Masonite International Corporation

Welcome to Mesonite's fourth quarter and full year 2021 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 the question and answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Rich Leyland, Vice President, Finance and Treasurer. Thank you and Over to you, sir.

Thank you, and good morning, everyone. We appreciate you joining us for today's call. With me here this morning are Howard Heckes, President and Chief Executive Officer, and Russ Tijema, Executive Vice President and Chief Financial Officer. Chris Ball, our President of Global Residential, will also be joining us for the Q&A session. We issued a press release and earnings presentation yesterday reporting our fourth quarter and full year 2021 financial results. These documents are available on our website at masonite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued yesterday. More information about risks can be found under the heading Risk Factors in Masonite's annual report on Form 10-K to be filed at the SEC later this week 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 released in today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations, which are in the press release and the appendix of the earnings presentation. Our agenda for today's call includes a business overview from Howard, followed by a review of the fourth quarter and full year results from Russ, along with our 2022 financial outlook. Lastly, Howard will provide some closing remarks and will host a question and answer session. And with that, let me turn the call over to Howard. Thanks, Rich. Good morning and welcome, everyone. I'm pleased to be joining you today to update you on Mason Ice's fourth quarter and full year results. 2021 was another outstanding year, and I'm grateful to each of Mason Ice's more than 10,000 employees that contributed to the impressive results we delivered in this challenging environment. Their flexibility, creativity, and resilience enabled us to grow volumes and deliver double-digit growth in both net sales and adjusted EBITDA. End-market demand remains strong, despite a number of well-publicized external headwinds. I'm proud of the way the team navigated the extreme levels of inflation, as well as supply chain constraints and labor-related issues that we faced throughout the year. Amid these challenges, our focus on maintaining a favorable price-cost relationship combined with disciplined capital management allowed us to realize a 33% increase in adjusted earnings per share and a 5 percentage point increase in return on invested capital for the year. And we accomplished this while continuing to invest in the important growth and strategic initiatives that will shape our future. I am also very pleased with the progress that we made on our 2021 on our key environmental, social, and governance initiatives. We published our latest ESG report in June that included our first-ever carbon footprint analysis, and we named Claire Doyle the company's first Chief Sustainability Officer. As part of our continued focus on safety, our operations teams conducted over 1,800 safety-related Kaizen events, helping to reduce our total incident rate by 6% year-over-year, with 10 of our facilities achieving our ultimate goal of zero safety incidents. We also launched our We Help People Walk Through Walls community grant program, with awards going to 15 amazing local organizations nominated by our employees. At our Investor Day in April, we presented our Doors to Do More strategy and our Centennial Plan, As you may recall, we called out three ambitious financial goals for 2025, roughly doubling our annual net sales to $4 billion, achieving adjusted EBITDA margins in excess of 20%, and delivering sector-leading return on invested capital. We made significant progress in 2021, and I believe we are well on our way to delivering on these goals over the next four years. Also at our investor day, you may recall that Russ laid out a glide path to achieving our Centennial Plan goals that included three main pillars of growth. First, we intend to grow our base business organically by capturing fair value for our products and optimizing our supply chain and production processes to increase capacity and capitalize on strong housing market fundamentals. Second, we intend to leverage our strong balance sheet and cash flow to pursue acquisitions which have the right fit and value proposition and which will help us meet our long-term financial goals. And third, we intend to drive growth through our Doors That Do More strategies, which aims to unlock the significant potential we have to differentiate our company through a combination of delivering reliable supply, product innovation, and creative down-channel marketing, making Masonite the supplier of choice and Masonite Door Systems the product of choice for architects, builders, and homeowners. Turning to slide five, certainly in terms of doors that do more innovation, 2021 was a big year. Among the new product launches this year was our Masonite M-Power smart door, the first residential entry door to integrate power, perimeter