MasterBrand, Inc.

Welcome to Masterbrand's first quarter 2023 earnings conference call. During the company's prepared remarks, all participants will be in a listen-only mode. Following management's closing remarks, callers 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 Farron Pollack, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you and good afternoon. We appreciate you joining us here on today's call. With me on the call today are Dave Bannier, President and Chief Executive Officer, and Andy Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our first quarter 2023 financial results. If you do not have this document, it is available on the Investors section of our website at masterbrand.com. I would like to remind you that this call will include forward-looking statements, and either are prepared remarks or the associated question and answer session. Each forward-looking statement contained in this call is based on current expectations and market outlook, and is subject to certain risks and uncertainty that may cause the actual results to differ materially from those currently anticipated. Additional information regarding these factors appear in the section entitled Forward-Looking Statements in the press release we issued today. More information about risk can be found under the heading Risk Factors on our Form 10-K and other filings with the SEC, which are available at SEC.gov and MasterBrand.com. These forward-looking statements in this call speak only as of today, and the company does not undertake any obligation to update or revise any of these statements except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables, which are in the press release issued earlier this afternoon, and are also available at sec.gov and at masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our first quarter 2023 financial results from Andy, along with our current 2023 financial outlook. Finally, Dave will make some closing remarks before we host a question and answer session. With that, let me turn the call over to Dave.

Thanks, Farron. Good afternoon, everyone, and thank you for joining us here today on our first quarter 2023 earnings conference call. MasterBrand delivered another strong quarter. Net sales performance in the first quarter was slightly higher than our internal estimates, and we delivered higher adjusted EBITDA and adjusted EBITDA margin year over year, despite the lower net sales. As the quarter developed, Our customers that served the new construction market performed better than expected, particularly in March. Following our last earnings call, lower mortgage rates appear to have incentivized home buyers back into the market, and single family completions bolstered our end market demand. I'll spend some more time discussing the market later in the call, but we were happy to see the improvements in that portion of our market this quarter. The team delivered strong results with $82 million of adjusted EBITDA. an increase compared to the first quarter of last year. Adjusted EBITDA margin expanded a healthy 160 basis points to 12%. Our margin performance was driven by solid execution on our continuous improvement and strategic initiatives and by a lower fixed cost structure from actions taken in 2022. While we report year-over-year information, It's helpful to look at our sequential performance this quarter to isolate operational improvements from the variation created by price and inflation in our P&L. On a net sales decrease of $108 million from the fourth quarter of 2022 to the first quarter of 2023, our adjusted EBITDA declined only $16 million. This is a decremental margin of approximately 15%. Both quarters include some discrete operational charges that are relatively the same size, So, with the exception of some holidays, the quarters are comparable. I'm extremely pleased at how well the team is operating. This favorable decremental margin highlights the impact of our continuous improvement efforts and strategic initiatives. These strategic initiatives not only reduce costs in our factory network and supply chain, but also build resiliency. Our previous Align to Grow work allowed us to seamlessly manage the impact of an unplanned weather event in the quarter. As I mentioned during our last earnings call, Our Jackson, Georgia plant sustained damage from a tornado in January and ended up being out of service through the end of the quarter. None of our customers felt the impact of that downtime, as we were able to shift production to other locations and maintain strong service levels for our partners. While we incurred significant costs that we expect to recover from insurance in the coming months, we absorbed those costs within the quarter and still grew our adjusted EBITDA year over year. It's important to highlight that we have an effective manufacturing model that, even in the face of significant unplanned downtime, can deliver outstanding results for our customers, associates, and shareholders. Without the additional cost of the plant shutdown, our sequential decremental EBITDA would have been even better than the 15% that I just highlighted. Given our demonstrated operational performance and stronger than anticipated financial results, we are raising our full-year 2023 adjusted EBITDA outlook. I'll let Andy provide you with more financial details later, but first I'd like to share more insight on what we saw in our end markets this quarter and how we see the remainder of the year. Our customers that served the new construction market performed better than anticipated in the first quarter. For our large publicly traded customers, you're hearing this directly from them as well. Additionally, we believe we saw better performance in the new construction market due to our strategic initiatives and the product portfolio decisions we made last year. The strength of our Align to Grow initiative is that it enables us to focus on the right parts of the market, the right customers with the right products at optimal service levels. Recognizing that we were entering a challenging cost environment for our customers, we launched new products specifically targeting production builders. This allowed these customers to meet their cost point while not sacrificing the profitability of our business, a true win-win. These actions yielded great results as production builders perform well and held up better than other parts of the new construction market, like custom home builders. We aimed for the right spot and had the right product to serve them. Decisions like this require trade-offs, and we consciously walked away from other areas of business as a result. It's important to remember our goal isn't to chase margin-dilutive business for the sake of volume. Our Align to Grow initiative is focused on winning in the best growth areas