Q1 2021 Masonite International Corp Earnings Call
Welcome to Masonite first quarter 2021 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 the question answer session. Please note that this conference call is being recorded I would now like to turn the call over to Joanne Freiberger Vice President of.
Sure.
Thank you Maria and good morning, everyone. We appreciate you joining us today with me on the call today are Howard packets, President and Chief Executive Officer, and Ross T. J Maxx Executive Vice President and Chief Financial Officer, Tony Hair, President of Global residential is also joining us for our Q&A session.
We issued a press release and Webex presentation. After market closed yesterday sharing our first quarter 2021 results. These documents are available on our website at masonite Dot 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 and masonite to most recently filed annual report on form 10-K, and our subsequent form 10, Qs, which are available at SEC Gov and at Masonite Dot 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 include certain non-GAAP financial measures. Please refer to the reconciliations which are in the press release and the appendix of the Webex presentation.
Our agenda for today's call includes a business overview from Howard a review of the first quarter from Russ along with our updated 2021 financial outlook Howard will provide closing remarks, and we will host a question and answer session and with that let me turn the call over to Howard.
Thanks, Joanne good morning, and welcome everyone.
I'm happy to be speaking with you all today and we look forward to discussing masonite is a great first quarter results.
But before I get to that I'd like to thank those of you who were able to join us for our 2021 virtual Investor day.
We've received a lot of positive feedback so for those of you that couldn't join us I'd like to revisit a few of the key highlights from the events.
These are important as we believe this is how we will create value for shareholders going forward.
One area I'm, particularly proud of is our strong leadership team.
A key goal of our Investor day was to provide you with access to a broader set of the management team.
Since I joined Masonite, we've established two new roles to help our company focus on growth and we gave investors an opportunity to meet our chief marketing Officer, Jennifer Renault and our Chief Innovation Officer, Corey series and hear a little more about their backgrounds and how their teams are helping drive our doors that do more of strategy.
We also caught up with our business leaders to hear how they are aligned with the strategy and discuss operational plans to support growth.
Moving to the center of the slide we spoke about the three pillars of our doors that do more strategy day.
Oliver consistent and reliable product.
Drive the specified demand at <unk>.
When is the last point of sale.
We've spoken at some length of this past year about how our north American the investment plan has been focused on quality assurance, including improved raw materials and packaging and investments in strategic inventory to improve our lead times and service metrics.
This is the first pillar is foundational for all of that we do.
Second we plan to increase specified demand for our products through doors that do more.
Through our research many consumers have told us that they want more from their doors, yet today, most demand is unspecified indicating that they do not receive any particular manufacturers focused on meeting their needs.
Our goal is to drive demand to masonite by developing and offering more innovative products. Examples include our new exterior smart door system, and our interior switching product both of which Cory showcased at our Investor day.
We believe we can create a strong of sustainable preference for masonite by offering products that deliver distinct benefits to consumers when and where they need it.
Third our goal is to win at the point of sale.
Our research shows that the substitution is very common and 94% of homeowners will purchase one of its convenient and available at the time they are in market.
We believe that the work Jennifer and her team are doing in conjunction with our channel partners to focus on down channel marketing and demand creation can change the behavior.
With consistent and reliable supply driving specified demand and winning at the point of sale. We believe we can drive incremental growth by capturing meaningfully higher prices for innovative new products.
Following masonite to grow in excess of what the market would naturally provide.
These strategies underlying the ambitious 2025 Centennial plan, we introduced at the event.
This plan aspires to nearly double the top of line of our company achieving approximately $4 billion and consolidated net sales by the end of 2025.
Given the improvements in our base business.
Along with incremental product that should be margin accretive. We believe this will allow us to deliver adjusted EBITDA margins in excess of 20% by 2025.
And this higher margin rate, coupled with our disciplined capital deployment should allow us to obtain sector, leading return on invested capital.
We realize this is sort of ambitious plan, but we believe we of the right people and strategy in place to make it a reality for.
For those of you that haven't watched our Investor day I encourage you to take some time to visit the event the link on our Investor Relations Web page, where you can view of the events in its entirety.
Now, let's move to slide five for an overview of our first quarter.
Net sales increased 17% year on year of higher average unit price or A&P and continued growth in our residential businesses, both in North America and Europe.
<unk> was up year on year across all three segments as we continued to benefit from pricing.
We saw our ninth consecutive quarter of year on year margin expansion with adjusted EBITDA margins up 100 basis points.
This was due to continued growth in A&P, primarily driven by our previously implemented in North American pricing strategy. Despite some cost headwinds largely in the form of inflation.
Russ will provide an update on inflation trends when he discusses our improved outlook.
We continue to invest in the quarter with the North American investment plan on schedule and in line with our expectations.
Following the quarter end in April Moody's upgraded our corporate credit rating from B to B, a one reflecting their view that masonite will benefit from residential end market tailwind and achieve strong credit metrics.
This upgrade places us just one notch below investment grade aligned with our existing rating from S&P.
