Masonite International Corporation

Welcome to Masonite's fourth quarter 2022 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 Rich Leland, Vice President, Finance, and Treasurer. Please go ahead, 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. Also joining us today for Q&A is Chris Ball, our President of Global Residential. We issued a press release and earnings presentation yesterday reporting our fourth quarter 2022 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 most recently filed annual report on Form 10-K and our subsequent Form 10Qs, 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 earnings presentation. Our agenda for today's call includes a business overview from Howard, followed by a review of the fourth quarter results by Russ. And then Howard will provide some closing comments and we'll begin a question and answer session. And with that, let me turn the call over to Howard.

Thanks, Rich. Good morning and welcome, everyone. Turning to slide four, I'm pleased to report that 2022 was another year of significant growth for Masonite. Full year consolidated net sales increased 11% year over year, while adjusted EBITDA was up 8%. Adjusted EPS grew 19%, driven by both an increase in earnings as well as the impact of share buybacks executed throughout the year. We also delivered a 400 basis point improvement in return on invested capital, reaching an impressive 18%. Our North American residential segment led the way with a strong year-over-year 17% increase in net sales, and 23% increase in adjusted EBITDA for the year. While consolidated adjusted EBITDA margins contracted 50 basis points due to the impact of inflation and volume deleveraging in our architectural and Europe segments, adjusted EBITDA margins in our North American residential segment expanded by 100 basis points. Price cost management was key to achieving both top and bottom line growth in 2022. When we entered the year, we did not anticipate that we would soon experience dramatically higher inflation and continued supply chain disruptions, significantly higher interest rates, and economic turmoil in Europe. We took actions to limit inflation where possible and worked with our channel partners to increase prices in a timely manner aligned with our disciplined price-cost management philosophy of capturing fair value for our products. We are fortunate to have an experienced team that was able to adapt to the changing environment from an operating perspective while maintaining focus on execution of our Doors That Do More strategic initiatives and delivering financial results within our original guidance. During the year, we were successful in growing the mix of solid core and on-trend door designs within our overall interior door portfolio, as well as the mix of fiberglass doors within our overall exterior door portfolio. We have also added incremental production capacity for these products in order to support future growth. In 2022, we began commercialization of our award-winning M-Power Smart Door in the new construction market. Our retail partners at the Home Depot recognize the value of this innovative product and will make the M-Power Door available nationwide later this year. We also launched the Masonite Performance Door System featuring superior protection against the elements versus the leading competitor. These new premium fiberglass exterior door solutions have generated a tremendous amount of positive publicity for Masonite and positioned us as an innovator in the space. Our vision of unlocking the value of fully integrated door solutions was also key to reaching a deal to acquire Endura Products, a leading innovator and manufacturer of high performance door system components. Endura has been a supplier to Masonite for over 25 years and we partnered with them to develop both M-Power and the Masonite performance door system. For those of you who had the opportunity to visit the Endura products booth at the International Builders Show earlier this month, I am sure that you now have a better understanding of the critical role that highly engineered components can play in the overall performance of a door system. We are excited about future innovations that will come from this acquisition as a key part of our strategy to drive specified demand and product leadership in the market. Likewise, we're encouraged by the progress we made in 2022 on initiatives related to delivering consistent and reliable supply. During the year, we completed over 3,000 continuous improvement Kaizen events as part of our mVantage program and further diversified our global supply chain to make it more resilient. We also modernized our production network with two new plants that will allow us to service our customers with greater efficiency and flexibility. We expect these new plants to become an increasingly important part of our production network as we ramp up their production volumes. Let's turn to slide five. Despite three years of significant unforeseen macroeconomic challenges, our team has been able to maintain a track record of consistent performance and impressive double-digit growth across key financial metrics. Our three-year compound annual growth rates at the end of 2022 for net sales and adjusted EBITDA were 10% and 16% respectively. Meanwhile, adjusted EPS had a 39% CAGR, and the growth rate for ROIC was 29%. As I've said before, our team is tightly aligned around a clear doors of do more strategy focused on operational excellence, product leadership, and engaging with customers to enhance the value of the Masonite brand. These financial results indicate that our strategy is taking us in the right direction, and I'm confident that the changes we are making