Q2 2021 Masonite International Corp Earnings Call

Greetings everyone and welcome to Masonite, second 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 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 treasure. Thank you. And good morning everyone. We appreciate you joining us today. With me on the call today are Howard heckes, president and chief executive officer and Russ, tiejema Executive, Vice President and Chief Financial Officer, Tony hair, president of global residential will also be joining us for the

Q and a session. We issued a press release and earnings presentation. Yesterday after the market closed reporting our second quarter, twenty Twenty-One 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

Part of these factors appears in.

Section entitled forward-looking statements in the press release. We issued yesterday. More information about risks and be found under the heading risk factors in Masonite. Most recently filed annual report on form 10-K and our subsequent form 10-qs 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 include 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, today is call includes the business overview from Howard. A review of the second quarter from Russ. Along with our thoughts on the second half of the year and are updated 20.

1 Financial Outlook. Lastly Howard will provide some closing remarks and will host a question-and-answer session and with that, let me turn the call over to Howard.

Thanks, Rich, good morning and welcome everyone. Before we review our second quarter results, I want to take a minute and thank our more than 10,000 employees who are working tirelessly in a very difficult operating environment to service our customers, to the best of their ability, whether you're an HR generalist working to hire key Talent a supply chain, leaders seeking high quality, best component options, or a production worker in 1 of our many factories around the world. I know it's been a crazy

Is a year and a half. I'm proud of the work that you are doing and the progress. We are making as we transform our company to consistently grow through providing reliable Supply winning, at the point of sale and driving specified, demand for doors to do more. It's a great time to be at Masonite and I couldn't be prouder of our team.

Let's move to slide for a second quarter overview.

We delivered record levels of net sales and adjusted ebitda since becoming an NYSE listed company in 2013, net sales, increased 33 percent year-on-year and adjusted ibadah was up 20 percent year-on-year, to a hundred and eleven million dollars. This strong performance was primarily driven by higher base volumes in our residential businesses as we laughed. The initial impacts of COVID-19 last year, along with higher average unit price or a you.

Across all 3 segments.

Adjusted ibadah margin contracted a hundred and seventy basis points year on year. Due to the rapid rise. In input costs ahead of price realization along. With the tougher, come from 2020, due to cost actions taken in the second quarter last year. In response to COVID-19, we continue to see rapidly evolving inflation across raw materials and Logistics along with higher wages and benefits as the labor market remained tight despite the diminishing impact of

Related absenteeism. Rust will provide an update on these trends for the second half of the Year along with our updated 2021 Outlook.

But the inflationary environment in our expectations, for the remainder of the year, we have taken further actions in an effort to maintain a favorable price cost relationship since our last earnings call. We've taken to additional rounds of price increases within our North American Residential segment..1 was effectively June and a second just became effective for orders. Received. After August 9th, we believe these price increases will drive, a favorable price cost relationship and return to adjust it.

Yves Adama margin growth later. This year, allowing us to still achieve full year 2021 adjusted ebitda margin expansion.

In July, we completed a 375 million dollar Bond issuance at historically, low rates to refinance our 2026 notes. This refinancing will result in more than 30 million dollars of Interest savings over the next 5 years and provide us with additional capital and financial flexibility. As we invest to support our 20-25, Centennial plants.

With respect to business and operational highlights for the quarter, we continue to see strong demand across our residential and markets in both North America and Europe with early signs of recovery in our commercial and markets as well. This continued strength coupled with material and labor. Constraints across our business has challenged our ability to fully Meet customer demand. Our supply chain team continues to identify alternative suppliers as well as material substitutions. We're possible.

To address tight labor markets were using initiatives, such as referral sign on retention and perfect attendance. Bonus programs in addition, to wage and benefit adjustments to remain competitive in our local markets.

In June, we published our 2020 environmental, social and governance report highlighting our ESG achievements and priorities. It also included our first comprehensive, third-party verified carbon footprint assessment. I encourage you to visit our website to access access the report and learn more about our ongoing efforts to extend a positive influence on the environment, as well as our employees, and the communities in which we operate.

Well, the organization remains keenly focused on near term commitments, to service our customers. We continue to look toward the future and make investments that support our growth opportunities accordingly. I am extremely pleased that we are moving forward with new facilities. In both our North American Residential and Europe segments. We believe these 2 facilities will provide the additional capacity needed to better service our customers in the future. And to do so more efficiently.

Now, let me provide you with some more details on these new facilities.

In late June. We announced our plan to invest in a new door manufacturing facility in Fort Mill. South Carolina. This facility will assemble interior. Doors for our North American Residential segment in is anticipated to be operational in the second quarter of next year, given the continued strength and demand, we believe this new capacity is ideally situated from a logistics standpoint to efficiently service high growth markets in the Mid-Atlantic and Southeast

being a

Built facility. We also have the benefit of Designing the site utilizing mvantage tools. Along with targeted automation from the start positioning this operation to be a highly efficient. Addition to our manufacturing Network.

In our Europe. Segment work is underway on a new facility. In Stoke-on-Trent England, this facility will increase capacity for our high growth and margin a creative exterior door business Masonite. I entered this business in 2014 with the acquisition of doorstop International, which sells fully finished exterior, door systems direct to contractors in early 2018, we acquired dw3, which includes additional Direct

Contractor entry system offerings including the widely recognized solidor brand. Our entry door. Business has grown in excess of 20% annually. As a result of these Investments, and the solidor business in particular, will soon become capacity. Constraint, as that business grew expansion took place across multiple facilities. This new build. The suit facility will afford US. The opportunity to consolidate 6 buildings into 1 efficient location.

