Q1 2022 Masonite International Corp Earnings Call

[music].

Greetings and welcome to makes a nice first quarter 2022 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 I'd like to turn the call over to Richard Leland, Vice President Finance and Treasurer. Thank you you may begin.

Thank you and good morning, everyone. We appreciate you joining us for today's call with me here. This morning are Howard <unk>, President and Chief Executive Officer, and Rob <unk> Executive Vice President and Chief Financial Officer also joining us today for Q&A, our bulk crystal ball, our president of global residential.

And Randy White, our senior Vice President operations and supply chain.

We issued a press release and earnings presentation yesterday reporting our first quarter 2022 financial results and 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 statements 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. 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 includes 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's call includes a business overview from Howard followed by a review of the first quarter results from Russ and Howard will provide some closing remarks, and we'll host a question and answer session with that let me turn the call over to Howard.

Thanks, Rich good morning, and welcome everyone.

I'm very pleased to report that masonite is off to a fantastic start in 2022, delivering strong performance across all key financial metrics as outlined on slide four.

Net sales for the quarter grew 12% year over year, while adjusted EBITDA increased 22% and our adjusted EBITDA margin improved by 140 basis points adjusted earnings per share for the period were up 50% driven by our strong operating results and the impact of a lower share count we deployed 100.

Third $40 million towards share repurchase in the quarter, including $100 million for the accelerated repurchase program, we announced on our year end 2021 earnings call.

These results exceeded our expectations given the slow start in January when we were still dealing with the lingering effects of the global spike in AUM across that constrained production.

Ultimately it was exceptional execution by our North American residential team that enabled us to recover production and service pent up demand as well as disciplined management of price cost across all business segments that made it possible to grow the top and bottom lines so significantly.

I am encouraged by these results not only because they give us a great start to the year, but also because they demonstrate the returns that we're getting from our doors that do more strategy and the investments we have made to position the company to capture upside opportunities from healthy demand.

While our European and architectural segment results. This quarter were not as strong as North American residential those management teams are executing well to navigate the headwinds affecting their business. The European team is adapting to the impact of inflation and softening marketing market demand due to weakening consumer confidence in the UK.

And the architectural team continues to make progress on the operational and supply chain challenges. They have been facing and are on track to return to profitability as planned in Q2.

Overall on a consolidated level, we are certainly generated the right momentum in the first quarter and are well positioned for another year of strong results in 2022.

Let's turn to slide five.

The doors that do more strategy that we articulated at our Investor day about a year ago has been our north star and has contributed to our success over the last two years as.

As you May recall the strategy has three core pillars delay.

Deliver consistent and reliable supply draw.

Drive specified demand and when at the point of sale.

Delivering consistent and reliable supply is about operational excellence by consistently delivering high quality products and outstanding service, we aim to secure masonite position as the industry's preferred supplier and business partner.

Driving specified demand is about product it starts with listening to the needs of our end users than creating a variety of compelling products and innovative solutions that customers ask for because of how they make life and living better.

And winning at the point of sale is about building the power of our brand by increasing awareness, making it easy to do business with us and driving preference through creative down channel marketing.

In recent months driving specified demand has been getting considerable attention from both customers and investors because of the enthusiasm surrounding the launch of our groundbreaking empower smart entry door system, which was showcased at both the consumer electronics show and the international Builders' show earlier this year.

Beyond the empower a door that does a lot more we've also been highlighting our doors that do a little more.

These are doors that gift home and building owners more of what they want more privacy more light more security more style.

This strategic pillar of driving specified demand is particularly important because along with giving customers more of what they want. These doors can also deliver higher average unit price and gross profits for masonite.

Today, However, I'd like to provide more insight into the pillar of consistent and reliable supply, which in many ways was a key enabler to delivering steps such strong results in Q1.

Let's turn to slide six.

As I said this pillar is about securing masonite position as a preferred supplier and business partner by consistently delivering high quality products and outstanding service.

We've been working on a number of initiatives in this area, including investing in capacity and productivity projects to cost optimize our manufacturing network.

Diversifying our supply chain to ensure consistent availability of high quality components.

And leveraging our M vantage operating system to drive out waste and improve throughput across our operations.

These are multi year initiatives and our work in these areas is never complete but here are a few examples of what we've achieved over the past two years.

