MasterBrand, Inc.

Welcome to the MasterBrands Third 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 Pawlik, Vice President of Investor Relations and Corporate Communications.

Thank you. 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 third quarter 2023 financial results. If you do not have this document, it is available on the investor section of our website at masterbrand.com. I would 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 updated as necessary in our subsequent 2023 Form 10-Qs, which are available at scc.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 at masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our third 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. Now with that, let me turn the call over to Dave.

Thanks, Farron. Good afternoon, everyone. We appreciate you joining us here today for our third quarter 2023 earnings conference call. I'm pleased to report that MasterBrand delivered another solid quarter of financial performance. Net sales in the third quarter were $677 million, a 21% decline over the same period last year. This decline was slightly greater than our expectations due to the impact of higher than anticipated trade downs. Absent the roughly 3% effect from trade downs, net sales for the third quarter were roughly in line with our previous outlook. Despite the net sales decline, adjusted EBITDA margin expanded by 150 basis points to 16.2% in the third quarter. This equates to a year-on-year decremental margin of less than 10%, well inside our stated guidance. Our exceptional margin expansion was driven by the team's continued execution on MasterBrand's strategic initiatives, particularly around supply chain improvements and productivity savings. This performance was higher than our internal estimates as our associates continued to outperform our expectations. Our strategic initiatives drove another quarter of working capital improvements as we reduced inventory by roughly $50 million sequentially from the end of the second quarter to the end of the third quarter. Our supply chain efforts, which are rooted in our Align to Grow initiative, are allowing us to reduce inventory as we continue to drive commonization amongst our componentry, product, and processes. Our rollout of RFID technology across our manufacturing network is helping improve inventory control at our facilities while simultaneously reducing the labor costs. These inventory improvements helped us generate free cash flow of $133 million in the third quarter of 2023, a threefold increase over the prior year quarter. Our year-to-date strong free cash flow not only demonstrates the value of our operational performance, but has also strengthened our balance sheet and provides us with great optionality in an uncertain market. Now I'll take a moment to discuss the end markets served by our customers and the trends we saw in the third quarter. The single-family new construction market remained the most resilient, with underlying demand running flat year over year. We saw expected seasonality in this market late in third quarter, which has continued into the fourth quarter. Trends across builders vary, as some are more equipped to navigate rising interest rates. Our large builder partners continue to find ways to lower the cost of ownership for potential homebuyers. This includes buying down mortgage rates or providing other discounts. As a result, we've seen that portion of the market perform better than the overall market. As we have mentioned in the past, builders are using product trade down to help reduce their costs, and we saw this accelerate in the third quarter. We expect this trend to persist through the fourth quarter. On the whole, we continue to be encouraged by the resiliency of home builders despite the current interest rate environment, and we believe that the long-term fundamentals for new construction are strong. The repair and remodel market, which we serve through our dealer and retail customers, continued to be tepid in the third quarter. In line with our prior commentary, this market demand is down more than our original expectations for the year, as consumers are prioritizing other spending. At the beginning of the year, we expected this portion of the market to be down mid-single digits, but as we finish the year, we anticipate closer to double-digit declines for the overall R&R market. Generally speaking, larger-ticket R&R tends to have a greater magnitude change than the smaller project R&R. Additionally, our dealers are relaying that consumers' decision lead time has extended from a year ago, which adds some further inertia into the buying behavior. Specific to the U.S. retail channel, we experienced the final stages of destocking this past quarter, and we now believe that we have worked through the impact of it with our retail partners and are at underlying consumer demand levels. Retail POS is following the double-digit decline in this category that I mentioned earlier. In the U.S. dealer channel, we saw similar trends overall to the retail channel, but within dealers, we continue to see better performance in the higher and lower end product categories. We expect that dynamic to continue moving forward as cash customers favor more premium products and the rest of the market targets value-priced products. As we heard last quarter from our dealer network, the end consumer is getting multiple quotes before doing a remodel project and looking for trade-down opportunities to achieve a desired price point. We continue to experiment with price to ensure that we are putting the right products in front of the right customers and are being disciplined about promotions. In Canada, both new construction and repair and remodel markets remain weak, declining over 25%. While Canada represents a relatively small portion of our net sales, slightly less than 10%, year-over-year declines of this magnitude are presenting a headwind to our business. As discussed in our last journey's call, we expect continued weakness in this portion of our business in the second half of 2023, and we are seeing that play out as anticipated. In summary, we expect the dynamics that started in the third quarter with both current demand levels and product trade down to continue into the fourth quarter. Domestic new construction continues to hold up better than repair and remodel, and we expect continued weakness across both Canadian markets. Coupled with normal seasonality, we now expect the overall market to be down sequentially from the third quarter, with our performance matching that trend on a daily sales cadence. Andy will provide more color on this later in the call. With this backdrop in mind, we remain encouraged by our ability to deliver incremental cost savings despite an environment with softer down volume. At the same time, we are investing in the business and positioning our company for growth. Now I'd like to talk a little more about some of the investments we are making for our strategic initiatives. On the last earnings call, I mentioned that our strong performance gave us the confidence to accelerate investment spending, particularly in our tech-enabled initiative. During the third quarter, we did just that, more than doubling our investment in technology sequentially. And as mentioned on our previous earnings call, we plan to increase the spending further in the fourth quarter of 2023. These opportunities are across the plant floor, back office, and customer-facing. For example, we believe our tech enabled initiative presents a meaningful opportunity in the area of quality processes. Much like supply chain efficiency, quality processes are hindered by complexity in product offering and manufacturing. With our common box initiative and more standard work across the plants, we can now improve the overall efficiency and cost of the quality processes that exist today in our manufacturing. Using technology, we'll be able to inspect product quicker and with a higher degree of accuracy. Masterbrand has robust automation throughout its facilities, but we see ample opportunity to introduce newer and more advanced automation to support our quality processes. While this technology might be newer to the cabinet industry, it has been proven in a number of other industries. Accordingly, we are trialing advanced yet time-tested solutions in a number of areas this year and into 2024. Beyond the platform, we have expedited our efforts around cloud migration. We have varied systems that organically grew and constrained our ability to optimize decisions across functions, creating reporting inefficiencies and out-of-support hosted applications. With our cloud migration efforts, we are standardizing our processes based on leading practices leveraging centralized master data and near real-time analytics. This helps us automate processes across master brand and enables shared service models for functions like AP and AR. This is also helping us allocate our internal resources from manual process steps to value added activities. Finally, we continue to invest in technology to improve the overall buying experience for our customers. Our new tech platforms are designed to improve the connection between MasterBrand and our channel. As mentioned last quarter, we have invested in the team and in applications to bring these tools to life for our customers. Our digital and technology team is making good progress in this area and are rolling out the first of these applications this quarter. Initiatives such as these serve as a reminder that the tools of the MasterBrand way not only drive efficiency, but also target growth. I look forward to sharing more details about our progress on these efforts going forward. Now I'd like to hand the call over to Andy for a more detailed discussion of our third quarter financial results and our revised 2023 outlook.