MasterBrand, Inc.

Second 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.

Thank you, and good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, 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 second quarter 2023 financial results. If you do not have this document, it is available on our investor section of our website at masterbrand.com. I'd like to remind you that this call will include forward-looking statements in either our 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 uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today. More information about risk can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2022 Form 10-K and our first quarter 2023 Form 10-Q, which are available at sec.gov and at masterbrand.com. The 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 scc.gov and masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our second 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 second quarter 2023 earnings conference call. Astro Brand delivered a quarter of strong financial performance. Net sales in the second quarter were in line with our expectations as lower volumes from software and market demand were partially offset by higher average selling price. Despite this sales decline, we delivered flat adjusted EBITDA year over year. Adjusted EBITDA in the second quarter of 2023 was $106.3 million, compared to $106.8 million in the second quarter of 2022. Our ability to preserve adjusted EBITDA dollars on lower sales drove adjusted EBITDA margin considerably higher than last year, with 281 basis points of year-over-year margin expansion. This was also higher than our internal estimates going into the quarter, as our teams continue to execute at a high level. We also made great improvements in working capital and delivered strong free cash flow within the . Our supply chain efforts are in full swing, and we are ahead of plan on our inventory reductions from last year's investments. This, along with improvements in accounts receivable, helped us generate free cash flow of $123.4 million in the second quarter of 2023, an 82% increase over the same period last year. Our strong free cash flow is allowing us to continue to invest in the business paying down debt, and return value to shareholders at the same time. One method of returning value to shareholders is through our previously announced share repurchase program, which we began executing on this quarter. These financial results are only possible because of the team's consistent execution. Our focus on utilizing the established tools of the MasterBrand way is allowing us to repeatedly achieve or exceed our operational targets and make meaningful progress on our strategic initiatives, align to grow, Lead Through Lean, and Tech Enabled. Today I'd like to share some more details on how those initiatives helped deliver such an outstanding quarter, and some of the investments we've made in the quarter that we believe will drive growth in future periods. Before I do that, I'd like to provide you with a brief update on what we saw in our end markets during the second quarter. If you remember, at the time of our last earnings call, our customers that served the new construction market were performing better than anticipated. This strength continued through the quarter, builders benefited from a pause in interest rate hikes and historically low inventory levels of existing homes for sale. Our flexible manufacturing network enabled us to service this sequential increase in demand from builders, particularly production builders, helping drive our second quarter financial performance. While year-on-year demand for new construction is still down overall, we're encouraged by the trajectory of this end market and recent builder commentary. The repair and remodel market, which we serve through our dealer and retail customers, has become more dynamic. While the U.S. retail channel was largely in line with our expectations in the first quarter, we saw a slightly greater sequential POS decline in the second quarter than anticipated. We expect this demand to remain soft for the balance of 2023. As we had previously discussed, we work very closely with our retail partners to manage inventory reductions and appropriately level set our production to accommodate their needs. allowing us to preserve margin as demand slows. Our business with U.S. dealer customers improves sequentially as expected, in line with normal seasonality. However, we are hearing from our dealer network that the end consumer is getting multiple quotes before doing a remodeling project and being more thoughtful with their budget. This focus on cost is driving some trade downs, as people look to give up features to achieve a desired price point. As we've discussed before, Our breadth of product offering, from premium to stock, allows us to work with all our customers, and we can shift between product lines to find the right solution for them at their various price points. This presents a headwind to net sales and adjusted EBITDA dollars, but our adjusted EBITDA margins are relatively unaffected by shifts in product categories. While we don't often talk about the Canadian market, given its relatively small size compared to the U.S., We have seen both the new construction and repair and remodel markets in this region underperform our expectations. We are taking actions to address the softening demand, but we expect this portion of our business to continue to be weaker in the second half of 2023. On balance, new construction seems to be trending a little better, and repair and remodel is trending a little worse than our prior