Despite COVID-19 related disruptions, we successfully opened a greenfield interior door plant in Tijuana, Mexico and have since ramped up weekly shipments to match volumes at our other north American interior plants.

This facility replaced less efficient capacity elsewhere, and is allowing us to more cost effectively service western markets.

Focused capital investments and the application of M. Vantage continuous improvement projects has also benefited our existing plants.

Over the past two years, we've completed projects that increased production by over 25% at our interior door plant in Monterrey, Mexico in Xian, Chile.

We have also increased production by over 40% at two of our U S door fabrication facilities servicing our retail business.

To support our strategy of continually improving the mix in our product portfolio, we have introduced new equipment, new suppliers and optimized processes that enabled a 20% increase in weekly solid core production and a 30% increase in our heritage interior door production over the past two years.

Our global supply chain team has substantially reduced our single source exposure by qualifying additional suppliers for several critical inputs. This has helped to make our supply chain, both more resilient and more geographically diverse.

And finally as an example of the benefits we are getting from targeted automation, we made capital investments at one of our exterior door plants that have resulted in double digit percentage reduction and the people needed to run our assembly lines specifically in positions that were very ergonomically challenging.

Our hard work and commitment in these areas hasnt been readily visible in the face of industry wide labor and supply chain constraints, but it is proving to be a smart investment as conditions normalize.

Improvements we have made we are an important part of our ability to drive excellent performance in the back half of Q1, and I believe that through many new projects. We have in flight now we are developing a strong competitive advantage based on providing consistent and reliable supply to our customers.

Looking out longer term our early successes in the execution of our doors that do more strategy is what gives us confidence in our ability to deliver our centennial plan financial goals as outlined on slide seven.

Organic growth has been stronger than expected and the potential we see in our doors that do more product innovations together with the possibility of strategic M&A positions us nicely on the glide path towards our goal of achieving $4 billion of net sales in 2025.

As revenue has increased so has the amount of adjusted EBITDA dollars that are falling through to the bottom line. We have a number of initiatives focused on driving richer product mix managing price cost and leveraging vantage to drive production efficiencies all of which position us to achieve our 20% margin goal.

We made strong improvement in ROIC in 2021, with a 560 basis point increase to 14%.

We're expecting another step up this year based on steady improvement in profitability and a disciplined capital allocation process that focuses on the highest returning projects.

Overall, I'm pleased with our progress so far and look forward to giving you more insights into our strategy and our results on future calls.

Moving on to slide eight before I turn the call over to Ross I want to highlight our latest annual environmental social and governance report that was published yesterday.

This report outlines our ESG objectives for the remainder of this decade I'm very proud of the team's progress on ESG in 2021, and I believe our 2030 ESG vision of renewed responsibility with focus on caring for the environment.

Lifting our employees and communities and innovating sustainably will help ensure we continue to do well by doing good.

This is an important area of focus for the company and one with significant investor interest.

Encourage all of you to visit our website to download a copy of the new report and to learn more about what we have been what we have been and will be doing as we move forward on our ESG journey, we have a lot of folks that are company doing some inspiring things and we think you will find our report quite compelling.

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 10, I'll start with an overview of our first quarter financial results.

We reported net sales of $726 million up 12% as compared to the first quarter of 2021.

The growth was primarily due to a 15% increase in A&P, which was up year over year across all three segments.

This increase was partially offset by a 1% decline in volume a 1% decrease due to a prior year divestiture and a 1% decrease due to unfavorable foreign exchange.

The year over year decline in volumes resulted largely from weaker market demand in the U K and a production reset in the architectural segment.

Simply offset by a low single digit volume increase in the North American residential segment.

Gross profit increased 16% to $184 million and gross margin increased 90 basis points year over year to 25, 4%.

<unk> growth came in higher than expected due in part to stronger volumes as we progressed through the quarter as well as favorable product mix.

Material inflation impacts in the quarter were generally in line with our expectations. Although we did see evidence of a further uptick as we progressed through the quarter I'll speak more about that later.

Selling general and administration expenses were $83 million down 1% compared to the same period last year and SG&A as a percentage of net sales fell 140 basis points to 11, 5%.