It's nice to see our commitment to maintain a strong balance sheet being reflected in our credit ratings.
Shifting to the right of the slide I'll touch on the business and operational highlights for the quarter.
Against the challenging backdrop, our operations team continued to deliver exceptionally well.
The core of our manufacturing operations as an advantage our lean operating system, which is helping to drive continued safety improvements.
Well one of accident is one accident to Mehdi we are pleased to report that our <unk> did improved 15% compared to the first quarter of 2020.
Additionally, M. Vantage has continued to help drive sequential improvements from capacity.
We are making progress on our ESG initiatives I am pleased to say that we recently completed our first global carbon footprint assessment.
This assessment of Theres been third party verified and will act as the baseline for our roadmap as we work towards the science based targets.
In addition to completing the successful we've also hired of dedicated ESG manager to focus on our sustainability journey.
Lastly, we continue to develop our architectural optimization plan, which has been Oregon are organized around three distinct phases.
One is focused on components. If you recall, we mentioned on our last earnings call. We had announced the closure of one of our veneer plants and would absorb its production into an existing facility.
Phase two was focused on specialty doors as part of this we've announced recently announced the closure of our Springfield, Missouri, Stile and rail door plants.
Similar to our components action, we will absorb most of the production from this plant into other existing facilities.
Phase three is focused on optimizing costs and are flushed door assembly plants, and we have already begun to take some actions there.
Ross will quantify some of the costs related to these actions later along with the anticipated savings.
Overall, we remain encouraged by the long term prospects of the architectural business. We believe the actions. We are taking will improve the segment's cost structure and service levels. So we can support growth as commercial end market demand recovers.
With that I'll turn the call over to Russ to provide more details on our financials Russ.
Thanks, Howard and good morning, everyone.
Turning to slide seven I'll start with the summary of our first quarter financial results.
We reported net sales of $646 million up 17% as compared to the first quarter of 2020.
The growth was primarily due to a 14% increase in <unk>.
Which was up year on year across all three segments due to price increases.
We also benefited benefited 2% from foreign exchange and 1% from higher component sales.
Base volume growth in the North American residential and Europe segments was offset by volume declines and the architectural segment.
Gross profit increased 18% to $159 million, driven by AARP, which was partially offset by higher inflation and tariffs on raw materials, rising logistics costs higher manufacturing wages and benefits and investments in the business.
Since the outlining our 2020 one outlook earlier this year the inflationary environment is worth it.
We saw higher inflation on our wood purchases than contemplated in our original outlook and experienced rapidly increasing inflation in the resin due to the impact of February of severe winter weather, which extended all the way to the Gulf Coast.
Wood in the resin represent our two largest baskets of materials spend. So this was a meaningful headwind in the quarter.
We also saw significantly higher inbound freight costs, particularly in the area of Ocean freight.
As a result material cost increased in excess of 5% for the first quarter.
Higher freight costs also impacted our distribution expense. Despite these headwinds we expanded gross margin by 10 basis points year on year to $24 five per cent.
Selling general and administration expenses were $84 million of 4% compared to the same period last year, primarily driven by higher personnel costs, which includes resources to support growth and incentive compensation.
However, SG&A as a percentage of sales was down 170 basis points to 12, 9%.
Net income was $47 million in the quarter, an increase of $17 million from the prior year, driven primarily by higher operating profit.
Diluted earnings per share were $1 89.
Up 59% from a dollar of 19 cents in the first quarter of last year.
Adjusted earnings per share increased to $1 93.
Which excludes charges related to our previously announced restructuring plans incurred in the first quarter.
This compares to $1 24 in the comparable period last year, which also excluded charges related to restructuring actions.
Adjusted EBITDA increased 25% to $102 million, while adjusted EBITDA margin expanded 100 basis points to 15, 8%.
This represents the highest first quarter adjusted EBITDA since becoming an NYSE listed company in 2013.
On the right hand side of the slide our adjusted EBIT of one illustrates the significant year on year contribution from volume mix and price.
This was primarily driven by price in the first quarter as the volume growth from our residential businesses was offset by continued weakness in our architectural segment.
We saw additional year on year favorability of $3 million due to foreign exchange as both of the Canadian dollar and British pound strengthened against the U S dollar.
Next we see the negative impact of the rising inflationary pressures I just discussed in both materials and distribution costs.
We also experienced $17 million of higher factory related cost in the quarter due to higher wages and benefits negative volume leverage in our architectural business and weather related impacts primarily in several of our north American residential plants.
Turning to slide eight then.
And our North American residential segment results.
Net sales increased 24% from the prior year to $477 million with the largest driver being a 17% increase in A&P. The result of an overlapping benefit of price.
If you recall our price increases last year were for orders placed in February effectively yielding us only one month of benefit while this year's increases went into effect at the beginning of the year.
This provided an outsized benefit the AEP in the first quarter.
Base volume contributed an additional 5% to growth in the quarter.
