wages and benefits, and investments in the business. Since outlining our 2021 outlook earlier this year, the inflationary environment has worsened. We saw higher inflation on our wood purchases than contemplated in our original outlook, and experienced rapidly increasing inflation in resin due to the impact of February's severe winter weather, which extended all the way to the Gulf Coast. Wood and resin represent our two largest baskets of materials spent, so this was a meaningful headwind in the quarter. We also saw significantly higher inbound freight costs, particularly in the area of ocean freight. As a result, material costs increased in excess of 5% for the first quarter. Higher freight costs also impacted our distribution expense. Despite these headwinds, we expanded gross margin by 10 basis points year-on-year to 24.5%. Selling general and administration expenses were $84 million, up 4% compared to the same period last year, primarily driven by higher personnel costs, which includes resources to support growth and incentive compensation. However, SG&A as a percentage of sales was down 170 basis points to 12.9%. Net income was $47 million in the quarter, an increase of $17 million in the prior year, driven primarily by higher operating profit. Diluted earnings per share were $1.89, up 59% from $1.19 in the first quarter of last year. Adjusted earnings per share increased to $1.93, which excludes charges related to our previously announced restructuring plans incurred in the first quarter. This compares to $1.24 in the comparable period last year, which also excluded charges related to restructuring actions. Adjusted EBITDA increased 25% to $102 million, while adjusted EBITDA margin expanded 100 basis points to 15.8%. This represents the highest first quarter adjusted EBITDA since becoming an NYSE listed company in 2013. On the right-hand side of the slide, our adjusted EBITDA block illustrates the significant year-on-year contribution from volume mix and price. This was primarily driven by price in the first quarter as the volume growth from our residential businesses was offset by continued weakness in our architectural segment. We saw additional year-on-year favorability of $3 million due to foreign exchange as both the Canadian dollar and British pounds strengthened against the US dollar. Next, we see the negative impact of the rising inflationary pressures I just discussed in both materials and distribution costs. We also experienced $17 million of higher factory-related cost in the quarter due to higher wages and benefits, negative volume leverage in our architectural business, and weather-related impacts, primarily in several of our North American residential plans. Turning to slide eight then, and our North American residential segment results. Net sales increased 24% for the prior year to $477 million, with the largest driver being a 17% increase in AUP, the result of an overlapping benefit of price. If you recall, our price increases last year were for orders placed in February, effectively yielding us only one month's benefit, while this year's increases went into effect at the beginning of the year. This provided an outsized benefit to AUP in the first quarter. Base volume contributed an additional 5% to growth in the quarter. While our wholesale business was negatively affected by winter weather, which impacted both demand and our capacity mid-quarter, our retail business continues to perform exceptionally well, supported by our previously announced new business wind flows, strong POS, and our ability to slightly rebuild channel inventory. Adjusted EBITDA in the North American residential segment was $95 million in the first quarter, a 32% increase over the same period last year. Adjusted EBITDA margin expanded 110 basis points to 19.8%, despite inflation and continued business investments. As I mentioned earlier, we saw increasing inflation in a number of our material baskets. The rapid increases in resin prices due to weather impacts on the Gulf Coast, coupled with already rebounding oil prices, pushed material costs higher than our original expectations for the North American residential segment. Break was also negatively impacted in both material and distribution costs in the quarter, as we saw both inbound and outbound rates increase. I would remind you that our goal is to always maintain a favorable price-cost relationship, and steps we are taking that are intended to mitigate increased inflation are contemplated in our updated outlook. Finally, our North American investment plan spending was on track for the quarter. Overall, another excellent quarter for our North American residential team. Turning to slide nine in our Europe segment, net sales increased by 25% year-on-year to $89 million. Excluding FX, net sales grew 16% compared to the first quarter of last year. This growth was driven by base volume increases of roughly 7%, as we saw continued strength