Capable of supporting continued growth, we anticipate production will start in the first quarter of 2022.

Both of these locations are great examples of our commitment to invest in the business. For growth. This new capacity will help us execute on the first pillar of our doors that do more strategy, provide, consistent, and reliable Supply, its foundational for all we do. And these Investments are designed to accomplish this goal and to help us achieve our 2025 Centennial plan. With that, I'll turn the call over to Russ to provide more details on our financials. Russ, thanks, Howard. A good morning, everyone.

Turning to slide 7, I'll provide an overview of our second quarter Financial results.

We reported net sales of 662 million dollars up 33 percent as compared to the second quarter of 2020. The growth was primarily due to a 19% increase in base volumes as we laughed the impact of COVID-19. In the second quarter of last year and benefited from previously announced new retail business in North American Residential.

AUP, improved, 7 percent year-on-year, with increases across all 3 segments due to pricing actions. We also benefited 5% from foreign exchange and 2% from higher component sales.

Gross profit increased 21% to 164 billion dollars on higher volumes and AUP which were partially offset by the impact of rapidly increasing inflation. Along with tariffs on raw materials Rising Logistics costs higher, manufacturing wages, and benefits and increased investment in the business.

As a result, gross margin contracted 250 basis points year-on-year to 24.8%.

William General and administration expenses were 12.5 percent of net sales, favorable, 220 basis points year on year. But up 12%, in absolute terms, 283 million dollars. This reflects the absence of cost actions taken in the second quarter last year in response to COVID-19, as well as the impact of wage and benefit inflation and renewed investments in resources necessary to support growth initiatives.

Net income was 35 million dollars in the quarter, an increase of 3 percent from the prior year.

Diluted earnings per share or a dollar forty..1 cents up from $1.38 in the second quarter of last year adjusted earnings per share increased, 49 percent to 2 dollars, twenty 3 cents which excludes charges related to our previously announced a restructuring plans. The loss on disposal varcek business and the impact of a corporate tax rate change in the UK.

This compares to a dollar fifty cents per share in the second quarter last year, which also exclude charges related to restructuring and the loss on disposal of our India subsidiary.

Adjusted even I increased 20% to 111 million dollars, which is Howard. Noted earlier was a record quarterly adjusted ibadah for Masonite.

As expected and per our comments on our first quarter earnings call the timing of inflation in relation to our mitigation actions, as well as the return of expenses absent. Last year, put a governor on our adjusted ibadah growth in the second quarter.

While price actions more than offset material increases adjusted. Even on margin was 16.7% down 170 basis points, from a strong margin level in the prior year quarter.

Moving to the adjusted ibadah bridge. On the right side of this page, you can see the significant year-on-year contribution from our strong top-line growth with the benefit shown here for volume, mix and price being delivered by roughly equivalent contributions from volume and a you pee.

We also realize year-on-year favorability of 6 million dollars due to Foreign Exchange as both the Canadian dollar and British pound strengthened against the US dollar.

Covering these Tailwinds was the negative impact of a quickly changing inflationary environment. Our cost of goods sold material costs dramatically increased and were 31 million dollars, unfavorable year-on-year.

Strong demand and sporadic supply chain. Disruptions also required us to Source, more material subject to higher tariffs and duties.

Coupled with higher Logistics, expenses to bring raw material into our facilities and move components within our supply chain internally. We experienced material inflation of almost 13 percent equivalent to mid-single digits, as a percentage of net sales compared to the second quarter last year.

We also encourage.

Million dollars of higher Factory related cost in the quarter due to higher wages and benefits and production in efficiencies in the architectural segment.

Distribution costs were also elevated 10 billion dollars a year on year as a result of freight Lane mix. As we rebalance production across our Network to best Meet customer demand as well as inflation in logistics and packaging materials.

Let's turn to slide 8 for our North American Residential segment results.

Net sales increased 29 percent from the prior year to 493 million dollars primarily driven by a 19% increase in base volume.

This increase includes the benefit of laughing COVID-19 related impacts in the second quarter 2020, as well as continued strength and our retail business which includes our previously announced new business with Lowe's.

AUP contributed, an additional 7% to growth in the quarter driven by favorable price which was partially offset by a mix headwind as our exterior door production was constrained, due to Upstream supply chain disruptions,

These disruptions also drove outside inflation and are chemicals basket. As Howard mentioned earlier, we have taken additional pricing actions to help mitigate the inflationary environment. I'll speak about the timing of those actions and their anticipated benefits. When I discuss our Outlook,

Adjusted Eva died in the North American Residential. Segment was 100 million dollars in the second quarter. A 10 percent increase over the same period last year. This too was a record marking the highest quarterly. Adjusted ibadah reported for the North American Residential segment.

Don't adjust it even on margin was 20.3% down, 360 basis points as material inflation and higher Logistics costs in the quarter outpaced mitigation actions.

Adjusted even on margin was also impacted by a tougher cop from 2020, is the absence of COVID-19 related cost, actions and investments in the business for growth specifically, our North American Investment plan and capacity expansion.