While our wholesale business was negatively affected by winter weather, which impacted both demand and our capacity mid quarter.
Our retail business continues to perform exceptionally well supported by our previously announced new business wins lows strong Pos and our ability to slightly rebuild channel inventory.
Adjusted EBITDA in the North American residential segment was $95 million from the first quarter, a 32% increase over the same period last year.
Adjusted EBITDA margin expanded 110 basis points to 19, 8% despite inflation and continued business investments.
As I mentioned earlier, we saw an increasing inflation and a number of our material baskets.
The rapid increases in resin prices due to weather impacts on the Gulf coast, coupled with already rebounding oil prices.
The material cost higher than our original expectations for the North American residential segment.
Freight was also negatively impacted in both material and distribution cost in the quarter as we saw both inbound and outbound rates increase.
I would remind you that our goal is to always maintain a favorable price cost relationship and steps. We are taking that are intended to mitigate increased inflation are contemplated in our updated outlook.
Finally, our North American investment planned spending was on track for the quarter.
Overall, another excellent quarter for our North American residential team.
Turning to slide nine and of our Europe segment.
Net sales increased by 25% year on year to $89 million.
Excluding the FX net sales grew 16% compared to the first quarter of last year.
This growth was driven by base volume increases of roughly 7% as we saw continued strength in our exterior door business up double digits year on year.
<unk> contributed another 7% to growth as we successfully realized price increases across all products and channels in the U K our primary European market.
Adjusted EBITDA in the Europe segment was $17 million in the first quarter, a 73% increase over the same period last year.
Adjusted EBITDA margin expanded 520 basis points to 18, 9% despite inflationary pressures.
Margins continue to expand on the strength in our exterior business, while we experienced some capacity constraints on the interior side of the business.
Moving to slide 10, and the architectural segment.
Net sales decreased by 18% year on year to $75 million due to a 22% decline in base volume as commercial end markets remained weak in the first quarter.
These base volume declines were partially offset by growth of 5% from ADP as we continued to benefit from favorable price.
Adjusted EBITDA margin contracted 890 basis points to two 7% with lower volume being the primary driver of this performance.
Roughly three quarters of our year on year adjusted EBITDA decline is due to loss of volume and the impact of negative volume leverage with the remainder of the decline largely due to inflation.
The three phase plan. Our team is working on is designed to reset our footprint to improve our cost structure.
And better reflect the current demand environment, while also improving the flexibility of our network.
As Howard mentioned, we have executed on phase, one and phase two and have already taken some early actions for phase III in the form of overhead reductions the.
The actions to date are expected to deliver annualized savings of approximately $5 million.
We incurred some negligible restructuring charges in the first quarter, but you will see the majority of the restructuring charges roughly $10 million occurring in the second quarter.
We believe this business has the ability to earn attractive margins and support our doors that do more strategy and non residential end markets.
Given the softness in those markets. It is time to aggressively reset the business we.
We are just beginning to see improvements in the architectural billing index billings index, suggesting that the market may have bottomed and could see eventual recovery as we enter 2022.
Slide 11 summarizes our liquidity and cash flow performance for the quarter.
Inclusive of unrestricted cash and accounts receivable purchase agreement and our ABL facility, which remains undrawn, our total available liquidity ending the quarter was $574 million.
Net debt was $468 million and we ended the first quarter with a net debt to adjusted EBITDA leverage ratio of one two times.
As Howard mentioned earlier, we're pleased to see that our focus on maintaining a strong balance sheet has been acknowledged most recently with the credit rating upgrade by Moody's.
We purchased approximately 85000 shares of the quarter from approximately $10 million at an average price of $112 98.
Cash flow used by operations was $14 million at the end of the first quarter down from $6 million provided by operations in the first quarter of 2020.
The first quarter is typically a minimal cash flow quarter, given the working capital seasonality of our business and this use of cash was not unexpected given our historically low net working capital at the end of 2020 and the higher cash taxes anticipated this year.
Capital expenditures were approximately $14 million.
Now, let's turn to slide 12.
On slide 12, we provide our updated outlook for the consolidated full year 2021.
Given the continued strength in residential demand coupled with the anticipated benefit of foreign exchange tailwind throughout the year. We now expect year on year consolidated net sales growth of 12% to 15% compared to our original outlook of 7% to 10%.
With inflation running higher for the year than our original expectations.
We would like to reiterate that our strategy is to maintain a favorable price cost relationship.
And this updated outlook reflects actions designed to achieve that.
This updated outlook also includes a 2% benefit from foreign exchange on the assumption that the tailwind we realized in the first quarter due primarily to the strengthening of the Canadian dollar and British pound will continue throughout the year.
With regards to our architectural segment, our net sales expectations remain largely unchanged.
On this updated net sales outlook, we now expect adjusted EBITDA to be in the range of $435 million the $455 million.
While we expect to realize higher net sales of the incremental impact to adjusted EBITDA is likely to be offset largely by material inflation, which we now believe could be as much of 7% for the full year.