in our exterior door business, up double digits year-on-year. AUP contributed another 7% to growth as we successfully realized price increases across all products and channels in the UK, our primary European market. Adjusted EBITDA in the Europe segment was $17 million in the first quarter, a 73% increase over the same period last year. Adjusted EBITDA margin expanded 520 basis points to 18.9% despite inflationary pressures. Margins continue to expand on the strength in our exterior business while we experience some capacity constraints on the interior side of the business. Moving to slide 10 and the architectural segment. Net sales decreased by 18% year on year to $75 million due to a 22% decline in base volume as commercial end markets remained weak in the first quarter. These base volume declines were partially offset by growth of 5% from AUP as we continue to benefit from favorable price. Adjusted EBITDA margin contracted 890 basis points to 2.7%, with lower volume being the primary driver of this performance. Roughly three-quarters of our year-on-year adjusted EBITDA decline is due to lost volume and the impact of negative volume leverage, with the remainder of the decline largely due to inflation. The three-phase plan our team is working on is designed to reset our footprint to improve our cost structure and better reflect the current demand environment while also improving the flexibility of our network. As Howard mentioned, we have executed on phase one and phase two and have already taken some early actions for phase three in the form of overhead reductions. The announced actions to date are expected to deliver annualized savings of approximately $5 million. We incurred some negligible restructuring charges in the first quarter, but you will see the majority of the restructuring charges, roughly $10 million, occurring in the second quarter. We believe this business has the ability to earn attractive margins and support our Doors That Do More strategy in non-residential end markets. Given the softness in those markets, it is time to aggressively reset the business. We are just beginning to see improvements in the architecture billing index, suggesting that the market may have bottomed and could see eventual recovery as we enter 2022. Slide 11 summarizes our liquidity and cash flow performance for the quarter. Inclusive of unrestricted cash and accounts receivable purchase agreement and our AVL facility, which remains undrawn, our total available liquidity ending the quarter was $574 million. Net debt was $468 million, and we ended the first quarter with a net debt to adjusted EBITDA leverage ratio of 1.2 times. As Howard mentioned earlier, we're pleased to see that our focus on maintaining a strong balance sheet has been acknowledged, most recently with a credit rating upgrade by Moody's. We purchased approximately 85,000 shares in the quarter for approximately $10 million, an average price of $112.98. Cash flow used by operations was $14 million at the end of the first quarter, down from $6 million provided by operations in the first quarter of 2020. The first quarter is typically a minimal cash flow quarter given the working capital seasonality of our business. And this use of cash was not unexpected given our historically low net working capital at the end of 2020 and the higher cash taxes anticipated this year. Capital expenditures were approximately $14 million. Now, let's turn to slide 12. On slide 12, we provide our updated outlook for the consolidated full year 2021. Given the continued strength in residential demand, coupled with the anticipated benefit of foreign exchange tailwinds throughout the year, we now expect year-on-year consolidated net sales growth of 12% to 15%, compared to our original outlook of 7% to 10%. With inflation running higher for the year than our original expectations, we would like to reiterate that our strategy is to maintain a favorable price-cost relationship. and this updated outlook reflects actions designed to achieve that. This updated outlook also includes a 2% benefit from foreign exchange, on the assumption that the tailwind we realized in the first quarter, due primarily to strengthening of the Canadian dollar and British pound, will continue throughout the year. With regards to our architectural segment, our net sales expectations remain largely unchanged. On this updated net sales outlook, we now expect adjusted EBITDA to be in the range of $435 million to $455 million. While we expect to realize higher net sales, the incremental impact to adjusted EBITDA is likely to be offset largely by material inflation, which we now believe could be as much as 7% for the full year. The timing of inflation in relation to our mitigation actions as well as the return of expenses absent last year, could limit our ability to grow adjusted EBITDA margin year on year in the second quarter. We believe this will be temporary and anticipate meaningful