to the company will have lasting benefits. In the short term, however, conditions are likely to remain choppy and we will need to remain agile in order to continue this strong performance while the housing market works its way through a period of more significant demand headwinds. On slide six, we have outlined some high level assumptions we're making about the market for this year and into 2024 and 2025. Through 2023, we expect end market demand to be lower due to the economic impact of steep inflation and higher mortgage interest rates we have seen over the past year. Given these conditions, we're planning for U.S. housing starts to decline by approximately 20% to roughly 1.2 million units in 2023. And we could also see high single-digit decrease in the repair, remodel, and replacement, or RRR market. In the U.K., we are assuming that strong macroeconomic headwinds we see today will remain for the majority of the year. During this period, we believe latent demand in each of our markets will continue to grow as people wait on the sidelines for more predictability in interest rates and housing prices. As economic conditions stabilize, we expect the housing market to return to growth. Factors such as continuing housing supply deficit, the aging housing stock, and elevated home equity should support a rebound to more normalized levels of new home construction and triple R market growth. in both North America and the UK. We anticipate this rebound will start sometime between the second half of 2023 and the first half of 2024. In the meantime, we are moving proactively to adjust our cost structure as a means to both protect our margins near term and position the company for meaningful margin improvements when demand recovers. Turning to slide seven. We have developed a detailed 2023 playbook with actions designed to offset Volume D leveraging, preserve margins, and drive free cash flow, while continuing to selectively invest in strategic priorities to fuel growth. The first part of our playbook is focused on efficiency and margin initiatives. Discipline price cost management has been a hallmark of our operating strategy. We have successfully increased our prices steadily in recent years, Yet our research shows that homeowners still expect to pay more for doors than what they actually pay in the market today. We are committed to capturing fair value for our products, regardless of the business cycle or macroeconomic environment. At the same time, we are also focused on maximizing benefits from the cost side of the equation wherever possible. We've started to see early signs of moderating inflation on certain materials and logistics costs, And our sourcing team is working aggressively to capture these benefits as we move through the year. We have a highly variable cost structure and our operations team are working to flex labor costs with volume while also identifying areas to trim fixed overhead wherever possible. This cost discipline will extend to SG&A as well as we scrutinize spending while protecting investments to maintain our momentum for important growth initiatives. As we announced in late December, we have started executing a restructuring plan to better align our commercial organization structure with the long-term business strategy and continue to drive cost efficiencies through an optimized manufacturing footprint. In total, we expect our restructuring initiatives to yield between $15 and $20 million of annualized cost savings without impacting our ability to deliver outstanding service levels and ramp up production capacity when needed. And since closing the acquisition of Endura in early January, our integration teams have been working quickly to implement plans to capture synergies. We continue to expect the majority of the $8 million of cost synergies identified during due diligence can be achieved in our first year of ownership. The second part of the playbook, summarized on the right-hand side of the slide, includes key initiatives that will ensure we continue to position ourselves for longer-term growth, with progress on each of the three pillars of our Doors That Do More strategy. These three pillars, as you may recall, align our teams around winning the sale with brand leadership and strong channel relationships, driving specified demand with product leadership, and consistently delivering reliable supply. With respect to winning the sale, we are realigning our commercial resources to engage more deeply with our channel partners. and increase our focus on joint business planning, category management, and customer experience. In the area of product leadership, we will continue our efforts to drive mix by increasing the awareness and availability of our higher value products and developing solutions that make life and living better. We also plan to leverage the newly acquired talent and know-how from Endura to accelerate the development and commercialization of new products. Finally, our work to establish ourselves as the supplier of choice in the market by delivering reliable supply of high-quality products remains relentless. In 2023, we will continue to implement mVantage continuous improvement projects aimed at taking our service levels to new highs. We fully anticipate 2023 to be another volatile year, but expect that execution of this playbook will allow us to maximize our financial performance in the near term while enhancing our competitive position and optimizing the business to capture the benefits of rebounding volumes at even higher margins in the longer term. With that, I'll turn the call over to Russ to provide more details on our fourth quarter and year-to-date financial results, as well as our 2023 outlook. Russ?