Net income was $68 million in the quarter, an increase of $21 million from the prior year, driven primarily by higher gross profit.

Diluted earnings per share were $2 89.

Up 53% from $1 89 in the first quarter of last year.

Adjusted earnings per share were also $2 89.

Up 50% compared to $1 93 in the first quarter of 2021, which excluded $1 million in charges related to restructuring.

The significant increase in adjusted earnings per share was primarily due to the higher reported net income in the quarter as well as the benefit of a lower share count due to our share repurchase activity.

Adjusted EBITDA increased 22% to $125 billion for the quarter, while adjusted EBITDA margin expanded 140 basis points to 17, 2%.

On the right hand side of the slide we have more detail on our adjusted EBITDA performance, which benefited from strong year over year price realization.

As expected cost of goods sold increased sharply year over year in the first quarter, driven primarily by $55 million of inflation on raw materials and inbound freight.

We also had $20 million of additional factory and distribution costs, approximately two thirds of which were related to inflation with the remainder primarily due to startup costs for new plants and volume deleveraging in the architectural and European segments.

Let's turn to slide 11 for our North American residential segment results.

Net sales increased 19% from the prior year to $569 million.

Driven by ANP growth of almost 17% and volume growth of almost 3%.

Outstanding performance by the North American residential operations team enabled us to recover production in February and March after a weak start in January which in turn helped to rebuild channel inventories.

A number of workforce stabilization initiatives were successfully implemented including changes to hiring processes shift structures and wage adjustments.

Howard noted many of the other drivers that made volume recovery possible in his remarks earlier about our focus on delivering consistent and reliable supply.

Adjusted EBITDA in the North American residential segment was $128 million in the first quarter up 35% from the same period last year.

With an adjusted EBITDA margin of 22, 5% up 270 basis points.

Margin came in higher than expected due to strong AEP and the year over year volume increase.

The main demand has remained broadly resilient exiting the quarter, but moderated somewhat in April as wholesale inventories normalized <unk>.

Feedback from the channel is that our production has improved more quickly relative to other building product categories.

<unk> strengths in other products that elongated the build cycle and could weigh on near term demand from builders.

In the retail channel, however, customer sentiment remains relatively bullish on demand as the triple our market remains healthy.

In the intermediate and longer term, we remain confident that the overall U S housing market fundamentals remain attractive after more than a decade of under supply.

Turning to slide 12, and our Europe segment.

Net sales of $80 million were down 9% year on year, but up 1%, excluding the impact of foreign exchange and the divestiture of our business in the Czech Republic completed in June of last year.

Strong <unk> growth of 16% was offset by a 16% decline in volume.

Demand softness in the quarter was driven by weakening consumer confidence in the UK, which is affecting major purchase decisions.

Adjusted EBITDA was $12 million in the first quarter down 29% year over year.

Adjusted EBITDA margin was 14, 7% down 420 basis points due to volume deleveraging and the disproportional impact of volume declines on our higher higher margin exterior business.

The European leadership team refrained from immediate head count actions earlier in the quarter to protect capacity for a possible volume recovery. Following the January spike in home of crop.

Now with the potential for lingering market softness the team has moved to flex cost out.

We expect to realize some of these benefits in Q2, although this will likely be offset by some one off costs, we expect to incur when the final transition to our new Stoke-on-trent plant in the second quarter.

Finally in light of industry wide questions over the past several weeks regarding commercial and supply chain impacts of the war in Ukraine I wanted to highlight that there is no direct impact on our business.

The indirect impacts we have felt or in the areas of energy inflation and consumer confidence, which are presenting some cost and demand headwinds presently.

Okay.

Moving to slide 13 in the architectural segment.

Net sales in the quarter decreased by 5% year over year to $71 million driven by a 10% decline in volume and a 4% decline in component sales, partially offset by a 9% increase in AEP.

Adjusted EBITDA improved sequentially to a loss of $3 million in the first quarter.

Pricing more than covered inflation dollars, although negative volume leverage remained a headwind to margins.

As anticipated the volume decline in the quarter was primarily isolated to January when the operations team was focused on cleaning up backlog so as to improve throughput.

Production volumes and service levels, both improved sequentially through Q1, and the segment returned to modest profitability in March.

Demand has remained stable with the majority of Q2 orders already in house.