Turning to slide 9 and our Europe segment. Net sales increase significantly year-on-year 288 million dollars driven by higher base volume as we laughed COVID-19 related. Restrictions that resulted in the idling of our UK and Ireland operations for approximately half the prior year quarter.

Underlying residential and market demand remains healthy with increased, new housing, builds and sustained. Robust, demand in the remodeling Market supporting strong growth in both our interior and exterior door businesses.

we achieve the strong Top Line performance, despite material, and labor availability impacting our your excitement

AUP, also contributed to year-on-year growth due to previously implemented price increases in response to the current inflationary environment. We have recently taken further pricing actions in Europe as well.

The further optimize our portfolio in this segment, we completed the sale of our check business near the end of the second quarter. This business did not have the scale necessary to serve as a platform for growth in Europe with net sales of approximately 20 million dollars annually and generating only mid-single digit, adjusted even of margins.

Adjusted even though was 17 million dollars in the second quarter up. Significantly year-on-year as we laughed COVID-19 related closures from the prior year,

Adjusted ibadah margin was consistent with the first quarter at 18.9% despite mix headwinds from the relative strengthening of our interior business overall, a strong quarter for our Europe segment.

Moving to slide 10 and the architectural segment, net sales decreased by 11 percent year-on-year to 76 million dollars. As a 16 percent decline in bass volume was partially offset by a 4 percent Improvement in AUP driven by Price actions.

Volumes were impacted by lingering weakness. In some of the commercial and markets we serve while manufacturing constraints including material, and labor, availability issues. Also impacted output in certain plants.

Adjusted even on margin contracted to less than 1% primarily due to the impact of lower volume.

Favorable contributions from Price or more than offset by inflation in the quarter.

Adjusted even on margin was also negatively impacted by a large Capital project to upgrade essential equipment. At 1 of our factories. The project was successfully completed, but resulted in extended downtime, and was ahead and win the second quarter financial performance,

As discussed last quarter, we have a 3-phase optimization plan and are executing against it. We completed 2 facility closures as part of phases, 1 and 2. And we expect to see the associated cost Savings in the second half of 2021.

We continue to make progress on phase 3 and are currently evaluating our flush door capabilities. Our belief is that once this plan is complete, we will be able to take advantage of a commercial and Market recovery, which we believe will be early 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 on Drawn our total available liquidity. Ending the quarter was 591 million dollars. Net debt was 463, million dollars, resulting in a net debt to adjust. It ibadah leverage ratio of 1 point 1 times.

Cash flow from operations was 33 million dollars through the end of the second quarter down from 103 million dollars in the first 6 months of 2020. These lower cash flow levels were expected given our historically low, net working capital at the end of 2020, coupled with the natural increases in working capital from rising sales volumes, along with anticipated higher cash, taxes and the cash payment of thirty 1 million dollars in June related to the settlement of us class. Action litigation

Capital expenditures were approximately 29 million dollars.

The first 6 months of 2021.

We continue to execute our share repurchase program in the second quarter purchasing nearly 2 hundred. Eighty 4 thousand shares for approximately thirty 2 million dollars at an average price of a hundred, fourteen dollars, and 28 cents. Our board of directors and management. Continue to view Masonite shares as an attractive investment opportunity. Accordingly the board recently approved a new share repurchase program allowing the company to repurchase up to 250 million dollars of its outstanding, common shares inclusive of a

Only 40 million dollars remaining available under the existing share repurchase, authorization approved in May 2018.

This repurchase program remains an important means for us to return value to shareholders.

As Howard mentioned earlier, subsequent to quarter end, we successfully completed a 375 million dollar Bond issuance in July acting on historically, low rates. We entered the market with the objective of fully, refinancing 300 million dollars of notes do in 2026.

In addition to extending the maturity date 2030. The coupon rate was significantly reduced from 5 and 3 quarters percent to 3 and a half percent.

We will record dead extinguishment cost in the third quarter but this refinancing will result in more than 30 million dollars in interest savings over the next 5 years and provide an excellent foundational layer in our capital structure.

I was pleased with the team's ability to execute on this deal quickly taking advantage of favorable market conditions.

Let's turn to slide 12 to discuss some of the key Dynamics. We expect to shape Mason's operational and financial performance in the second half of 2021.

Overall we see 3 factors driving strong, Top Line performance for Masonite, in the back half of the year.

First, we anticipate continued favorable conditions in our residential and markets both in North America and the UK US. New housing starts remain up significantly year-on-year, which, when coupled with an existing backlog in the North American Residential business and a steadily recovering new housing market in the UK should result in healthy demand for our residential products across the balance of the year.

Second we have worked hard to enhance our capacity to support this customer demand.

Actions we've taken in the first half of 2021 such as adding shifts and new equipment and certain door assembly and Fabrication facilities are intended to provide incremental capacity for some of our most constrained product offerings.

As a result, we expect volumes and our residential businesses will continue to be up year on year in the second half of the year.

While select commercial and markets, have shown initial signs of improvement, we still anticipate soft volume in the architectural segment, through the balance of 2021.