full year margin expansion again in 2021. Moving to EPS, we now expect adjusted earnings per share in 2021 will be in the range of $8 to $8.60, compared to $7.40 to $8.30 in our original outlook. There's no change in our assumption for cash taxes or capital expenditures from our initial 2021 outlook. Given the increased adjusted EBITDA outlook, we would expect free cash flow of approximately $160 million to $180 million for the full year. Now I'll turn the call back to Howard for closing comments. Thanks, Ross. In summary, we were very pleased to have delivered a net sales increase of 17% in the first quarter as we continue to benefit from higher AUP across all segments and volume growth in our residential and markets. Strong price and mix drove adjusted EBITDA in the quarter more than offsetting increasing inflation and resulting in our ninth consecutive quarter of year-on-year adjusted EBITDA margin expansion. We leverage the mVantage operating system to drive safety improvements and sequential increases in capacity. While capacity is improved, we remain focused on ensuring that we are a consistent and reliable supplier for our channel partners. We continue to invest in the business to drive future growth, as all our segments focus on strategies that support our goal of delivering differentiated products and doors to do more. We've increased our 2021 outlook based on favorable results in the first quarter and our expectations for the remainder of the year. Lastly, before we start Q&A, I have an announcement to make regarding our investor relations department. After 13 years with Masonite, Joanne Freiberger has made the decision to leave the company for another opportunity. I want to thank her for her hard work and leadership in the organization. I've personally enjoyed my time working with her, and we all wish her well in her future endeavors. So be with us through the annual shareholder meeting, but you can always reach out to Farron Pollack, Director of Investor Relations, for any assistance. And with that, I'd like to open the call to questions. Operator?
spk00: Thank you, Mr. Hackies. If you would like to register a question, please press star 1. 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 a question, press star one on your telephone at this time. One moment, please, while we poll for questions. Our first question is with Josh Chan with BARG. Please proceed with your question.
spk03: Hi, good morning. Thanks for taking my questions and best wishes for Joanne on her future endeavors.
spk04: Thanks, Josh.
spk03: morning um just uh given your comments about uh february at least in the north american residential channel i was wondering if you could give sort of an update on sort of the cadence in in march and into april particularly in in uh in wholesale um you know how that trended uh exiting you know the storm impacted february if you could talk about that great yeah josh it's tony um
spk01: A couple of highlights. We did, with the weather impact, we did see some slowness in both demand and our capacity with the limitations that we saw. We were a pretty strong business in the south and south-central part of the U.S., particularly in wholesale. So we did see a bit of a dip there. We also saw some impact as we looked at completions in the multifamily sector. So customers who were focused on multifamily felt a little dip in February as well. I would say that we got sequentially better in that demand and in our ability to supply in March as we started to recover from the weather impacts, and we continue to see very strong growth. Through it all, we saw very strong demand and point-of-sale positivity in the retail business, and so that stayed relatively consistent and has done so. And I don't know, Russ, if you want to add some color across the rest of the business. Well, I think Tony encapsulated it really well, is that most of those impacts that we did feel from the February weather impacts were in the North American residential business, and particularly in the wholesale business, given that a number of the plants servicing the interior door business were impacted by that. But the door fabrication plants, they have a natural amount of buffer inventory that they can continue operating to support the retail channel. And you did see a little bit of that next shift as we continue to run our retail operations to keep up with point of sale that we're seeing in that channel.
spk03: Great. That makes sense. So thanks for the color in that. And then my follow-up is on inflation. If you look at the bridge rust that you gave in terms of materials, factory, and distribution, Is it fair to think of those headwinds in Q1 basically continuing into Q2 in roughly the same magnitude? Just because it sounds like most of those factors haven't gone away, maybe with the exception of sort of the weather impact. So is that the right way to think about inflation looking into the second quarter?