lighting, a video doorbell, and smart lock into a complete door system that can be controlled remotely through a proprietary mobile app. Last month, we showcased the new M-Power door at the 2022 Consumer Electronics Show in Las Vegas, and the reception was phenomenal. Who would have imagined that a door company would ever be part of CES, let alone win top accolades? But that is just what we did. The Empower Reveal at CES was highlighted in over 130 articles garnering over a half a billion impressions worldwide. Our goal was to make a splash at CES to lay the groundwork for engaging builders about this exciting new product. And I've got to hand it to our marketing team. They executed beautifully. This effort certainly helped raise awareness and interest in the market, and our conversations with builders have been picking up. We recently showcased the door again at the International Builder Show and have already received preliminary commitments from six builders for installation in communities they plan to build this year. We are in active discussions with dozens more, which we are confident will lead to additional sales announcements throughout the year. So we're off to a good start. And while we understand the adoption curve will take some time, we're very encouraged by the early indicators of purchase intent and overwhelming enthusiasm for a product from CES and social media to the leadership at Top Builders. Turning to slide six, when I joined the company in mid-2019, it was clear to me from customer conversations and market research that doors were largely commoditized and underpriced compared to consumer expectations. Innovation in the door space was primarily focused on style and design, while margin growth came primarily from cost management and productivity initiatives. Over the last two and a half years, we've been on a mission to transform Masonite from a manufacturer of commoditized building products to a manufacturer and marketer of consumer durables, of doors and door systems that solve life and living problems where we work and play. The Empower Smart Door is a great example. Our strategy was to begin closing the price value gap by implementing a significant price increase on our products effective January of 2020, followed by investments back into the business focusing on delivering reliable supply, driving specified demand, and winning at the last point of sale. The global pandemic was not originally part of our plan, and certainly the macroeconomic impacts of this phenomenon have resulted in some volatility quarter to quarter. But overall, I am very pleased with the financial results that our strategy has delivered over the past two years. Since 2019, net sales are up 19%. Adjusted EBITDA is up 46%. Adjusted EPS is up 123%. And return on invested capital is up 560 basis points. Our strategy puts us on a new growth trajectory, and we believe we have the momentum to follow this path through to achieving our centennial plan goals. Turning to slide seven, I'd like to give an overview of some of the highlights from Q4. I'm pleased to report that we delivered year-on-year growth in both net sales and adjusted EBITDA. The 3% increase in net sales was driven by higher average unit price, or AUP, offset by volume declines caused primarily by the 53rd week in 2020. AUP was up year-over-year across all three segments as we continued to benefit from previously implemented pricing actions. Adjusted EBITDA margin in the quarter increased 190 basis points year over year as pricing actions and SG&A savings more than offset inflation and operational inefficiencies. Russ will discuss this in more detail in just a few minutes. Also in the quarter, we recorded $83 million in pre-tax charges related to architectural goodwill impairment and the annuitization of our legacy U.S. pension plan to remove the liability from our balance sheet. With respect to business and operational highlights for the quarter, end market demand fundamentals remain generally healthy across our residential and commercial end markets. But several unpredictable manufacturing disruptions impacted our ability to efficiently operate in constrained capacity. Among these disruptions was the well-publicized winter spike in Omicron cases in both North America and Europe, which impacted our suppliers and customers as well as our own operations. In our plants worldwide, COVID-related absenteeism increased approximately 40% in the last three weeks of December versus the rest of the fourth quarter. You will note that we saw significant and unanticipated underperformance in our architectural segment in Q4, resulting from a number of factors that increasingly constrained production. Russ will discuss some of this in more detail, but we are clearly disappointed with these results, and we are evaluating additional actions to restore the business to profitability. Finally, I'm pleased to report that the capacity expansion, mVantage process optimization, and sourcing initiatives are moving forward to help lay the foundation for continued growth in 2022. All in all, this quarter was not as