of the market, both for the top and bottom line. We are cautiously optimistic about the pace of the new construction market for the remainder of the year, although we are still worried of the economic environment and the impact of reduced starts on the second half of the year. Turning to the repair and remodel market, we serve this market through our dealer and retail customers, and the dynamics were a little different between these two in the first quarter. Our business with dealer customers has been steady throughout the last three quarters, but since our lead times have greatly improved from a year ago, and our backlog is down to normal levels, we are entering a period of very difficult comparable net sales over the next two quarters. Despite that gap, we are confident that our product portfolio and flexible factory network will put us in a good position to continue to deliver strong results, and we expect to see a continued steady pace in this market for the remainder of the year. In our retail channels, POS remains steady throughout the quarter. However, we saw it slowing slightly on a sequential basis towards the tail end of the first quarter and into April. Our retail partners have been reacting to this with a very controlled inventory reduction over the past several months, so our sell-in was lower in the first quarter than POS. We expected this in our initial 2023 guidance, and as such, we continue to work closely with these partners to manage the pace of sell-in to ensure that they are well stocked and that we are running our plants at the appropriate pace. Due to this sell-in dynamic, we expect this portion of the market to continue to be challenged in the first half of the year, and we'll continue to monitor sales through this channel in the second half. Many investors continue to ask us about the impact of imports, so I thought I'd provide a little more detail on that part of the market. We compete against importers in stock kitchen cabinets sold through retailers and dealers, as well as bath vanities sold mainly through retailers and e-commerce. We've spoken about our success competing against kitchen imports in the past. We successfully countered the threat of imports three years ago with the introduction of our Mantra brand. At the time, we identified a gap in our product offering, benchmarked the import model, and created our own solid wood quick-ship cabinet for the domestic market. Utilizing our industry-leading distribution network and scale, we've been able to out-compete imports and grow Mantra into an over $150 million business through 2022. This product category continues to outpace the market, growing strong double digits year over year in the first quarter. Bath vanities differ from kitchen cabinets in that they can be fully assembled abroad and shipped into the domestic market. As part of our Align to Grow initiative, we reviewed our bath portfolio and identified products that can help us improve our vanity offering. In 2022, we believe we took some share from imports in bath vanities as ocean freight costs and shipping delays improved our competitive position, despite having product gaps. As ocean freight costs have come down, we are focused on broadening our product offering to maintain our competitive advantage. We are no stranger to winning against imports. Utilizing the proven tools of our business system, new product offerings in the near future, and our strong channel coverage, including a number one position at a very large e-tailer that I mentioned last quarter, We believe we should not only be able to maintain, but take share against bath imports the same way Mantra did against kitchen imports. As you can see, our end markets were dynamic in the first quarter. With March's net sales pace continuing through April, fewer holidays, and some slight seasonality expected, we anticipate net sales being slightly higher sequentially in the second quarter. However, we are still cautious about the general conditions going into the second half of 2023. and this uncertainty is reflected in our updated outlook. Regardless of the market conditions, we remain confident in our ability to deliver strong, detrimental margins and make progress on our strategic initiatives. I spoke at length about a line to grow today to illustrate the point that our initiatives are not just about cost takeout, they are about growing and differentiating the business as well. We continue to make similar progress in Lead Through Lean and Tech Enabled, with the understanding that all three of our strategic initiatives will impact every aspect of our business performance going forward. Investments in these strategic initiatives, along with other investments in the business, will be funded with our strong cash flow generated from operations. During the first quarter, we generated over $60 million in cash from operations, as we benefited from steps taken to improve working capital efficiency. This, along with our strong operational performance and improved financial outlook, gave our management team and Board of Directors confidence that we could begin to directly return value to shareholders. Accordingly, in April, the Board of Directors approved a new share repurchase program, which authorizes us to purchase up to $50 million of the company's outstanding common stock. This authorization represents the continued refinement of our cash deployment priorities, which I introduced at last December's Investor Day. Our first priority remains unchanged, to invest in the business, specifically in high-return areas, like those from our tech-enabled initiative. Our next priority remains paying down debt. We have a strong balance sheet and we aim to maintain it, so you will see us work to pay down debt in 2023. Lastly, with the approval of this new plan in place, we will directly return value to shareholders through share repurchases. At a minimum, we would expect our purchases to offset the dilutive impact of stock compensation. Given our current valuation, we also believe our stock is undervalued and represents an appealing investment. So we'll balance our investment in the business, debt pay down, and share repurchase appropriately as we move forward. One item I did not mention is M&A. M&A will be a tool in our toolkit, and we are in the early stages of developing a strategic funnel of targets. We will be very disciplined in our approach to deploying capital in this arena, and we'll take the appropriate amount of time to develop our M&A strategy as we study the landscape further. So as you can see, a strong quarter given the macroeconomic backdrop and a lot of progress made on our initiatives to deliver on our long-term growth targets. With that, I'll hand it over to Andy for a deeper look at our first quarter financials and our revised 2023 outlook. Andy?