spk01: Yeah, generally that's true, Josh. If you step back and look at our updated outlook, we're comprehending material inflation now in the 7% range as opposed to the 4% range that we talked about earlier in the year. So three points alone up from material inflation. Now, there are a couple of other factors that impact materials spending. We did see impacts from both of those in the first quarter, and a lot of that could very well continue. One factor is the fact that we do have just naturally higher inbound freight within our vertically integrated network. We're moving, for example, components, door facings, et cetera, from our facings plants to our door assembly plants, and we're moving door slabs from our assembly plants, in some cases, to our door fabrication plants to support the retail channel. So we're seeing some higher cost of freight logistics that accrue to our material costs just from that movement within our vertically integrated supply chain. You also have some sourcing that's in there. Demand has been extremely robust, fortunately, but that is impacting our ability to supply components from our lowest-cost plants. In some cases, they're maxed out, and so you're seeing us draw on a higher degree of components from some of our higher-cost plants within the network, including actually bringing in some additional facings from our Ireland plant now to support certain operations in North America residential. So those are some headwinds on the materials side that we have comprehended in the outlook, and to some degree, with the exception of any that will abate because of weather impacts that we're trying to manage around the middle of the quarter, some of those headwinds will continue, however.
spk03: That's great. Thanks for the color, and good luck on the rest of the year.
spk01: Thanks, Josh.
spk00: Our next question is with J.P. Morgan. Please proceed with your questions.
spk05: Hi, good morning. This is Laud Hillman for Mike, and thanks for taking my question. So first on the raised sales guide, which was raised by 5%, I was curious if you could just provide a little more detail on how that breaks out by segment. I think you pointed to some stronger North America residential demand, architectural not change, but maybe where you're really seeing some upside and also regarding Europe.
spk01: Yeah, that's Russ. I'll take that. If you look at it on a segment-by-segment basis, I guess I'd characterize it as architectural, you know, kind of in line with our original plans. No real change there. We continue to expect pretty weak end markets throughout the year in the commercial end markets that the architectural segment serves. Now, I believe as Howard noted, you know, we are seeing some encouraging trends with the architecture billing index. I noted that as well during the prepared remarks. That likely puts us in a position to see demand recovery in that business as we get to the end of this year and into 2022. But our outlook for architecture currently is kind of as it was previously. The areas of strength that we're seeing are across the residential business. Obviously, a bulk of that is the North American residential, but the U.K. business is continuing to recover at a little bit quicker pace than we would have expected. And we're also seeing FX tailwinds that, you know, earlier in the year we were a little uncertain as to whether or not they would stick. If you look at the forward curves now, it would appear that they're likely to remain in place throughout the year. So if you step back and you look at that five-point improvement, in our net sales guide, midpoint to midpoint. I'd characterize two points of that as FS, and the other three points as being a combination of market strength and AUP as we get deeper into the year.
spk05: Great. Thanks. That's helpful. And then my second question is, looking at North America residential in one queue, I was curious how much of the new Lowe's business win represented in terms of sales, and then Also, you talked about kind of strong North America retail POS continuing, and you also talked about some rebuilding of inventory there. So I was just curious if that rebuild of inventory was indicative of some kind of slowing of market demand there or increased production on your side, and if there's still further opportunity for the rebuild.
spk04: There you go.
spk01: Yeah, I'll answer your last question first and just talk about the inventory situation. I would say sequentially our output improved through the application of all the advantage efforts in trying to improve our capacity. So that was one key part of our ability to drive sequential improvements in inventory position. I would say that, you know, we just talked about a little bit of a lull in demand, particularly of multifamily and across wholesale, primarily due to weather. We saw that come back. And so we did deliver some sequential improvement in wholesale as a result of that because we were able to drive some output there. So we still see and we still have certainly some inventory makeup to do across all the channels, but primarily in retail. So we're going to continue to see that play out as we see improved capacity and as we drive more output, we'll be making up that inventory position on the retail side. Yeah, Alon, I think your other question was just with respect to the amount of pickup that we were having from the new business wind with Lowe's and the retail channel. I think you estimated roughly 3%. I think that's in the right range. If you take a look at our annual guide for how much new business that represented, and that is fully now in place. And so that's about what we would have yielded in increasing the first quarter. It's important to note, too, that POS remains strong. So it's a combination of business wins and POS. About equally split, yeah.
spk05: Got it. Thank you.
spk00: Our next question is with Mike Dahl with RBC Capital Markets. Please proceed with your question.