strong as we planned, but I believe the issues are primarily transient in nature and that the fundamentals that have driven the success of our business over the past two years remain sound. Before I turn the call over to Russ, I also wanted to highlight the announcement we made yesterday regarding our additional commitment to enhancing shareholder returns. The increased repurchase authorization and announcement of plans for an accelerated share repurchase program reflect the confidence that the Board of Directors and management have in the growth potential for Masonite and the results we expect to see under our Doors that Do More strategy. With that, I'll turn the call over to Russ to provide more details on our financials. Thanks, Howard, and good morning, everyone. Turning to slide nine, I'll provide an overview of our fourth quarter financial results. We reported net sales of $636 million, up 3% as compared to the fourth quarter of 2020. The growth was primarily due to a 14% increase in AUP, which was up year over year across all three segments on favorable price. We also benefited 1% due to favorable foreign exchange. These increases were partially offset by base volume declines of 10%, as well as a 1% decrease from the sale of components and a 1% decrease from the impact of a divestiture. The year-over-year decline in volumes resulted largely from the absence of a 53rd week in 2021, as well as Omicron-related labor shortages, destocking among certain U.K. merchants, and production challenges in the architectural segment. Gross profit decreased 5% to $135 million, and gross margin decreased 170 basis points year-over-year to 21.2%. As expected, our strong AUP growth was sufficient to more than offset inflation, which was slightly higher than anticipated in the quarter. But factory and distribution inefficiencies related to labor constraints and volume declines contributed to the gross margin contraction. Selling general and administration expenses were $66 million, down 31% compared to the same period last year, primarily driven by lower incentive compensation as well as the absence of charges related to the settlement of U.S. class action litigation that were included in the prior year period. SG&A as a percentage of net sales fell 500 basis points from the prior year to 10.3%. We recorded a net loss of $25 million in the quarter as compared to $27 million of net income in the prior year due to the combined impact of the goodwill impairment in the architectural segment and the pension settlement charge that Howard mentioned. These two items represent approximately $83 million of discrete pre-tax charges in the quarter. Absent these items, net income would have increased almost 80% versus the prior year. Diluted earnings per share were a loss of $1.06 compared to earnings of $1.08 in the fourth quarter of last year. Excluding the goodwill impairment and pension settlement charges, adjusted earnings per share increased 60% to $2.01 in the fourth quarter compared to $1.26 in the fourth quarter of 2020. Adjusted EBITDA in the quarter increased 17% year-over-year to $95 million, with adjusted EBITDA margin of 190 basis points to 15%. On the right-hand side of the slide, we have more detail on our adjusted EBITDA performance, which was largely driven by strong year-over-year gains in price as well as SG&A savings. Cost of goods sold remained elevated in the fourth quarter, with material costs up $47 million year-over-year. Raw material inflation, higher inbound freight costs, and global supply chain disruptions all contributed to material costs, which remained elevated in the fourth quarter, yielding year-on-year material cost inflation slightly higher than the mid-teens rate we had expected. We also incurred $16 million of higher factory-related costs in the quarter due to increased wages and production inefficiencies caused by our limited ability to flex labor and overhead costs in line with short-term volume fluctuations. Distribution costs were $12 million higher year on year, primarily due to inflation on freight rates and packaging materials, including wood pallets, as well as an impact from sub-optimized payload and freight lane mix. Let's turn to slide 10 for our North American residential segment results. Net sales increased 9% from the prior year to $495 million, driven by higher AUP, which benefited from multiple price increases implemented throughout the year. Base volume declined 6% year-on-year, principally due to a 53rd week in the prior year. Volume was also constrained somewhat by discrete weather events that led to temporary plant closings, as well as the Omicron-related spike in absenteeism that Howard noted. Despite the volume drop in Q4, full-year volume increased 5%, driven by strong end-market demand and previously announced new retail business. Adjusted EBITDA in the North American residential segment was $88 million in the fourth quarter, up 1% from the same period last year, with an adjusted EBITDA margin of 17.9%, down 140 basis points. While we achieved favorable price costs in the quarter, this was more than offset by the