The team is working through remaining material and production constraints and we continue to believe this segment will be profitable in the second quarter.

Slide 14 summarizes our liquidity and cash flow performance at quarter end, our total available liquidity was $443 million.

Inclusive of unrestricted cash and accounts receivable purchase agreement and our Undrawn ABL facility.

Net debt was $683 million, resulting in a net debt to adjusted EBITDA leverage ratio of one six times.

Cash used in operations was $38 million through the end of the first quarter as compared to $14 million used in the first quarter of 2021.

The higher cash used in the quarter was anticipated given changes in net working capital, which were exacerbated by the continuing impacts of inflation and extended transit times.

Capital expenditures were approximately $19 million in the first quarter up from $14 million in the prior year quarter as we near completion on larger scale investments in our new Fort mill and Stoke-on-trent facilities.

From the beginning of the year through February 22nd we repurchased approximately 388000 shares of stock for $40 million in the open market we.

We subsequently entered into our previously announced accelerated share repurchase agreement and received an initial delivery of approximately 848000 common shares in exchange for a prepayment of $100 million.

Together. These resulted in the retirement of over one 2 million shares since year end 2021.

We now expect an average diluted share count of approximately $23 million for the year.

Turning to slide 15.

Q1 was clearly a great jumpstart on the year, our teams executed exceptionally well and delivered results that exceeded our expectations.

Our track record of successfully executing key initiatives was demonstrated again in the first quarter.

We're also encouraged by the improved health of our supply chain and manufacturing operations as Howard noted our global sourcing team has worked hard to diversify our supply base, improving material availability and reducing the risk of shortages.

Alongside this workforce initiatives executed by our HR teams have resulted in lower turnover and absenteeism at our plants helping.

Helping to provide more stability improve efficiency and deliver on a consistent and reliable supply promise to our customers.

Based on this momentum we are well positioned to meet or exceed the full year outlook. We provided in February .

There are a variety of well publicized macroeconomic factors, however, which create a mixed picture for the balance of 2022.

Like to provide some color on variables, we are prepared to address in order to deliver strong results regardless of the external environment.

One macro factor further impacting the business is inflation.

Our assumption at the beginning of the year is that we would experience full year inflation in the low to mid teens.

As I mentioned earlier inflation moved up yet again in the first quarter and we now will take a full year rate in the range of 20% is possible as wood chemicals and logistics costs continue to escalate.

These higher input costs will flow from inventory to production in the second quarter.

Combined with weaker near term results in Europe . This could yield lower adjusted EBITDA margin year on year in the second quarter, although margin for the first half overall is now expected to be flat or slightly ahead of last year better than previously anticipated.

We remain committed to maintaining a favorable price cost relationship and continue to expect margin expansion for the full year.

The impact of inflation as well as higher interest rates also cloud somewhat the demand outlook for housing comp.

Commentary from U S. Homebuilders has remained positive yet affordability concerns could ultimately lead to softening market conditions going forward.

Despite these variables it's important not to lose sight of other key factors, which are supportive of our business in both the short and long term.

First underlying demand for new housing in the U S has not diminished.

Housing supply remains limited and there continues to be a persistent gap between starts and completions.

Absent a major economic contraction this should provide a multiyear tailwind for the construction of new housing.

Second irrespective irrespective of housing unit growth there are trends impacting the demand for our products given the evolving uses a home and the role the doors play.

For example, working from home is expected to remain permanent in some form driving a need for additional rooms, and the desire to trade up to doors that do more more privacy more style more light and more security.

And third it's important to remember that over 50% of our North American residential business is attributable to the repair and remodel market.

Retail point of sale trends remain quite strong and could be supported further as higher home values and limited for sale inventory encourage people to continue investing in their existing homes.

In summary, there are number of moving pieces influencing our business, we will stick to our strategy and adapt quickly to the changing environment in order to take advantage of opportunities, which emerge while mitigating risks that materialized.

We expect to gain additional clarity on the impact of these macro factors in coming months, and where appropriate we will update our full year guidance on our second quarter earnings call.

Now I will turn the call back to Howard for closing comments.

Thanks, Ross to summarize we're off to a good start and positioned to deliver another year of accelerated growth on top of the solid performance. We recorded in 2020 and 2021.