spk01: Good morning. Thanks for taking my questions. My first question is, First question is kind of a two-parter around inflation and margins. I was wondering if you could put a finer point on maybe regionally when you think about the 7% full year. I mean, obviously we're seeing worldwide issues, but presumably the North American side is running a little hotter than some other regions given the multitude of issues there. So maybe a finer point on those inflation percentages by region. segment as possible. But then the second part is your continuing comment about favorability on price cost. Your adjusted EBITDA margin guide is up 125 basis points year-on-year at the midpoint. And any sense of kind of order of magnitude we should be thinking about as far as how much of that's coming from gross margin versus SG&A leverage. Yeah, Mike, it's Russ. Let me take a shot at that and then maybe Howard will want to add some color. Specific to your question around inflation, you know, a significant majority of what we saw as even-eyed impact in material costs in the quarter was indeed in the North American residential business. And that's driven by the fact that we're seeing pretty significant wood inflation in North America. Wood inflation is a global phenomenon, but it is primarily hitting North America because we are still incurring higher tariffs on wood imports. So that's driven. In fact, if you look at just our commodity inflation by basket in the first quarter, we saw wood upload double digits. But the other categories of low and mid single digits call it, but in all cases, effectively ahead of what our original outlook had been very early in the year. So that impact is clearly going to hit North American residential, as well as some of the other dynamics I think I mentioned on one of the earlier questions about just the higher logistics cost in moving our own components around our network to facilitate our vertical integration. You know, with respect to your question on the guide and margin progression, you know, we're putting actions in place to mitigate the inflationary effects that we are seeing. But it's fair to assume that there's going to be a little bit of lag with some of those actions. And so that's why I commented during the call that in Q2, it's unlikely or we've placed difficulty certainly in meaningfully growing margins on a year-on-year basis. But some of those actions that we're taking and planning would certainly give us a tailwind as we enter the third quarter. And so that is all comprehended in the outlook that I gave. And those actions should benefit us as well in gross margin. Yeah, I might just add, Mike, I'm glad you recognized our margin increase year over year with our guide. I mean, we're really proud of the progress we're making on margins. We raised our margins 310 basis points last year, and the midpoint of our guide this year is in the 110, 120 basis range. You know, on top of, as I said, a really strong year last year. So despite significantly more inflation than we had contemplated in the outlook, we're still planning very healthy margin growth to, you know, the low 17s, which I'm proud of the team for. Thanks.
spk06: Really comprehensive answer there. Appreciate it. My follow-up question is on architectural. It's helpful laying out the details on the three phases. When I take a step back at $5 million of annualized savings, and not to diminish it, but it's a little under 2% of sales where even if you realize that, it doesn't really get you back to the levels of profitability that you were at just a couple of years ago and where I think certainly some of the long-term goals would be. So I'm wondering, you know, is this three phases of what could still end up being a four, five, six-phase plan? Are there kind of contingency plans in place and any call around, you know, where that could potentially flex up in terms of the actions there?
spk01: Yeah, Mike, obviously that architectural business had a disappointing quarter. That said, the volumes were actually a little better than we had expected. Volumes down 22% in that segment, you know, well documented that that commercial business, you know, is struggling right now. Now, there are some encouraging signs. The ABI was north of 50, and, of course, when it's greater than 50, it indicates an increase from the prior month. For the first time since February 20, it was north of 50 in February of 21. So it took a year. So we're in what we would consider expansionary territory. Now, in February, there were still some weak spots regionally and whatnot. In March, it increased to 55.6, and every measure trended positive. So we do believe, now there's obviously a lie because with doors, it may be 9 to 12 months. later that the putting doors and projects, but the markets are recovering. So when you look at this quarter, you know, we had a volume and an inflation problem. We didn't have the flexibility in the network to be able to adjust to the dramatic reductions in volume. And that's what we're trying to address with our three phase plan. We also had some inefficiencies in the factory due to that volume leverage. And then we had a, quite a bit more inflation than we had planned. So between those three things, we had obviously troubled margins. But as we can take actions to moderate inflation, as Russ described, as we can lower the cost structure of our network through this plan. We closed a veneer plant last quarter. We announced the closure of a stout oil plant recently. And we have to address our flush door capacity next. And we're doing some things with overhead there. Our cost structure is going to change. And then we do expect the volume is going to begin to recover. So we still like this business. We believe this business can be near, at, or slightly more than our margins. That's our goal with this business. We want it to be consistent with our other businesses. And we got some work to do to get there. We're committed to doing it. Yeah, and you know, I might just add, Mike, you've talked about is there a phase four, five, six. I wouldn't want you to think from our commentary that this means that phase three is largely done. Phase three has just started, right? So while phase one around components to Howard's point and phase two around the specialty door, we've announced actions there. We're just very early in the phases of starting what we think can be our flush door footprint. So more to come on that, but I would want you to think that the numbers that we have cited represent a fully completed plan. There's still plenty of work that the team is executing right now. Okay. All right. Thanks, Russ. Thanks, Howard. Thanks, Michael.