impact of manufacturing and distribution inefficiencies presented by the challenging labor and supply chain environment. As Howard mentioned, we continue to look toward the future and invest for long-term growth. In the fourth quarter, we made significant progress on capacity expansion initiatives, such as our Fort Mill, South Carolina facility. This new facility will fully leverage our mVantage operating system and targeted automation. Its location in the southeast is ideally suited to serve as some of our strongest markets. We have other initiatives underway targeting exterior door production capacity that are scheduled to come online in stages starting in Q2 of this year. Turning to slide 11 in our Europe segment. Net sales of $74 million were down 11% year-on-year, or 6%, excluding the impact of foreign exchange and a divestiture, as strong AUP growth was offset by volume headwinds. Base volumes declined 20% year-on-year, In addition to the impact of the 53rd week in the prior year, we witnessed destocking in the merchant channel, coupled with widespread shortages of various building materials and trade labor, which affected builders' ability to complete projects. Partially offsetting the volume decline was a 14% increase from AUP. Adjusted EBITDA was $11 million in the fourth quarter, down 37% year over year. Adjusting EBITDA margin was 14.4% down to 570 basis points, driven primarily by our limited ability to flex labor and overhead in line with the sharp volume decline we experienced in December. We are keeping a close eye on channel inventories and demand signals in the market and stand ready to manage costs accordingly. But we have already seen order rates for interior doors improve in late January and early February. Demand for exterior doors remains somewhat soft due in part to trade labor constraints. However, given the age of the housing stock in the UK and the limited new construction in the market in recent years, we remain bullish on the long-term remodeling market for exterior door systems. Our new exterior door facility in Stoke-on-Trent will allow for continued growth, and in the fourth quarter, the team successfully began a staged transition of production to the new site. Full transition of production remains on schedule to be completed by the end of Q2. Overall, we are pleased with the full year results for our European segment, which included a 12% increase in COVID recovery volume, primarily in Q2, as well as a 12% increase in AUP. This strong AUP performance, along with the structural work the European team has done to streamline the portfolio, drove a year-on-year adjusted EBITDA margin increase of 240 basis points to 18.1%. Moving to slide 12 in the architectural segment. Net sales decreased by 18% year-over-year in the quarter to $63 million, driven by an 18% decrease in base volume and a 6% decline in component sales, offset by a 6% increase in AUP. The base volume decline was largely the result of three main factors. Material supply outages of third-party source components, the impact of spiking Omicron-related absenteeism, which affected production in this segment to an even greater degree than in our residential plants, and inefficiencies related to the ramp-up of new systems and equipment that are a part of our plan to better leverage our network of door plants. These production constraints, coupled with sustained order flow in the quarter, and extended lead times. Adjusted EBITDA was a loss of $6 million in the fourth quarter. While we continue to realize favorable price, this was more than offset by the impact of lower production volume. The order book for this segment is still strong, and we are now seeing additional price come through from actions taken as recently as December for the QuickShift business, as well as price realization from actions earlier in 2021 that are now being realized on quoted projects. To address material supply constraints, additional vendors have been qualified and we should start receiving shipments from them in late Q1. An intense focus on production scheduling in January has allowed us to ship 80% of our back orders. As for the ramp up of systems and equipment, we've assigned additional continuous improvement resources to support and train local operators. As you may recall, part of our architectural restructuring plan involves increasing production flexibility between plants, giving us the option to service customers out of multiple locations. We are making progress on this initiative, but needed greater temporary support resources to facilitate change management in light of elevated absenteeism and turnover. Given the spike in Omicron-related issues that carried over into January and the time required to solve some of these supply chain and production issues, We are not expecting to see a return to profitability in the architectural segment until the second quarter. Let's move to slide 13 and summarize our full-year financial results for 2021. Net sales were up 15% compared to 2020 due to AUP growth of 11%, base volume growth of 2%, and a 2% benefit from foreign exchange. Gross profit