Third, as discussed earlier, we have implemented additional pricing actions across our segments to help mitigate inflationary pressures in our North American Residential segment. We expected benefit from 2 additional price increases since our first order or rings call due to the timing of these price increases late, June and mid-august coupled with the existing backlog. I just mentioned, we would not expect to realize the significant benefit in the third quarter, but should see the full benefit of both increase.

During the fourth quarter.

Along with pricing actions taken in our Europe and Architectural segments, should drive acceleration in a u p-- growth as we progress through the second half.

These price increases.

From a cost perspective, we expect the environment to remain challenging for the rest of this year.

We have seen inflation continued to exceed, our expectations. As of, our last call, we expected material inflation. Could reach 7 percent for the full year. Given the further increases, we experience through the second quarter coupled with our Outlook that this headwind will strengthen in the third quarter before. Moderating. We now expect material inflation will be in the low teens for the full year, inclusive of tariffs and inbound Freight.

Due to the tight labor market. We are seeing higher year on your wage and benefit inflation in North America. We have seen wage and benefit increases averaging over 5 percent this year across our hourly employees.

The employment incentives. Howard noted earlier present an additional cost headwind, but are expected to improve our ability to hire and retain qualified employees. Yet, we anticipate that labor availability will remain in constraint.

Distribution costs. Also remain elevated as Logistics inflation, we see the ship material between our plants. Also impacts our outbound shipping cost to customers. We also expect that our mix of freight Lanes could remain somewhat sub optimized as we continue to flex production across their manufacturing Network to provide the best service levels possible in the current supply chain environment.

Our manufacturing and supply chain teams are working incredibly hard, and doing an outstanding job, under the circumstances to manage through this difficult supply chain. Environment further, we remain confident that the incremental price actions. We have taken will allow us to fully offset material and Logistics cost headwinds for the full year.

With these factors is a backdrop on slide 13. We provide our updated outlook for the Consolidated full year 2021.

1 based on the continued strength of residential, demand and incremental pricing actions. We now expect year-on-year, Consolidated, net sales, growth of 17 to 20 percent compared to our prior Outlook of twelve to fifteen percent.

This updated Outlook reflects a slight increase in the benefit from foreign exchange from 2% to two-and-a-half percent due primarily to further strengthening of the Canadian dollar and British pound.

Given the challenging cost environment, I just outlined coupled with when we anticipate fully realizing the benefits of our additional price. Actions. We expect adjusted ibadah to remain in the range of 435 million dollars to 455 million dollars, unchanged from our prior Outlook.

With the full benefit of pricing not expected until the fourth quarter, we anticipate additional adjusted, even a margin compression until that time.

However, we do expect to return to adjust, it even a margin expansion in the fourth quarter. And for the full year,

Our adjusted earnings per share and cash tax expectations remain unchanged as well. We expect adjusted earnings per share in 2021 will be in the range of 8 dollars to 8 dollar sixty cents and cash, taxes will be 45 million dollars to fifty 5 million dollars.

We Believe Capital expenditures will now be in the range of 85 million dollars. To 100 million dollars for the full year 2021. I'm increased Investments to support growth. We now expect full year. Free cash flow of 130 million dollars to 160 million dollars reduced from our prior Outlook to reflect the impact of higher net sales and material cost on our working capital balances and the slightly higher Capital expenditures.

Now, I'll turn the call back to Howard for some closing comments.

Thanks for us. We are very pleased with the results. This quarter given the challenging operating environment as we reported record, net sales and adjusted ibadah, both. The highest since becoming an NYSE listed company in 2013. Well, adjusted ebitda margins were impacted by inflationary headwinds in the quarter. You've taken further pricing actions to help mitigate these impacts which should provide incremental benefits as we progress through the second half of the year, we are encouraged by the continued.

Residential end markets and initial signs of recovery in the commercial end markets. This strong demand gives us confidence to continue investing in the business, including larger capital projects to add new capacity.

We are proud of the progress made on res, G Journey. We invite you to visit our websites, dedicated ESG page to view this report.

Lastly, we've updated our 2021 Outlook to reflect the strong demand, as well as recent pricing actions taken that should allow us to maintain a favorable price. Cost relationship for the full year and drive year-on-year, adjusted ebitda margin expansion for 2021. And with that, I'd like to open the call to questions, operator.

Thank you. Our first question comes from Josh Chan with bared. You may proceed with your questions. Hi. Good morning, everyone. Thanks for taking my questions. I guess to start off. Maybe could we talk about the the Cadence of raw material inflation? I guess you posted a the 31 million head win in the quarter and it sounds like you think that that's gets worse before it gets better? But maybe it could you talk about the shape of that.

Go ahead when the you expect and some color behind that, perhaps, yeah, Josh it's rust, I'll take that 1. What we saw is really a crossed Q to the inflationary head winds continue to increase such that we exited the second quarter. It a pretty strong rate of inflationary increase and that was why. In our prepared remarks, I commented that we expected the inflation to be even worse in the third quarter before if moderate somewhat in the fourth quarter. So that that curve we see from an inflationary Stan.

A point again, approximately thirteen percent in the second quarter, getting worse in the third quarter. Moderating back to the probably low to mid teens level in the fourth quarter, such that we see again that low teens rate for the full year, that's our current view point, okay? That's that's how full of. So, and idea that it moderates, in the fourth quarter have you started to see some stabilization in in sort of the raw material cost at least on a sequential phases.

Yeah, I would say generally that's true.