The timing of inflation in relation to our mitigation actions as well as the return of expenses absent last year could limit our ability to grow adjusted EBITDA margin year on year in the second quarter.
We believe this will be temporary and anticipate meaningful full year margin expansion again in 2021.
Okay.
Moving to EPS, we now expect adjusted earnings per share in 2021 will be in the range of $8 to $8 60.
Compared to $7 40, the $8 30 in our original outlook.
There is no change in our assumption for cash taxes or capital expenditures from our initial 2021 outlook.
Given the increased adjusted EBITDA outlook, we would expect free cash flow of approximately 160 million to $180 million for the full year.
Now I'll turn the call back to Howard for closing comments.
Thanks Ross.
In summary, we were very pleased to have delivered a net sales increase of 17% from the first quarter as we continued to benefit from higher A&P across all segments and volume growth in our residential end markets.
Strong price and mix drove adjusted EBITDA in the quarter more than offsetting increasing inflation and resulting in our ninth consecutive quarter of year on year adjusted EBITDA margin expansion.
We leveraged the <unk> vantage operating system to drive safety improvements and sequential increases in capacity.
While capacity has improved we remain focused on ensuring that we are consistent and reliable supplier for our channel partners.
We continued to invest in the business to drive future growth as all our segments focused on the strategies that support our goal of delivering differentiated products endorsed the do more.
We've increased our 2021 outlook based on favorable results in the first quarter and our expectations for the remainder of the year.
Lastly, before we start Q&A I have an announcement to make regarding our Investor Relations Department.
After 13 years with Masonite Joanne Freiberger has made the decision to leave the company for another opportunity.
I want to thank her for her hard work and leadership in the organization.
I have personally enjoyed my time working with her and we all wish you well into the future endeavors she'll be with us through the annual shareholder meeting, but you can always reach out to <unk> Pawlak director of Investor Relations for any assistance.
And with that I'd like to open the call to questions operator.
Yeah.
Thank you Mr. Keith if you would like to register for a question. Please press star one if you are using a speaker phone. Please lift your handset before entering your questions.
Ask that you limit yourself to one question and one follow up ladies and gentlemen, as a reminder to register a question Press Star one on your telephone at this time one moment. Please while we poll for questions.
Our first question is with the Josh Chan with Park. Please proceed with your question.
Hi, Good morning, Thanks for taking my questions and best wishes for Joanna the future endeavors.
Thanks, Josh.
Good morning.
Just given your comments about the February at least in the North American residential channel I was wondering if you could give sort of an update on sort of of the cadence in in March and into April particularly in the.
In the wholesale.
Yeah, how that trended exiting the storm impacted February if you can talk about that great.
Yes, Josh it's Tony.
Couple of highlights we did with the weather impact we did see some slowness in both demand and our capacity with the limitations that we saw we have a pretty strong business in the south south and south central part of the U S, particularly in wholesale so we did see a bit of a dip. There. We also saw some impact as we looked at completions.
In the multifamily sector. So customers, who are focused on multifamily felt a little dip in February as well.
I would say that we got sequentially better in that demand and in our ability to supply in March as we started to recover from the weather impacts and.
And we continue to see very strong growth through it all we saw very strong demand and point of sale of positivity in the retail business and so that stayed relatively consistent and it has done so and I don't know Brian do you want to add some color across the rest of the the rest of the business well.
Tony encapsulated it really well is that most of those impacts that we did feel from the February weather impacts were in the North American residential business and particularly in the in the wholesale business given that a number of the plant servicing and the <unk>.
Carrier door business were impacted by that but the door fabrication plants they have of natural amount of.
Buffer inventory that they can continue operating and to support the retail channel and you did see a little bit of that mix shift as we continued to run our retail operations to keep up with point of sale that we're seeing in that channel.
Alright that makes sense. So thanks for the color of that.
And then a.
Follow up on is on inflation.
You look at the bridge Russ that you gave in terms of materials factory in distribution.
Is it fair to think of those headwinds in Q1, basically continuing into Q2 and in roughly the same magnitude just because it sounds like most of those factors haven't gone away and maybe with the exception of some of the <unk>.
Weather impacts, though is that the right way to think about inflation looking into the into the second quarter.
Yes, generally that's true Josh at the setback and look at our updated outlook, we're comprehending the.
The material inflation now in the 7% range as opposed to the 4% range that we talked about earlier of the year. So three points alone up from material inflation now there are a couple of other factors that impacted materials spending we did see impacts from both of those of the first quarter and a lot of that could very well continue one factor is the fact.
We do have just naturally higher inbound freight within our vertically integrated network. We're moving for example components door facings of et cetera from our facings plants to our door assembly plants, and we're moving door slabs from our assembly plants in some cases to our door fabrication plants to support the retail channel. So we're seeing some higher <unk>.
Cost of freight and logistics that accrue to our material costs just from that movement within our vertically integrated supply chain. You'll also have some sourcing mix of their <unk>.