Like the last two years, we continue to see substantial macro volatility, but our doors that do more strategy provides the northstar that has helped drive our success so far and the teams are executing well on the fundamentals.

Inflation is coming in higher than expected this year, but we are carefully monitoring the situation to ensure we stay price cost favorable.

Our efforts to deliver consistent and reliable supply to our customers are ongoing and include targeted capacity enhancements that will allow us to take advantage of any upside in demand or mix shifts and to more easily move volume between plants should there be localized business interruptions.

We also continue to optimize our production operations and are prepared to flex out costs quickly if necessary.

Each year since I joined the company in 2019 has brought with it new challenges that none of us were expecting.

But just as we have over the past two years, our team will continue to push forward towards our 2025 Centennial plan goals, regardless of the headwinds and we are confident that we will get there by delivering consistent and reliable supply by driving specified demand and by winning at the point of sale.

Thank you now I'd like to open the call to your questions operator.

Thank you if you would like to register a question. Please press star one if youre using a speaker phone. Please lift your handset before entering your request, we 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 keypad at this time.

Our first question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.

Good morning, Thanks for taking my questions.

Good morning, Mike a follow up Nick Good morning, Russ maybe a follow up for you first on the inflation comments and guidance you talked about inflation.

Now it's possible that you will see 20%.

Full year inflation is that what is now embedded in the unchanged.

And if so how should we be thinking about additional pricing thats either already been taken or.

Or that will be required to then hit your margin targets.

Yes, Mike Thanks for the question, so with respect to raw material inventory.

Material inflation excuse me the short answer is yes. It is embedded in the commentary that we've made.

Just to give a bit more perspective on inflation, we came into the year as you might recall expecting it to be low to mid teens that would have been similar to what we saw in 2021.

We knew that our steel costs, we're going to step up meaningfully as contracts reset at the end of last year.

Our viewpoint previously, though is that wood and chemicals would probably stabilized somewhat albeit holding your pretty high exit levels in 2021, okay, well, we've seen <unk> seen more inflation would supply remains pretty tight.

Pet Chem shortages and the fragility of that supply chain and demand have created more chemicals inflation, and so really wood and chemicals are of where we're seeing further inflation. We saw that began in Q1 that will begin to flow into the P&L in Q2, and we've also seen really no moderation and in some cases even <unk>.

Further inflation in the logistics costs that we bear to move freight on the ocean.

So we've taken all of that into account in our.

Our viewpoint that material inflations, probably more on the order of 20% now for the year.

So what we have said consistently is that we're committed to maintaining a favorable price cost relationship.

We will continue to take actions and have communicated actions that are embedded in the guidance commentary that I offered earlier.

Okay. That's very helpful. Thanks, and my follow up question.

It's somewhat related but as we think about combination of yes.

Maybe some of this macro uncertainty and also.

Clearly a very high.

Heightened inflationary environment with respect to them and pricing that we have.

Putting through and the consumers are facing is there any I know you are actively shifting gear product mix kind of higher value, but underneath the surface are you seeing any signs of any trade downs in response, whether in ordering patterns or other other activity that youre seeing.

Any any mix down in response to higher pricing.

Yes, Mike This is Howard the short answer is no generally we are very we remain very bullish on housing fundamentals and demand now as Russ said theres. Some theres some macroeconomic things that are obviously, making a bit of that cloudy and mixed but if you look at our segments.

<unk> demand is strong and mix is positive product mix, we're seeing actually trade up which is helping our A&P.

As you know housing remains under belt and as Russ said, there is a large gap between starts and completions and we think that those are going to point to continued growth and we like doors as a category generally within housing as we've talked about people are spending more time at home and they want an extra room for an office for example, and often <unk>.

ROE means an extra closet and that means more doors and it sometimes means an extra bathroom and so we like doors within the category as well.

So we're bullish on demand.

Recognize that affordability issues in the near term as well as extending the build cycle could soften demand in the back half, but we're fortunate because we had a strong a strong start so we can be conservative in the near term and we don't need.

We don't need a hockey stick in the back end in order to deliver our guidance.

Okay, great. Thanks Howard.

Thank you. Our next question comes from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question.

Hi, good morning, maybe to start with.

Yeah.