spk00: Our next question is with Noah Markowsko with Stevens. Please proceed with your question.
spk02: Good morning, and thanks for taking my question.
spk01: So I wanted to go into a little bit more detail on some of the actions you're taking to impact to mitigate the impact of higher cost inflation outside of price. And maybe if you could talk specifically to the North American residential business. Yeah, Noah, this is Howard. You know, our sourcing team has been working hard on sourcing strategies to mitigate inflation, whether that's finding alternative suppliers regionally. Part of the inflation is due to tariffs and anti-dumping duties and things like that. So that's something that's been going on for quite some time. And the team's done a terrific job, actually, at trying to mitigate some of the significant increases in tariffs and duties and and it's the same with inflation. So that's certainly a strategy that we use often. You talk about pricing as another arrow in the quiver. Surcharges, we've talked about surcharges to offset freight, for example, and they may be temporary in nature, but there's a lot of ways that we're working to try to mitigate the impacts of inflation. Russ also talked a little bit about moving components around the network in order, you know, when When we have some of these capacity challenges and we've been able to successfully increase our capacity sequentially, when you have capacity challenges, you're moving freight around the network more than you might normally. And so as there's inflation in freight, it hits us at a higher rate if we're moving product more frequently. So minimizing that by increasing capacity is another strategy to minimize the impact of inflation. Gotcha. Thanks. That's helpful. And then for a follow-up, you're talking about in 2Q, just given the timing of where you're seeing inflation, adjusted EBITDA margin expansion might be challenged on a year-over-year basis. Is that to say there's a possibility to see some compression, that margin goes lower, or that it just won't be as high as we saw in the 1Q? Yeah. Well, no, it's Ross. I guess I would answer that. As you know, we don't like to provide a guide for any specific quarter. But what I can tell you is that if you look at the second quarter and some of the challenges that we're seeing around inflation, which is an industry-wide issue, clearly, and some of the actions that we're taking to mitigate that and the fact that there is anticipated to be a lag with some of those actions, That's really what informs our view that any kind of margin growth in the second quarter would be challenging to deliver. And it really becomes the ability to then leverage those actions as we get into the second half, which we're pretty confident in, and that's why we laid out the outlook for updated four-year results that we did. Yeah, the other thing to think about second quarter is last year's second quarter we essentially cut – all discretionary spending because we had no idea what to expect relative to COVID. And so our expense load in the second quarter relative to our comp is less than it is today on a burn rate basis. Right. That makes sense. Thanks. I'll leave it there. Thanks, John.
spk00: Our next question is with Jay McCandless with Wedbush. Please proceed with your questions.
spk02: thanks good morning everyone um just wanted to ask first on the the tariff and anti-dumping duties has there been any progress on that any signal from the administration that they may do away with those tariffs i don't think so jack i wish we could make the call but i don't think that's our call so i don't think so at this point okay um And then the second question I had, just talking about making up for the costs in North America residential, have you gone to market with another price increase, or is it going to be more trying to make it up through some of the freight surcharges you were talking about?