Areas that were focused on most carefully, our wood and chemicals. Those are the 2 baskets where we have seen the most inflation as the quarter progressed and Q2 and where we think there's probably the greatest opportunity for additional inflationary pressure in Q3 but we do expect those both of those baskets to Madhuri somewhat, as we get deeper into the year.

All right, that's great. And then I guess my last question is on some of your internal initiatives. I mean obviously price is a key component to offset that the raw is, but could you talk about other things that you're doing in terms of sourcing and substitution and how big of an impact can can those mitigation efforts have in the back half?

Yeah, Josh is Russ. Let me just follow that up by saying that our sourcing team, frankly. They've been working their tails off to manage. What's been a pretty fluid supply chain environment. We see continued supply chain disruptions, that's no secret, were seeing that across the industry space generally. And so, whereas entering the year, they probably would have expected more of their time, and head stays to be devoted to material substitutions, supply chain, Montour Supply base modifications qualifying,

Turn it up materials, from alternative sources at lower cost. They're not having to devote more of their time to actually managing some of these supply chain disruptions. And we're putting that frankly as our Priority 1 to make sure that we can maintain their service levels as best as possible. This current environment. So, I would say, our Outlook does not necessarily reflect as much progress on the sourcing saving side, including finding alternate suppliers that will allow us to avoid some of the tariffs that we've been paying but supply chain.

Gene resilience is number 1 priority right now. Let me just add to that Josh, this is Howard. We think about servicing our customers, first and foremost. And and so, the supply chain is 1 aspect and finding appropriate sources of supply and labor is the other. So, you know, laborers, been difficult, this quarter. And we are beginning to see some signs of improvement of some of the states that had Federal Unemployment, Benefits roll those back. The Federal Unemployment Benefits generally ended September, we expect to see

Some improvements but getting qualified labor and getting materials in our shop to service. Our customers are quite is our priority

and make sauce and sent. Thanks for the color and good luck in the second half. Thanks Josh. Thanks Josh.

Our next question comes from Michael. With JPMorgan, you may proceed with your question.

Michael, your line is now live, you may proceed with your question. All right. Thanks. Sorry about that. Good morning everyone around you know price and cost here just to be clear, you know? It seems that you know, you kind of reiterated your outlook for a favorable or positive relationship, the full-year just want to make sure thing about it right? That essentially first quarter.

Positive.

Second and third, quarters negative, and fourth quarter returning to positive. Is that is that the right way to understand the the quarter by quarter progression? Yeah. I'm like it's rough. You you've got that correct. That is essentially the case that we see you some of that's driven by the timing of the incremental price increases that we've taken. You know, we remarked 1 was effective in Late July, so orders after it started late, June, June 21st, orders after that date, and the third increase with orders effective actually,

After today, 1 of the things that puts a bit of a governor on our ability to realize that prices we do have an extended backlog at this point. And so we're not really realizing any price on the June increase until we got to the very end of July early August and the August price increase just implemented. We really don't expect to see any benefit until the fourth quarter. So once you get to the fourth quarter, you see the full benefit of both of those price increases laid over the top. But in the meantime again,

You see the increasing inflation or a headwind that Ayah commented on exiting Q2 and through Q3, that is what leaves is exposed from a margin perspective. In the third quarter alone, certainly recovering to we think healthy margin expansion in the fourth quarter.

Okay, it's helpful. Thanks for that. And just you know, also kind of thinking about the degrees of magnitude here in the, you mentioned that in the previous question, you expect the worst inflation in 3Q combined with not having the full impact of the offsetting price increases. So you know from a sheep it's on margin perspective particularly as we think about North American,

Obviously drives the majority of the bus year on a solid basis. Should we be looking for a greater amount of year-over-year margin contraction Riku versus to to? Yeah, but I think that clearly is a risk that we would see even more compression in the third quarter. But again, to my comment a moment ago, a pretty strong snap back in the fourth quarter, those comments that I gave a moment ago work for the consolidated,

Business but to your point like a largest single part of that is North American Residential and we would expect that Trend to play out in that segment as well.

Great. But 1 last question, if I could just on architectural, you mentioned that you remain on track with your improvement plan, you know? And, and that you're expecting some cost savings to flow through in the back half of the year, you know, from a degree of magnitude standpoint as well. You're kind of a little bit better than Break. Even, let's say in the first half of the year, should we be thinking maybe mid to high school digit margin zbom.

It's on margins in the back half because I assume that you know, you're not necessarily at the point where you're getting back to like a low double-digit little bit double-digit type of dynamic.

Yeah.

Mike, this is Howard. I think that those assumptions are about, right? I think the second half margins are in the sort of same zip code as what we had in the second half of 2020. That'd be our expectation as we start to see some of these Improvement projects take hold. And as you know, we begin to see some volume return. I mean, it's been really a volume leverage story. There that's been really problematic for us. And, you know, we are beginning to see some very early signs of recovery as far as quoting and what not, it's

Not necessarily translating into order volume yet but we would expect through the third and fourth quarter that some of these, you know, mid-teens volume reductions would begin to improve and I think that's going to be helpful. So I think that that margin assumption is reasonably close. Yes Mike is Russ..1 thing and that I might just add some perspective on the results in the second quarter is as we commented on, we did see some extended downtime due to some major Capital upgrades in 1 of our plants. We

So I saw some inventory cost associated with clearing inventory, at 1 of the sites that we recently closed. So you take those 2 items together that was circuit 2 million dollars or the impact in the quarter. So again, these Investments that we're making to better position that business, going forward, did represent a cost in the quarter if you were to adjust those out. I mean, clearly that would add a few points to margin in the second quarter alone for the segment.