<unk> has been extremely robust fortunately, but that is impacting our ability to supply components from our lowest cost plants. In some cases, they are maxed out and so youre seeing us draw on a higher degree of components from some of our of higher cost plants within the network, including actually bringing in some additional facings from.
Our Ireland plant now to support certain operations in North American residential so those are some headwinds of the materials side that we have comprehended in the outlook and to some degree with the exception of any of that will abate because of weather impacts that we're trying to manage around in the middle of the quarter.
Some of those the headwinds will continue however.
That's great.
Thanks for the color and the good luck on the rest of the year.
Thanks, guys. Thank you guys.
Okay.
Our next question is with Michael Rehaut with Jpmorgan. Please proceed with your question.
Hi, Good morning. This is a lot Hillman from Mike and thanks for taking my question.
So first on the race at good morning.
So the first time the raise sales guide, which was raised by 5% and I was curious if you could just provide a little more detail on how that breaks out by segment. I think you pointed to some stronger in North America residential demand architectural net change, but maybe where you're really seeing some upside and and and also the regarding Europe.
Yeah, a lot it's Russ I'll take that if you look at it on a segment by segment basis, I guess I would characterize it as architectural kind of in line with our original plan. So no real change there. We continue to expect a pretty weak end markets throughout the year in the commercial end markets at the architectural segment serves.
I believe as Howard noted.
We are seeing.
Some encouraging trends with the architectural billing index I noted that as well during the prepared remarks.
That likely puts us in a position to see demand recovery in that business as we get to the end of this year and into 2022, but our outlook for architectural currently it's kind of as it was previously the areas of strength that we're seeing are across the residential business. Obviously the bulk of that is the north American residential, but the UK business is continuing to recur.
Cover it a little bit quicker pace than we would have expected and we're also seeing FX tailwind that earlier in the year, we were a little uncertain as to whether or not they would stick. If you look at the forward curves now it would appear that they are likely to remain in place throughout the year. So if you step back and you look at that five point improvement.
In our net sales guide midpoint to midpoint I would characterize two points of that is FX and the other three points as being a combination of market strength in A&P.
As we get deeper into the year.
Great. Thanks, that's helpful. And then my second question is.
Looking at North America residential and one Q I was curious how much of the the new Lowe's business swing represented.
In terms of sales and then also you talked about kind of strong North America retail P O S.
Continuing and you also talked about some rebuilding of inventory there.
Curious if that rebuild of inventory was indicators of some kind of slowing of market demand there or increase production on your side and if there is still further opportunity for the rebuild.
Yes.
Yes, a lot of all I'll answer your last question first and just talk about the inventory situation I would say sequentially our output improved.
Through the application of all of the advantage efforts in trying to improve our capacity so that that was one.
A key part of our ability to drive sequential improvements in inventory position I would say that we just talked about a little bit of a lull in demand, particularly of multifamily and across wholesale primarily due to weather we saw that come back and so we did deliver some sequential improvement in wholesale as a result of that because we were able to drive some output.
Yeah.
We still see and we still have certainly some inventory makeup to do across all of the channels, but primarily in retail. So we're going to continue to see that play out.
As we see improved capacity and as we drive more output, we will try to we will be making up that inventory position of the retail side, yes.
Yes, a lot of I think the other question was just with respect to the amount of pickup that we were having from the new.
The business win with Lowes in the retail channel I think you estimated roughly 3% I think that's in the range range. If you take a look at.
Our annual guide for how much new business that represented.
And that is fully now in place and so that's about what we would have yielded an increase in the first quarter.
It's important to note. The <unk>. This is Howard that the POS remains strong so was the combination of business wins and Pos.
About equally split.
Yeah.
Got it thank you.
Yeah.
Our next question is with Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
First question.
First question is kind of of two partner around inflation.
The margins I was wondering if you could put a finer point on maybe regionally when you think about the 7% full year.
Obviously, we're seeing worldwide issues, but presumably the north American side.
Running a little hotter than some other.
Regions, giving them of the multitude of issues there so maybe a finer point on.
On those inflation percentages by segment if possible, but then the second part is.
You are continuing to comment about.
The favorability on price cost of your adjusted EBITDA margin guide is up.
125 basis points.
Year on year at the midpoint and any sense of kind of order of magnitude, we should be thinking about as far as how much of that's coming from gross margin versus SG&A leverage.
Yes, Mike It's Russ let me take a shot of that and then maybe Howard of want to add some color.
Specific to your question around inflation the significant majority of what you saw as the EBITDA impact and material cost in the quarter was indeed in the North American residential business.
And Thats driven by the fact that we're seeing pretty significant wood inflation in North America, what inflation is the global phenomenon, but it is primarily getting North America, because we are still incurring higher tariffs on with imports and so that's driven in fact, if you look at just our commodity inflation by basket in the first quarter we saw.
Wood up low double digits with the other categories of low to mid single digits call it but in all cases.
Effectively ahead of what our original outlook at that very early in the year.