spk01: Yeah, Jay, this is Tony. You know, as a matter of practice, we don't speak prospectively about price. I will say, and Russ alluded to it, certainly with the inflation that we've seen and our mandate to remain favorable in price-cost, we're going to do everything and use all those arrows in our quiver to be able to address the costs that come up. And we talked about, you know, certainly some potential challenges for Q2 margin relative to year-over-year performance, but for the full year, we expect to be favorable in that price-cost relationship. Okay, sounds good. Thanks for taking my question.
spk00: Our next question is with Steven Ramsey with Thompson Research Group. Please proceed with your question.
spk04: Hey, good morning, everyone. Hey, maybe to start with the mix factor in Europe, can you maybe talk about how you expect mix to trend through the rest of the year and thinking longer term, are there proactive measures you're taking to drive higher exterior mix even beyond 2021? Yeah.
spk01: Thanks for the question, Steven. The exterior mix has been fantastic for our business for some time, and it continued in the first quarter. We were sort of strong double digits in the exterior space. Our lead times are sort of back at pre-COVID levels. We've aggressively increased our stock, both on hand and on the water, so that we can minimize any potential disruptions due to stockouts. And so we're really proud of that exterior business, and we do aggressively and proactively increase generated leads and tried to create demand in that business, and it's been working quite well for us. The interior side of the business in the first quarter was softer. I would say that we had some internal challenges with capacity in our largest interior door plant driven by COVID. We had some pretty significant absenteeism in the quarter. We actually left some business on the dock, if you will, because we couldn't get it made in all the time. And absent that, we would have been essentially flat, maybe up a little bit on the interior side of the business. But we do expect the next to continue to be strong for our exterior business, and we're going to do whatever we can to drive that. And we do expect the interior business to begin to recover as well in subsequent quarters. Yes, Steven, it's Russ. I might just add to that. You hear the management team here talk a lot about our advantage operating system. I wouldn't want folks to think that that's largely combined to our North American business. I mean, M-Vantage is a global initiative for us. And so we have teams that are continually looking at continuous improvement changes and improvements that can be made in all of our plants, including our door plants over in the U.K., And so we'll continue to look at where we can, from a capacity standpoint, also support what's been really, really good growth in the RRR market for entry doors specifically. And to Howard's point, it's been a really nice tailwind for our business in Europe.
spk04: Great. And then one more kind of adding on to that, but is there any way to quantify or even ballpark the sales that were lost in Q1 from the absenteeism? And then I guess,
spk01: sales or or delayed uh sales into q2 and then kind of thinking forward is the labor situation involved uh evolving positively in the uk yeah i'd say um you know it was millions not tens of millions so we're not material to the total business but probably you know uh borderline material for the european segment uh as far as those orders and yes i think um It is improving. The situation is improving with labor in the UK.
spk04: Great. Thank you. Thank you.
spk00: Our next question is with Ruben Garner from The Benchmark Company. Please proceed with your question.
spk06: Thank you. Good morning, guys, and congrats on the results and, Joanne, good luck in your future endeavors. Most of my questions have been answered. I just have one quick follow-up on the UK. There's been a lot of moving parts over the last year with shutdowns and lockdowns. you know, stimulus or, you know, things to boost the housing economy over there. What's kind of the longer-term outlook? I think most folks are pretty familiar with the U.S. dynamics. What are your thoughts on the new and R&R markets for the U.K. as we move through this year and into next year? Any high level of color would be great. Thank you.
spk01: Yeah, Ruben, you know, it is an aged housing stock in the U.K., so we expect that the triple R market, particularly as it relates to our exterior door business, is going to continue to be strong. And we think housing in the U.K., just like the U.S., is a good bet long term. The macro trends look good there, and housing stock is underbilled. It's aging. And so we like it. In the U.K., like the U.S., people have spent a lot of time in their homes over the last year, and they've realized the opportunities to make upgrades. And we think that that's going to be a positive macro there, just like it is here in the U.S. Yeah, Ruben, it's Russ. I might just add that, you know, for those of you that have followed the company for several years, you know that we've been talking about some of the legislative moves even or policy moves that regulators in the U.K. have been talking about several years ago to actually promote more property being made available for development. and more building by smaller builders in the UK. And that was in recognition of the fact that the new housing stock, the new housing market in the UK has fundamentally been underbuilt for several years. And there were strategies at one point in time to try to incent annual housing starts of circa 250,000 units, whereas we have been seeing an annual run rate well below 200,000 units. Now, Brexit got in the way, and then COVID got in the way, but it doesn't change the fact that, you know, the tone that we feel from the regulators in the U.K. is that they recognize the housing stock is underbuilt, and where, from a policy standpoint, they can continue to encourage that longer term, they will. And that's what, in part, informs our view that it's going to be a constructive market for several years to come.