But thanks so much, that's very helpful. Appreciate it. Thanks.

Ladies and gentlemen, as a reminder, if you would like to register a question, please press star 1. If you are using the speakerphone, please lift your handset before entering your request.

Our next question comes from Mike doll with RBC Capital markets, Mike, you may proceed with your question.

Morning. Thanks for taking my questions to stick with the. I wanted to understand a couple different things, when we're thinking about you know price cost neutral or Price cost favorability. You know if I look from a dollar standpoint it does look like price covered materials in to q. But obviously if you just cover materials from dollar-for-dollar, that's me.

And dilutive. So are you are you telling us that we should be expecting from a dollar standpoint price cost to be unfavorable in the third quarter? Or is that from just from a margin standpoint? And I guess the second part of that is obviously costs have surprise to the upside all year in such a dynamic environment. How you change the way that you forecast, and, and incorporate those forecasts into your guide.

With respect to the price cost on a dollar basis. Yes, you're right. We were clearly favorable in the second quarter and in the third quarter, taking into account material and Logistics we would expect to be slightly unfavorable. So it really is when we get to the fourth quarter, we see the benefit of both of those price increases that positions us to well more than offset. Not only material costs but the logistics expense increases that we're seeing as well around freight car.

The constantly moving bogey here on inflation the sourcing team has worked really hard to try to project forward what supply lines will look like and where they're going to see inflationary pressures. And at this point, we'd like to think they've got a pretty good be drawn on what the balance of the year looks like, what that looks like by commodity basket and how it looks by segment. But we're going to continue monitoring this environment really carefully and

That they can do to continue shifting Supply. Albeit there are challenges spent a lot of time on that right now that's going to continue to be a tool, the tool kit. But sitting here today, the Outlook we've outlined we think is, you know, it's good as our visibility report us and it's like anything else. We've had to get better at this. I think over the last several months because you're right. It was, it was so rapidly changing early, that we weren't as far ahead of it, as I think we could have been should have been and

And we're better at that now, so I agree with Ross. I think we got a pretty good bead on it, but we've had have a pretty intense focus on a lot of the indices and and, you know, the moving Parts, because it's moving quick.

Okay, thanks for that. My second question is on the, on the capacity, expansions in both North America and Europe. Pretty interesting, I mean, obviously 2 entirely different stories with those, those 2, but I was hoping for a little more detail, you know, clearly, you would have had some sort of internal return analysis that that told you, hey this, you know, more than exceeds the high-water mark in terms of, you know,

Ry anything you can share on just once these are operational, how you envision whether it's changes how much does this improve your net effective capacity in these categories and and also just, you know, relative margin profile or anything on relative profitability, given you know, these these plants will incorporate some of your, you know, some of your newer tools.

And, and Automation, and such anything you can give us in terms of thoughts around comparisons of what these facilities could produce in profitability versus. Call it just your your average current facility.

Yeah, so let me let me take a shot at that, I'll start with Europe and then I'll like Tony talk a little bit about North American Residential and the logic with the fort Belle plant. But as you know the European business we have an into your business and exterior business. The we enter the exterior market and 14 and that business has been growing really nicely since that time greater than 20% kegger in that business. And like with most businesses that grow, you know, you begin to expand and the solidor

Dennis specifically, which is a direct to contractor finished exterior door system. Business is sort of growing up and now comprises 6 different facilities..5 of which are in a residential neighborhood on a campus if you will. But it's 5 separate buildings, we're limited by the hours, we can work because the noise ordinances. So for example we can't work past 10 p.m. any evening on Saturdays. We can only work 8 to noon. And so we're capping up against our capacity now where the demand is

Going to get to a point where we're not going to be able to service it. So that becomes a

Easy analysis. This new facility 1, we believe is going to drive some efficiencies because it's 1 big facility and not 6 separate facilities but 2 is going to allow us the ability to continue to grow that business and as you know, when we talk about our exterior business in the UK its margin of creative and so this 1 we believe is absolutely the right thing for continued growth.

Of a important margin acree of category similar for North America, but let Tony go into some of the analysis there. Yeah, Mike. I think the excitement around the expansion in Fort Mill, South Carolina is, we do believe that the residential Market, North America is going to continue to be robustly. Think there are some positive Tailwinds that will continue for, for a good period there. And so as we looked at our capacity, this was really an opportunity to step that capacity up

Marilee interior doors and do it in a geographic region, frankly, that's really strong for us. And 1 that's been more capacity constraint you know, as we opened the Tijuana facility and began to expand that as it allowed for better service proposition and the West we've seen more tightness of capacity in the East. And so, for bills located very well to service, you know, the southeast up through the Mid-Atlantic and Northeast. And we believe that by opening a new facility,

Leti will eliminate some of the constraints we've had in some are others. We've owned some of those plants for decades and frankly the layout has limited efficiencies and limited, some of the things that we could do in terms of operational change. And so the ability to come in and start from scratch and a big Square facility in Fort Mill, it's going to give us the advantage of really appropriate. Really efficient layouts and frankly, some new equipment that were bringing in to help Automation in certain aspects of that operation. So, very excited about that and should have an excellent.

