Masonite International Corporation

Welcome to Masonite's first quarter 2023 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.

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 first quarter 2023 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 10-Q, 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 first quarter financial results from Russ, and then Howard will provide some closing remarks and will begin a question and answer session. And with that, let me turn the call over to Howard.

Thanks, Rich. Good morning and welcome, everyone. Beginning on slide four, I'm pleased to report that Masonite is off to another solid start in 2023. First quarter net sales and adjusted EBITDA came in ahead of our expectations, although down year-on-year given softer end demand and versus the exceptionally strong first quarter we had last year. Order volumes remained stable through the quarter, and early success on our 2023 playbook initiatives further supported our Q1 adjusted EBITDA. Swift implementation of working capital reduction initiatives also gave us a head start on free cash flow for the year. As a reminder, we typically see lower operating cash flow in the first quarter due to seasonality impacts. In Q1, we generated $56 million of operating cash flow, a $94 million improvement over the prior year period. Based on our positive cash flow and healthy balance sheet, we were able to repay $100 million of bank debt in the quarter and repurchase $15 million worth of common stock. while still maintaining our strong liquidity position. With respect to the business and operations highlights for the quarter, I'd start by noting that end market demand trends overall are playing out roughly in line with the planning assumptions we used when preparing our full year 2023 financial outlook. U.S. housing starts, which we expected to be down 20% year on year, have been marginally better than expected thus far, down 18% through March, while retail POS in North America was slightly weaker, down low double digits on average in Q1, as compared to our full-year outlook for a high single-digit decrease. In Europe, the UK housing market is somewhat weaker than we were expecting, with starts down 28% year over year. and builders commenting that they could see completions down between 30 and 40% for the full year. Demand in the architectural segment has fluctuated from month to month, but we were encouraged to see the architecture billings index increase to above 50 again in March. Across all our business segments, we have been flexing variable costs to align with demand. At the same time, we have continued to execute network optimization and fixed cost reduction projects that will lead to leaner and more efficient operations. I'll speak more about this when I address execution of our 2023 playbook on the next slide. Rounding out our highlights this quarter is the positive performance we saw in the architectural segment. While we continue to explore strategic alternatives, the team has been actively addressing the challenges that have faced this business. In Q1, we were able to deliver over $5 million in adjusted EBITDA on a combination of sequentially higher output, improved operational performance, and strong price-cost management. We believe these results are a positive indication of the potential this business has to return to prior levels of profitability. All in all, this was a good quarter that positions us well to achieve the results outlined in our full-year outlook. More importantly, I'm encouraged by the momentum we are gaining across the organization on our initiatives related to margins, cash flow, and long-term value creation that will increasingly benefit all stakeholders through the balance of the year and into 2024. Let's turn to slide five. On our last earnings call, we presented our 2023 playbook to illustrate how we plan to thoughtfully manage costs while staying focused on margin expansion opportunities and continuing to activate our Doors That Do More growth initiatives. The playbook is summarized on the right-hand side of this slide. Planning for these initiatives started in 2022, and our teams did a great job of executing quickly to begin realizing some of the benefits already in Q1. Among our margin-related initiatives, maintaining price-cost discipline remains a top priority. We continue to benefit from prior year pricing actions with consolidated AUP up 10% in the first quarter. We are also keenly focused on unlocking savings on the cost side of the equation. Wages and benefits, rent, insurance, and energy costs continue to escalate and underscore the importance of securing savings elsewhere in the business in order to deliver margin expansion in the second half of the year. We are seeing lower rates for ocean freight, but have yet to realize broad deflation in our material basket. Our team is closely monitoring market indices for all of our raw materials and actively negotiating cost improvements wherever possible. Other important margin initiatives underway include flexing variable costs to match order volumes, executing on our restructuring program, and capturing expected cost synergies from the Endura acquisition. In North America Residential, for example, we reduced direct labor headcount by approximately 16%, in line with the overall market decline. We've also reduced our SG&A headcount by approximately 10%. As part of the North American Residential restructuring, we announced the closure of one of our older and less efficient door facilities located in California. The customers previously serviced out of this plant will now be serviced from other sites in our network. where we have increased capacity and throughput utilizing our mVantage continuous improvement initiatives. The restructuring actions across our North American residential segment, architectural segment, and corporate functions delivered approximately $3 million of benefit in the quarter. And additional restructuring actions are underway to deliver the full $15 to $20 million of annualized cost savings that we are expecting from this program. The combined impact of these cost actions are enabling us to coil the spring, as we say, to maintain margins despite the current downdraft in the housing cycle before delivering margin growth from fixed cost leverage when volumes return. But we're doing a lot more this year than just leaning out our organization. We're also moving forward with the implementation of our Doors That Do More growth initiatives that are enhancing our competitive advantage and category leadership with consistent and reliable supply, product leadership, and deeper customer engagement. With regard to reliable supply, our operations team achieved another significant milestone this quarter. In March, they completed the startup of a second interior door production line in our new Fort Mill, South Carolina plant, which brings additional technologically advanced capacity and flexibility to our production network in the eastern United States. In terms of product leadership, we continue to see the impact of educating our channel partners and homeowners about the value of upgrading their doors. Solid Core Doors are a great example of the life and living benefits you can get from upgrading to this quieter solution. In Q1, we realized another quarter of growth in the mix of Solid Core Doors as a percent of our total interior door sales. We also launched new nationwide distribution of barn door kits with one of our major retail partners. Barn doors have become very popular due to the added privacy and style they can add to a home as part of a weekend project that takes the average DIYer only 90 minutes to complete. The typical barn door kit retails for $200 to $300, which also makes for a strong positive contribution to AUP for Masonite and our customers. This new barn door program is a great example of the win-win solutions we bring to the table to create benefits for homeowners, channel partners, and Masonite alike. This is the essence of the win the sale pillar of our Doors That Do More strategy, and the reason why we are focused on developing deeper engagement with our customers. We believe there continues to be tremendous untapped demand, and we are eager to work with our channel partners to service that demand. To this end, we have started joint business planning initiatives with several of our largest partners, to map out the most significant growth opportunities available to them and to identify how we can most effectively support them in capturing these win-win opportunities. Our 2023 playbook is detailed, comprehensive, and focused on reducing our cost structure and preserving margins while continuing to selectively invest in strategic priorities to fuel long-term growth. It was a busy first quarter for our team, and we have no intention of slowing down the pace of our progress. We will continue to work with urgency to achieve all the goals we have set up for ourselves this year, and we look forward to updating you on our progress as we achieve more milestones each quarter. Turning to slide six. Underpinning our initiatives across Masonite is a focus on sustainability and responsibility, which has been core to our company for almost 100 years. We recognize that our long history of success is directly connected to our commitment to taking care of our employees, our communities, and our environment. In April, we released our 2022 Environmental, Social, and Governance Report, which outlines our ESG priorities and highlights the progress we made towards our goals during the year. These accomplishments reflect work done throughout our organization, and I couldn't be prouder of the improvements we have made and the dedication shown by our employees to the principle of doing well by doing good. I hope you'll take some time to learn more about our ESG goals and achievements by reading the full 2022 report, which you can find at masonite.com forward slash ESG. Now I'd like to turn the call over to Russ to provide more details on our first quarter financial performance. Russ?