of $612 million represents an increase of 7% over the prior year, while gross profit margin declined 180 basis points to 23.6% for the full year. The benefit of a low double-digit increase in AUP was more than offset by the combined effects of material and logistics inflation, which increased steadily across the year, as well as incremental tariffs, rising manufacturing wages, and manufacturing inefficiencies related to an extremely volatile supply chain and labor environment throughout 2021. Selling general and administration expenses were $308 million, down 16% compared to last year, primarily due to the absence of charges related to the settlement of U.S. class action litigation in the prior year period. and lower incentive compensation, partially offset by higher personnel costs in the form of both wage and benefit inflation and investment in resources to support growth initiatives. SG&A as a percentage of net sales fell 430 basis points from the prior year to 11.9%. Debt income was $95 million for the full year, an increase of 37% from the prior year. Diluted earnings per share were $3.85 in 2021, up 39% from $2.77 last year. Adjusted earnings per share increased 33% to $8.16. Adjusted EBITDA increased 13% to $413 million for the full year, while adjusted EBITDA margin contracted slightly to 15.9%. On the right side of the slide, we provide a full year adjusted EBITDA bridge. A relatively straightforward combo for 2021. Volume growth and strong AUP, partially offset by significant inflationary pressures and higher factory and distribution costs. Slide 14 summarizes our liquidity and cash flow performance. At year end, our total available liquidity was $601 million, inclusive of unrestricted cash, an accounts receivable purchase agreement, and our undrawn ABL facility. Net debt was $484 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.2 times. Cash flow from operations was $156 million through the end of the fourth quarter, down from $321 million in 2020. We anticipated lower cash flows versus the prior year due to higher cash taxes and cash payments related to the settlement of U.S. class action litigation, as well as a rebuilding of working capital from abnormally low levels exiting 2020. This working capital rebuild was exacerbated by the impacts of inflation and elongated supply chains, strategic increases in raw material safety stocks, and lower accruals for variable compensation. Capital expenditures were approximately $87 million in 2021. We continue to repurchase our shares in the fourth quarter, purchasing over 276,000 shares for approximately $31 million at an average price of $111.51. As of February 21st, we have repurchased an additional 388,000 shares of stock for $40 million in the first quarter of 2022. Yesterday, we announced that our Board of Directors has approved a new share repurchase program, allowing us to repurchase up to an additional $200 million of shares. This new authorization, plus approximately $156 million currently available under our existing authorization, approved in August 2021, provides us with over $350 million for future share repurchase activities. We also announced that we intend to enter into a $100 million accelerated share repurchase transaction during the first quarter of 2022. We believe our strong balance sheet and steady cash flows allow us to take advantage of what we see as an attractive investment opportunity in our own shares, while maintaining ample resources to pursue both organic and inorganic growth initiatives. On slide 15, we have provided our consolidated full-year outlook for 2022. As backdrop, we believe that demand fundamentals will remain healthy across the markets we serve, particularly in the North American residential market, where existing for-sale housing inventories remain historically low, prompting continued strong demand for new housing, and higher home values, which are supportive of repair and remodeling activity. While concerns about the impact of inflation and rising interest rates cannot be ignored, our current viewpoint is that, barring any significant supply chain disruptions, housing starts and the triple R market will be flat to up slightly in 2022. In the UK, slight headwinds are beginning to materialize in the form of limited availability of trades labor, which is impacting the construction markets broadly, as well as moderating consumer confidence. However, we remain constructive on the long-term fundamentals in that market due to the underbuild of new housing, which has persisted throughout Brexit and the COVID-19 pandemic. As for our commercial markets in the U.S., the ABI index has moderated slightly in recent months, but has remained in positive territory since February of 2021, indicating that non-residential markets will likely continue to see some recovery in 2022. As an overlay to end market demand, we continue to monitor the health of supply chains and the labor market as they may ultimately influence construction activity in the near term. We entered the year with meaningful constraints on our own production related to the end-of-year spike in