spk06: Great. Thanks, and congrats again, guys.
spk01: Thank you.
spk00: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question is with Kevin Josevar with North Coast Research. Please proceed with your question.
spk01: Hey, morning, everybody. I'm on the inflationary front, just revisiting that. Russ, I think you mentioned upwards of 7% inflation for the year, and you gave all the dollar values of the inflation in the first quarter, but what was the percentage for the quarter? And it sounded like you expect relatively similar in 2Q based on an earlier question. So I'm just trying to figure, you know, for the full year, if you expect some, you know, mitigation, if it's going to be similar the whole year, or if maybe there's some mitigation in the back half of the year from, you know, maybe find a mitigate the anti-dumping duties by finding alternative sources or whatever. But I'm trying to just get a sense for what was the percent inflation in the first quarter and kind of how you expected to trend the full year. Yeah. If you look at the total inflation that we incurred, Kevin, in the first quarter, It was in excess of 6%. We were able to mitigate circa one point of that through some of the sourcing savings projects that we have in place. But, yeah, gross inflation was in excess of 6%. So, as you can see by our commentary on the outlook, our expectation is that certainly will continue or, in certain cases, even strengthen a little bit further.
spk03: OK.
spk01: And then on the architectural front, you mentioned encouraging signs. Obviously, those are leading indicators that take some time to develop. In your business, some of the comps start getting easier in 2Q and beyond. So I'm just kind of curious if maybe 1Q is the low-water mark and we can start seeing some sequential improvements in sales and earnings. I know there is a little bit of seasonality to the business, but I'm curious if that's kind of how you see it going, that maybe 1Q is the low-water mark and we continue to see improvement from here, or if we maybe take a step back before we take a step forward. Curious your thoughts. Kevin, we certainly had a difficult first quarter, as I said, on three fronts. You know, volume was way down, which hurt. Inflation was up, which hurt. And then we had some factory inefficiencies due to leverage, due to that volume being down. So longer term, we certainly see some light at the end of the tunnel. Now, we're taking some specific actions, as we said. through a three-phase plan, close the plant last quarter, announce the closure of the plant this quarter, addressing some capacity in our flush door plants that will help our cost structure. So all these things that we're doing, I think, are going to improve this business. But the first quarter was difficult because we had a triple whammy. Yeah, you know, Kevin, it's Russ. One thing I'd like to add also is just to remind everyone, this is a pretty long cycle business, right? Eighty percent of our revenues in the architectural segment are related to project quotes, and those are for projects that, you know, won't go into effect or, you know, actually yield an order for, in some cases, three, six, nine months out. And so we look at things like the architecture billing index as more of an indication as opposed to just year-on-year comps in any given quarter. And so what we saw is that the ABI fell dramatically last year, and it has stayed low. And given that that is an indicator of market demand nine to 12 months in the future, the fact that it is starting to recover is encouraging, but it really doesn't indicate, in our view, any significant firming in commercial end markets until at least the end of this year.
spk05: Okay, great. Thank you.
spk01: Thank you.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to Mr. Howard Hecht with closing remarks.
spk01: Thank you, Maria, and thank you all for joining us today. We appreciate your interest and continued support. And finally, I'd like to thank Joanne and wish her all the best. This concludes our call.
spk00: Thank you for joining me for this first quarter 2021 earnings conference call. This conference call has been recorded. The replay may be accessed until May 19th. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. Enter conference ID number 13718196. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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