Masonite International Corporation

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.

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?

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