So that net impact is clearly going to hit North American residential as well as some of the other dynamics I think I mentioned on one of the earlier questions about <unk>.
The the higher logistics costs and moving our own components around our network to facilitate our vertical integration.
With respect to your question on the guide and margin progression.
We're putting actions in place.
To mitigate the inflationary effects that we're seeing but it's fair to assume that there's going to be a little bit of lag with some of those actions and so that's why I commented during <unk>.
During the call.
In the Q2, it's unlikely for places of difficulty certainly in the meaningfully growing margins on a year on year basis, but some of those actions that we're taking in planning would certainly give us the tailwind as we enter the third quarter and so that is all comprehended in our in the outlook that I gave in those actions.
Benefit as well in gross margin.
Yes, if I can just add Mike.
I'm glad you recognized our margin increase year over year with our guide I mean, we're really proud of the progress we're making on margins. We've raised our margins 310 basis points last year and the midpoint of our guide. This year is in the 100 110 120 basis range.
On top of as I said, a really strong year last year. So despite significantly more inflation than we had contemplated in the outlook, we're still planning.
Very healthy margin growth to the.
Low seventeens, which proud of the team for it.
Okay. Thanks.
Really comprehensive answer there I appreciate it Mike My follow up question is on architectural and so the the.
Helpful laying out the details on the three phases.
When I take a step back that 5 million of annualized savings and not to diminish it but it's the law.
Little under 2% of <unk>.
Sales were even if you realize that it doesn't really get you back to the levels of profitability that you were at just a couple of years ago, and where I think yes.
Certainly some of the long term goals would be so I'm wondering is this.
Three phases of of.
What could still end up being a four of five six days.
Or are there kind of contingency.
Plans in place and then any color around where that could.
Potentially flex up in terms of.
The actions there.
Yeah, Mike.
Obviously, the architectural business had a disappointing quarter that said the volumes were actually a little better than we had expected volumes down 22% in that segment well documented that the commercial business.
<unk> right now now there are some encouraging signs the Abi.
Was north of 50 and of course, when it's greater than 50 of indicates an increase from the prior month.
For the first time since February of 'twenty. It was north of 50 in February of 'twenty. One. So it took a year. So we are in what we would consider expansionary territory now in February.
There were still some weak spots regionally and whatnot in March it increased to 55, six and every measure trended positive. So we do believe and others, obviously of lag because with doors that may be in the nine to 12 months.
Later that the putting doors of projects, but the markets are recovering so when you look at this quarter, we out of volume and an inflation problem.
We didn't have the flexibility of the network to be able to adjust to the dramatic reductions in volume and that's what we're trying to address with our three phase plan. We also had some inefficiencies in the factory due to that volume leverage and then we had.
Quite a bit more inflation than we had planned so between those three things we had obviously troubled margins, but as we can take actions to moderate inflation as Russ described as we can lower the cost structure of our network through this plan closer to the near plant last quarter, we announced the close.
The style of our oil plants.
Recently, and we have to address our flushed or capacity next and we're doing some things with overhead there our cost structure is going to change and then we do expect the volume is going to begin to recover so we still like this business.
We believe this business can be.
Here at or slightly more than our margins. That's our goal with this business we wanted to be consistent with our other businesses and we got some work to do to get there we're committed to $1 billion.
Yes.
I might just add Mike.
You've talked about is there a phase four of 506 I wouldn't want you to think from our commentary that this means that phase III is largely done phase III has just started right. So while phase one around components to Howard's point in phase II around the specialty door, we've announced actions. There. We're just very early in the phases of starting what we think can be.
The cost optimization within our flushed or footprint, so more to come on that but I wouldn't want you to think that the numbers that we've cited represent a fully completed plan. There is still plenty of work that the team is executing right now.
Okay, Alright, thanks, Ross Thanks Howard.
Thanks, Mike.
Our next question is with Noah Markowski with Stephens. Please proceed with your question.
Good morning, and thanks for taking my question so.
So I wanted to go into a little bit more detail on some of the actions you're taking to impact to mitigate the impact of higher cost inflation outside of price and maybe if you could talk.
Specifically to the North American residential business.
Yeah No. This is Howard.
<unk> team has been working hard on the sourcing strategies to mitigate inflation, whether that's finding alternative suppliers regionally part of the inflation is due to tariffs and antidumping duties and things like that so that's something that's been going on for quite some time and the team's done a terrific job actually.
And trying to mitigate some of the significant increases in tariffs and duties and it's the same with inflation. So that's certainly a strategy that we use often.
You talk about the pricing is another.
Era of the quiver.
Surcharges, we've talked about surcharges to offset freight for example.
They may be temporary in nature, but there is a lot of ways that we're working to try to mitigate the impacts of inflation Russ also talked a little bit about moving components around the network in order.
When we had some of these capacity challenges and we've been able to successfully increase our capacity sequentially. When you have capacity challenges you're moving freight around the network more than you might normally and so as freight is there is inflation in freight.
Hits us.