expectations. Regardless of these end market shifts, we remain confident in our ability to continue to drive our strategic transformation forward. As I mentioned earlier, our second quarter is largely a result of our continued operational excellence. This includes both continuous improvement efforts and our strategic initiatives. Our Align to Grow initiative, specifically our supply chain work, had a meaningful impact on our second quarter financial performance. Our Tech Enabled initiative is already benefiting the organization, and our rapid execution is enabling us to increase the number of projects launched and accelerate other projects already in progress. There's a lot of exciting work underway, so I'll spend a little time discussing both of these areas further. For those of you who remember our investor day, you will recall that we discussed our supply chain as a near-term opportunity for our Line to Grow initiative. Our ability to consolidate and improve the efficiency of our supply chain was limited by the complexity in our product offering and manufacturing processes. As we implemented our common box initiative and deployed standard processes across the plants, Organizing our extended supply chain and realizing the full benefits of our scale became a possibility. Given the supply chain challenges faced during COVID, our ability to make changes was limited. Now, in 2023, we've been able to focus on our supply chain optimization. We are realizing the benefits of these efforts earlier than expected, which helped support our strong margin performance in the second quarter. While it's still in its early stages, our tech enabled initiative is already improving operations and contributing to our financial performance. As a reminder, the goal of this initiative is to simplify and modernize our technology foundation to drive better insights and outcomes for the business. This can be on the plant floor, in the back office, or customer facing. I mentioned in a prior call, we've been implementing RFID technology across our facilities. RFID tags help improve inventory tracking and accuracy. This automated tracking has allowed us to save on labor as individuals that previously spent time tracking parts have now been reallocated to other more value-added areas. Additionally, the improved inventory accuracy has allowed us to control working capital more tightly. Our improved technology foundation goes beyond the plant floor and to the back office as we look to get near real-time analytics across the company. We continue to enhance our data lake to support this effort. We recently consolidated another facility onto a common ERP platform. The process was seamless as our digital and technology function did a great job partnering with operations to get this done. Adding manufacturing, customer, consumer, and pricing analytics to our data lake strengthens our technology architecture and increases our ability to act with speed and agility. Those are some examples of how our tech-enabled initiative is supporting the business today. We are also investing in additional technology to improve the overall buying experience for our customers. We've accelerated investment in new tech platforms that improve our connection with our channel and expect to roll these improvements out late this year or early 2024. The tools of the master brand way are deeply embedded in this initiative. We utilize cross-functional Agile teams through every phase of development and implementation, making sure that we have all the inputs needed to get the right technology in place. Agile also helps us reduce waste in the process. identifying barriers early, and keeping the team focused on eliminating those barriers so that when a new technology is launched, it works and adds value. It's early days for us in our tech-enabled initiative, but our accelerating investment in these technologies will make them more robust and bring value to our customers sooner. Based on our strong financial performance and the project pipeline supporting our strategic initiatives, we've decided to increase our investment spending for 2023. A lot of exciting work taking place across the company and a softer demand environment presents an ideal time to prepare for future growth. With these investments, as demand strengthens, we believe we can grow in excess of the market as outlined in our long-term targets. Now, before I hand the call over to Andy, I want to address another area of success in the quarter. I'm pleased to say that in June, MasterBrand published its inaugural Environmental, Social, and Governance Report. I've said this on several occasions. Being a leader in the industry comes with an even greater responsibility to do what's right for all stakeholders. We take this commitment seriously, and I'm extremely pleased with our ESG efforts to date. Along with the report, we've launched an ESG page on our corporate website under the About Us section of our homepage, where you can find the ESG report along with future updates on our ESG journey. And this journey is continuing. After publishing the report, Masterbrand received notification that it was being recognized as one of America's Safest Companies by EHS Today magazine. For over 20 years, America's Safest Companies competition has sought to identify those characteristics that differentiate great safety programs from good ones. We're pleased to be recognized for our practices and procedures that exemplify safety excellence and our industry-leading safety record. With that, I'll hand the call over to Andy for a closer review of our second quarter financials and our revised 2023 outlook.