Turf.

Okay, thanks appreciate that. Tony and Howard.

Our next question comes from McCandless with wedbush. You may proceed with your question.

Thanks for taking my questions. So it seems like you guys have a high-class problem, the demands there, you're able to raise price, but you've got these 3 cost headwinds. If you want labor and transportation or sorry, you left Logistics and transportation of 1 bucket, your other input cost and then managing the the labor force I guess. Which 1 of those 3 buckets. Do you feel like you've made the most progress on? And in the second question I have is

It's great that you're putting the price increases. Now, how sticky do you feel like these will be as hopefully some of these inflation the different inflation buckets hopefully moderate as we move into next year.

Yeah, good question, Jay. I think that it is a high-class problem and as I said, I'm incredibly proud of the team for how they performed. I think, from a material cost perspective, the supply chain team have been working on alternative suppliers for nearly as long as I've been here. And thankfully, you know that gave us some optionality. Now the demand is so strong that we've had to sort of go back to some of the original suppliers. For example, when when tariffs and anti-dumping duties became a real thing, we had good options for some of those

Products in other areas regions that weren't subject to the same terrasmart.

Because of demand, we've had this Source product from both the alternative supplier that we found and the original supplier and as a result our, you know, our tariffs have increased now. So we've made a lot of progress there and I'm really proud of the team. But inflation is what inflation is. And so obviously, you know, we're eating some of that as well. The HR team has been doing a remarkable job. I mentioned all the different things we're doing, whether it's retention. Bonuses are perfect attendance bonuses. We've had outsized

Wage and benefit inflation in order to reattach attract and retain key talent. And despite having, you know, some challenges there and I think that's pretty common. We read it sort of headlines in the paper every day. We're doing a pretty doggone good job at keeping people in the factory. So I feel good about that Logistics is hard, you know, I was just talking to our head of the supply chain earlier today and we continue to see inflation and container costs. And when you Source product from elsewhere, you have to get it here.

Here. And you know, it's a supply and demand issue and and there's been a number of things that have happened you know over the last several months, to drive those costs up but you know we're doing our absolute best to secure containers at you know a price that is reasonable. But again you kind of you take what you can get there right now. So I'd say we have a little less control over the logistics side of things than we do over the material or labor. Peace.

and then, in terms of the, the stickiness of the price increases,

Yes, it's Tony. I would say that, you know, we're not alone in seeing that inflation. And so it's certainly been justification for our communication on price and given the really, really strong demand in the end markets. Certainly folks have been understanding of that and wanting more products. So we right now feel very good about what we've done as a strategy around pricing and what that will end up guiding with the Target store being favorable in price cost.

Great. Thanks for taking my questions.

Okay.

Our next question comes from Trey, Grooms with Steven, you may proceed with your question.

Good morning. This is no more cows. Go on for Trey. So I wanted to dig in a little bit more on the the capacity expansion and and sort of how you're thinking about that is the year progresses. You know it sounds like in interior doors remains on allocation. So just any sense of when you'll be able to sort of fix that situation and where you'll have enough product to fully meet the demand, especially in the North America residential,

Yeah, that's a good question. This is Tony the, you know, we continue to work really hard on optimizing the output on our existing facilities. Obviously the the 2 big expansion that we talked about that 1 in Fort Mill, South Carolina in the u.s. won't have impact in our overall capacity until next year in second quarter. So that's a longer-term investment. We talked, Howard mentioned earlier all the things. Our HR teams are doing to try to attract and retain Talent.

Adjustments were making their that's 1 of the biggest factors.

We have is Simply Having all of the people available in each 1 of those plants to be able to run at full capacity, and that frankly has been a challenge, but we're seeing some progress as the government incentives, begin to cease and as we've taken different steps and invested more to try to get those people. They're saying by the materials play. You know, we haven't seen as many material limitations on interior doors, as we have the exterior doors, but there have been some and so as we manage those

We're seeing that come back. I wish I could give you an exact date on when we be able to meet unconstrained to man, I don't know what that's going to be. It's pretty volatile, you know demand fluctuates day-to-day. So we're working against all those initiatives in an effort to satisfy the customer and to Howard's point, we make decisions every day and we are on the side of satisfying. The customer in some cases that creates mix and payload unfavorability in our distribution and Logistics as we shift from non-optimal plants in in lanes that we normally would.

Use, but that's the commitment. We have to try to address the customers needs.

Thanks, that's helpful. And then for my follow-up. What were the investments from the North American Investment plan? Geared towards in the quarter? And how are you thinking about the Cadence of spending for that in the back half of this year? And into next year, Noah we talked about. Originally, when we introduced this plan first is about consistent and reliable Supply and then it's about product Innovation, and then it's about down chandali.

Marketing. And we said, we're going to over index and the first 2 in the early stages and then ramped up the down Channel marketing later. And I think that, that's essentially true of how we're spending the money today. And, you know, we said that that's approximately 200 million over 5 years, approximately 20 million a year. We under index last year, for obvious reasons, we started cut spending and into q and so we didn't quite get to that number. So, we said there may be a little ketchup this year. But generally, you know,

That spending is is pretty balanced, you know, quarter quarter.