At a higher rate if we're moving product more frequently so minimizing that by increase of capacity is another strategy to minimize the impacts of inflation.
Got you. Thanks, that's helpful and then and then for a follow up.
You're talking about into Q, just given the timing of.
Where you're seeing inflation adjusted EBITDA margin expansion might be challenged on a year over year basis is that to say there is possibility to see some compression that margin goes lower or that it just won't be as high as we saw in the wound care.
Well no. It's Russ I guess, how I'd answer that as you know we don't like to provide the guide for any specific quarter, but what I can tell you is that.
If you look at the second quarter and some of the challenges that we're seeing around inflation, which is an industry wide issue clearly and some of the actions that we're taking to mitigate that and the fact that there is anticipated to be of lag with some of those actions that's really what informs our view that.
Any kind of margin growth in the second quarter would be challenging to deliver and it really becomes the ability to leverage those actions as we get into the second half, which we're pretty confident in and that's why we've laid out the outlook for updated full year results that we did yes.
The other thing to think about second quarter as last year's second quarter, we essentially cut all discretionary spending because we had no idea of what to expect relative to COVID-19 and so our expense load in the second quarter relative to our comps.
<unk>.
Less than it is today of a run rate basis.
Yeah.
Right that makes sense, thanks, I'll leave it there.
Thanks Dawn.
Our next question is with the Jay Mccanless with Wedbush. Please proceed with your question.
Thanks, Good morning, everyone.
Just wanted to ask first on the the tariffs and antidumping duties has there been any progress on that any.
Signal from the administration that they may do with those tariffs.
I don't think so Jake.
I wish we could make the call, but I don't think that's our goal. So I don't think so at this point.
Okay.
And then the second question I had just talking about making up for the cost in North American residential.
Have you gone to market with another price increase or is it going to be more trying to make it up through some of the freight surcharges you were talking about.
Yes, Jay this is Tony.
As a matter of practice, we don't speak prospectively about price.
I will say and Russ alluded to it certainly with the inflation that we've seen in our mandate to remain.
<unk> remained favorable and price cost.
We're going to do everything and use all of the arrows in our quiver to be able to address the cost that come up.
And we talked about.
Certainly some.
The potential challenges for Q2 margin relative to year over year performance, but for the full year, we expect to be favorable and that price cost relationships.
Okay sounds good thanks for taking my questions.
Sure Jay.
Our next question is with Steven Ramsey with Thompson Research Group. Please proceed with your question.
Hey, good morning, everyone.
Hey, maybe to start with.
The mix factor in Europe can you maybe talk about how you expect mix to trend through the rest of the year of thinking.
Longer term, our their proactive measures, you're taking to drive higher exterior mix.
Even beyond 2021.
Yeah.
Thanks for the question Steven exterior mix has been fantastic for our business for some time and it continued in the first quarter, we were sort of strong double digits in the exterior space.
Our lead times are sort of back at pre COVID-19 levels, we've aggressively increased our stock on hand and on the water. So that we can minimize any potential disruptions due to due to <unk>.
Stock outs and so we're really proud of that extra of your business and we do aggressively and proactively.
Generate leads and try to create demand in that business and it's been working quite well for us the interior side of the business in the first quarter was softer.
I would say that we had some internal challenges with capacity in our largest interior door plant driven by COVID-19, we had some.
Pretty significant absenteeism in the quarter, we actually left left some business on the dock if you will because we.
We couldnt get of made it out in time and absent that we would have been essentially flat maybe up a little bit on the interior side of the business.
But we do expect the mix to continue to be strong for our exterior business or do whatever we can to drive that and we do expect the interior business to begin to recover as well in subsequent quarters, yes, Steven It's Russ I might just add to that you hear of the management team here talk a lot about RM vantage operating system I wouldn't.
I want folks to think that thats largely confined to our north American business and vantage is a global initiative for us and so we have teams that are continually looking at continuous improvement changes and improvements that can be made and all of our plants, including our door plants over in the U K and so we will continue to look at where we can from a.
Passive the standpoint of also support what's been really really good growth in the triple our market for <unk>.
Entry door, specifically to Howard's point, it's been a really nice tailwind for our business in the Europe segment.
Yeah.
Great and then one more kind of adding on to that but.
Is there any way to quantify or even ballpark. The sales that were lost in Q1 from the absenteeism and then I guess.
The sales or or delayed.
Sales into Q2, and then kind of thinking forward is the labor situation involved evolving positively in the UK.
Yes, I would say.
It was millions not tens of millions so not material to the total business, but probably.
Borderline material for the European segment as.
As far as those orders and yes.
Think.
It is improving the situation is improving with labor in the.
The U K.
Great. Thank you.
Thank you.
Our next question is with Reuben Garner from the Benchmark Company. Please proceed with your question.
Thank you good morning, guys and congrats on the on the results and.
Joanne good luck in your future endeavors.
Maybe most of my questions have been answered I just have one quick follow up on the U K.