Omicron absenteeism. January deteriorated further. Thankfully, we saw these rates start to improve in February, but they remained elevated and have put a governor on our ability to meet unconstrained demands thus far in Q1. In view of these factors, which potentially impact both demand and supply, we are assuming minimal volume growth in our consolidated 2022 outlook. In terms of pricing, we are assuming a nearly double-digit benefit at a consolidated level for the full year, comprised of both the carryover impact and mid-year pricing actions taken in 2021, and additional price increases implemented in early 2022. We expect the impact of these recent price actions to be somewhat muted in the first quarter, given timing of implementation and the impact of extended lead times on some of our products. In addition to volume and price, we assume our net sales will be impacted by a one-point headwind from foreign exchange and a one-point headwind from the impact of the mid-year 2021 divestiture of our check business in the Europe segment. Considering all of these factors, we expect net sales growth of 6% to 10% versus 2021, or 7% to 11% excluding foreign exchange. With respect to adjusted EBITDA drivers in 2022, we anticipate that inflation will remain a substantial headwind. We assume our raw materials costs will remain elevated and yield an annual inflation rate in the low to mid-teens. with year-on-year increases heavily weighted to the first half, given the trajectory of inflation across 2021. Inflation on wages and benefits, as well as on logistics, are expected to come in at mid-single digits. And finally, we would expect SG&A to grow year-over-year, roughly in line with net sales growth, as we also incur wage inflation that is somewhat higher than historical norms and continue to invest in resources important to deliver growth and improve operational capability. Based on this cost overlay to our net sales outlook, we expect adjusted EBITDA to be in the range of $445 million to $475 million. Taking into account the price and inflation dynamics I previously mentioned, quarterly counts for adjusted EBITDA margin are likely to be particularly challenging in Q1, given the strong price and much lower relative inflation we saw in the first quarter of 2021. We are expecting margins to be down year-over-year in Q1, approach paring in Q2, and then improve in the second half, with year-on-year margin improvement for the full year. We expect that adjusted earnings per share in 2022 will be in the range of $9.10 to $10.05, based on an assumed tax rate of approximately 22.5% and an average diluted share count of approximately 24.5 million. The share count includes the repurchases made through February 21, 2022, but does not consider the impact of our planned accelerated share repurchase program or other repurchases that may be conducted throughout the year under the remaining authorization. We expect cash taxes in 2022 to range from $60 million to $70 million, and for capital expenditures to increase to between $100 million and $120 million. reflecting our focus on strategic investments in capacity, service and reliability, health and safety, and product innovation. On the basis of these assumptions for adjusted EBITDA and key cash flow drivers, we anticipate free cash flow of $150 million to $180 million for 2022. With that, I'll turn the call back to Howard for closing comments. Thanks, Russ. To summarize, we're pleased to have delivered double-digit sales and adjusted EBITDA growth in 2021 on top of what was already an extraordinary year of growth in 2020. The team navigated numerous challenges with perseverance and creativity this year. While we have some carryover issues that we need to address in the architectural segment specifically, the investments we have been making in capacity, productivity, and new product innovation across all of our business segments leave us enthusiastic about our prospects as we enter 2022. A tight supply of housing stock and rising home values in North America are supporting both the new construction and repair and remodel demand and could provide upside for volumes in 2022. Margin growth will be a priority for us this year, and we'll be focused on cost management, improving our mix, and continuing to capture fair value for our products. At the same time, we will continue to invest in our Doors to Do More strategy to further grow the company and help us achieve our ambitious 2025 Centennial Plan goals. For the past two years, we've been faced with plenty of macroeconomic volatility, and yet our team has found a way to focus on what we are able to control and generate results. So while no one can say with certainty what's in store for us in 2022, I'm confident in our ability to step up and deliver another year of continued momentum and exceptional growth. And with that, I'd like to open the call for questions. Operator?

Thank you. Mr. Hackes, 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, please press star 1 on your telephone keypad. The first question comes from the line of Mike Dell with RBC Capital. Please go ahead.