Thanks, I'll leave it there.

Good morning and the Dynamics, impacting margins in the second half and into early next year will mix be a Major Impact over that time frame and does the new plant as it rolls out, will that change mix in a positive way.

Yes, Stephen it's Roswell is we talked about before? We do have a much stronger margins on the exterior door, business side of the UK business, then on the interior door, side in part due to the fact that is Howard mentioned earlier, we're selling fully finished Door Systems direct to the contractor channel for the entry door business in the UK. And so, what we have seen over the last several quarters is as the interior door business, which we

Sell more through the.

Channel or to the Builder Channel. As the new housing market has fluctuated in the UK. These would be the remodel Channel, which is where we strongly compete on the entry door side. We have seen mixed, headwinds, or Tailwinds, respectively, and more. Recently, there's been a bit of a mix Tailwind just because the relative growth of our entry door business has been stronger than our interior door business. Now that recovered somewhat in the second quarter, we did see how spilled

demand, come back stronger in the UK and our interior business, began to tick up and grow. It rates more line with the entry door business going forward. Again, to Howard's Point our focus is on supplying that continued very robust Demand on the remodeling, Market side for exterior doors and to the extent that we can continue to grow that business, that should be margin, accretive to the business longer term. But again, we're not going to be getting that facility up and running and really a full

Until we get well into 2022. But that will be a longer term margin tale, went for the business in the UK.

Okay, great. And the thing about architectural volumes being down now, and in the second half, yet the plants are down for restructuring. Is there a way to think, maybe about pure demand currently and as the, in market demand Rises over the next several quarters, will the major plant restructuring be done in time to benefit in a greater way from that higher demand.

Yeah, that's certainly in the intense. I think the loss of volume and that segment expose some flexibility in our Network. And that's why we're addressing this architectural business. As we are. We've successfully close to plants. We're analyzing are flushed or capability. And the intent is as these markets begin to improve we're in a much better position. You know to service those markets from a cost perspective. We are seeing you know the abis been positive for the last

5 months. That's great news. However, there is a bit of a lag particularly when it comes to doors, you know, we think it's sort of 9 to 12 months before that probably translates into door volume. So you can say it's an opportune time to do some of the things we need to do. You know, with some Capital Equipment, Russ mentioned, a Capital Equipment upgrade that we were successful with but took some more time to install that has an impact on our financials. In the quarter there's going to be a couple more big projects in the back half of the

A year, which are going to be a bit of a drag. But the time is right to do those because because volume is soft.

Okay, great. Thank you.

Our next question comes from Stanley Elliot which default you may proceed with your question. Thank you morning everyone. Thank you all for squeezing. Me and 2 quick questions and I love them together. Can you talk a little bit about the the increase in the repurchase authorization if there's any sort of cadence anything like that that we should expect and then curious kind of what you're seeing in the ma environment, given the cash flows, you guys are generating and I'll hang up. Thanks.

Yeah, thanks for the question, Stanley's for us. I'll take both of those.

Quickly with respect to our share repurchase authorization first and foremost, I would say as we laid out during our investor day in early April, the 3 areas that we plan to deploy cash flow across their business are first and foremost organic Investments inside the business. Things around our manufacturing capability, new product. Launches in some cases, our digital capabilities to better service customers long-term those internal Investments, our top priority,

Second priority would be identifying. Where Ma opportunities for further inorganic growth lie? I'll talk about that more in just a second and then the third priority is a returning cash to shareholders. And there's going to be a little bit of a fulcrum point there with respect to what's available in the m&a market and at points where there are not opportunities to strategically deploy large amounts of cash there we certainly want to step back into ploys, a share repurchase program. So you know frankly at our

Our evaluation levels. We see our stock is a really good investment and this is an opportunity for us to continue to pulling cash, back to our shareholders where we don't have strong return projects elsewhere. Suspicions at to use the strong cash flow that we're generating on the ma front. It was, we talked about during the investor day, also, we want to widen the lens out a little bit and take a look at assets. That will help us drive this Innovation story in the whole doors that do more strategy. We have launched into the market now or new.

Howard and connected empowered or system that we have, you know, essentially installed in model homes with 1 Builder and commitment from another Builder to launch that into their offering of high-end Custom Homes. So we think that there's an opportunity to continue driving that type of innovation into the door system and assets that will allow us to do that. We're going to be really attractive to us, so we'll continue to monitor the environment. You know, we continue to look at actively. It asked us and nothing specific to talk about. But

You know, obviously, we'll report back when we see those opportunities present themselves.

Thanks, guys. Appreciate it. That's all I. Thank you.

That's all the time we have today for questions mr. Heck he's I like to turn the floor back over to you for any closing remarks. Thank you, operator and thank you for joining us today. We appreciate your interest and continued support and this concludes our call operator. Will you please provide replay instructions?

Thank you for joining Masonite second quarter 2021 earnings conference. Call this conference call has been recorded the replay maybe access until August 24th to access the replay. Please dial 8.7 7.6 6 zero 6.853 in the US or 2016.1 2.7 4.1 5 outside of the US enter conference ID number 1.3 7.2 zero 3.6 4.

This concludes today's conference.

You want me disconnect your lines at this time, have a great day and thank you for participating.