There's been a lot of moving parts over the last year with shutdowns end.
Stimulus or you know think the boost the housing economy over there what what's the kind of the longer term outlook I think most folks are pretty familiar with the U S dynamics what are your thoughts on the new and R&R markets for the UK as we move through this year and into next year any high level of color would be great. Thank you.
Yes Reuben.
It is of aged housing stock in the U K so.
We expect that the triple our market, particularly as it relates to our exterior door businesses continue to be.
It's going to continue to be strong.
And we think housing in the UK just like the U S is a good bet long term.
There.
The macro trends look good there and.
Housing stock is under built its aging.
So we like it in the UK life of the U S. People have spent a lot of time in their homes over the last year and they've realized the opportunities to make upgrades and we think that that's going to be of positive macro there just like it is here in the U S.
Yes, Reuben it's Russ I might just add that for those of you that of followed the company for several years you know that we've been talking about some of the the legislative moves even of our policy moves.
The regulators of the UK had been talking about several years ago to actually promote more property being made available for development and more building by smaller builders in the U K and that was in recognition of the fact that the new housing stock the new housing market in the UK and fundamentally been under built for several years and the.
There were strategies at one point in time to try to Incent annual housing starts of circa 250000 units, whereas we have been seeing of <unk>.
Annual run rate well below 200000 units now Brexit gotten the way and then COVID-19 gotten away, but it doesn't change the fact that the tone that we feel from the regulators in the UK is that they recognize the housing stock is under bill and we're from a policy standpoint. They can continue to encourage that longer term they will and that's.
And part of informs our view of that it's going to be of constructive market for several years to come.
Great. Thanks, and congrats again guys.
Thank you Kevin.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is with Kevin Hocevar with North Coast Northcoast Research. Please proceed with your question.
Good morning, everybody.
Okay.
I Wonder I'm the inflationary from just just revisiting that so.
Russ I think you mentioned upwards of 7% inflation for the year and you gave all of the dollar values of the inflation in the first quarter, but what was the percentage for the quarter.
It sounded like you expect relatively similar in <unk> based on an earlier question. So im just trying to figure for the full year. If you expect some mitigation if it's going to be similar of the whole year. If maybe there's some mitigation of the back half of the year from maybe find Deb mitigate the anti dumping duties by finding alternative sources or whatever but many of them.
Trying to just get a sense for what was the percent of inflation in the first quarter and kind of how you expect it to trend the full year, yes.
Yes, if you look at the the total inflation that we incurred Kevin in the first quarter. It was in excess of 6%.
We were able to mitigate circa of one point of that through some of the sourcing savings projects that we have in place.
But the gross inflation was in excess of 6%. So as you can see.
By our commentary on the outlook our expectation is that certainly will continue or in certain cases, even strength a little bit further.
Okay, and then on the the architectural front.
You mentioned.
Encouraging signs that that obviously those are leading indicators that take some time to develop but curious if in your business.
Some of the comps start getting easier in <unk> and beyond so I'm just kind of curious if if maybe <unk> was the low watermark and we can start seeing some sequential improvements in sales and earnings I know there was some a little bit of seasonality of the business, but I'm curious if that's kind of how you see of go into maybe <unk>, the low watermark and we continue to see improving.
From here or.
If we maybe take a step back before we take a step forward curious your thoughts.
Yes, Kevin we certainly had a difficult first quarter as I said on three fronts volume was way down which hurt the inflation was up which hurt and then we had some factory inefficiencies due to the leverage due to that volume being down so.
Longer term, we certainly see some light at the end of the tunnel now we're taking some specific actions as we said through the three phase plan post the plant last quarter announced the closure of the plant this quarter addressing sort of capacity and are flushed or flat.
That will help our cost structure. So all of these things that we're doing I think are.
Going to improve this business, but the first quarter was difficult because we.
We had a triple whammy.
Yes.
Kevin It's Ross the one thing I might add also just to remind everyone. This is a pretty long cycle business rate, 80% of our revenues in the architectural segment are related to project quotes and those are for projects that will go into effect or actually yield in order or in some cases, three six to nine months out and so.
We look at things like the architectural billing index is more of an indication as opposed to just year on year comps in any given quarter and so what we saw is that the API and fell dramatically last year and it has stayed low and given the debt is an indicator of market demand nine to 12 months of the future. The fact that it is starting to Rick.
Cover is encouraging but it really doesn't.
We indicated in our view any significant firming and commercial end markets until at least the end of this year.
Okay, great. Thank you.
Thank you.
Yeah.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Mr. <unk> for closing remarks.
Thank you Maria and thank you all for joining US today. We appreciate your interest and continued support and finally I'd like to thank Joanne and wish her all the best This concludes our call.
Yeah.
Thank you for joining me from its first quarter 2021 earnings Conference call. This conference call has been recorded the replay may be accessed until May 19 to access. The replay. Please dial 870 76606853 in the U S or 20161 to 7415 outside the U S.
Enter conference I'd number 171819.
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