<unk> demand by channel, maybe you could get some more thoughts on your comments that retail sentiment is more bullish than wholesale am I understanding that right that sounds the opposite of some.

Commentary from public companies and our channel checks, so maybe just anything to add there.

Yeah. Thanks, Steven I wouldn't say that that's necessarily true retail is indeed bullish in Pos remains sort of mid single digits positive there it's been great for years.

But we're also bullish on new construction, we just have these.

The potential of delayed building cycle as Russ said, our customers are telling us that our recovery has been quicker than some others in the building materials space some other categories.

<unk>.

Elongated build cycles could just softened demand a bit but we remain very bullish in the long term, Chris if you want to maybe add some color to that yes, I think I would add Anthony this is Chris here.

Prof short supply we've talked about with tenants backlog are new construction plus to home equity increases that consumers are seeing out there lead to bolster triple R. As well as the new construction market is having some nice tailwind right now in that marketplace. So affordability challenges and obviously interest rates are something that could be a bit of a headwind from a new perk.

<unk> standpoint, but we think that our presence on both of those markets and how we're serving them frankly from a reliable supply standpoint that it's up very well to take advantage of the market.

Okay helpful and then on the second quarter.

Margin guide being down can you clarify again, if that was sequential or year over year basis, or both and the factors that drove that you talked about is that primarily due to <unk>.

Or is that inflation hitting.

Yes, Steven it's Russ the short answer is both sequentially and year on year and they are really two primary factors that we see in that one is you mentioned Europe and clearly they are seeing weaker demand right now they are moving to flex our cost in line with that short term demand downdraft in the market.

But conditions in the UK are a little bit challenged right now, particularly on the triple our side of the business, which we service with.

Pretty high AEP and high margin exterior fully finished door sets. The other key factor is in North America as I mentioned earlier this increased inflation that we saw in the first quarter.

Going to start moving from the balance sheet into the P&L as we bring that higher cost inventory or higher cost product out of inventory in the production of salable products. So that will be a bit of a headwind for the north American residential business in the second quarter again ahead of incremental price cost actions planned and discussed with <unk>.

<unk>.

Helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Josh Chan with Baird. Please proceed with your question.

Hi, good morning, Congrats on a strong quarter.

Yes.

Hi, good morning.

So very strong operating performance and in residential exiting the quarter.

Could you talk about if anything changed kind of internally to drive this and then the degree to which those things can be sustainable kind of past Q1, then and maybe whether you can implement some of these changes and there are other segments as well.

Hey, Thanks, Josh I'm going to turn this one over to Randy why he has joined US today. He is responsible for our operations and supply chain and obviously instrumental in a lot of the progress we've been making really over the last several years, but I'll, let Randy speak specifically to your question. Okay. Thanks, Alan and thanks, Josh for the question. So I'll start by saying, yes, we are confident in our ops teams ability to.

Continue to sustain this level of performance so.

So I think the short answer to your question is yes, I mean, we're very confident there so and in the Q1 performance was driven by everything Howard just talked about in his discussion on consistent reliable supply, including all the investments in capacity in the supply chain diversification work and really the deployment of our and vantage operating system tools and standards across the business. So.

I think that's the lever we use to drive our continuous improvement efforts.

Also I would say our workforce stabilization was also key in Q1, obviously, we made some changes to two.

So our wage and benefit structures, our ship schedules and things of that nature, but we did recover from a pretty significant omicron spike early in January we work our way through that stabilized throughout the quarter, Yes, I think all of those things work across not just north American residential, but all of our other businesses, while European and architectural segments now.

The mix of the issues might be facing there might be a little bit different in those businesses, but the tools apply across all of those businesses as well and obviously as you look at architectural is probably the area of biggest opportunity you know theyre not as mature in the advantage journey is as say North American residential we ask and we're confident those tools will will continue to work there.

And that will drive some of the complexity out of that business as we go so.

One thing I'd say is it keep in mind this continuous improvement mindset as is in our DNA as an organization and we've been working on these things for us for quite some time and as Howard mentioned earlier in the last couple of years somebody defensive kind of muted some of the efforts or maybe some of the benefits of the work that's been going on but as things have normalized have started to normalize we're starting to see that.

<unk> seen this benefits to bring through and those will continue as we go into 2022.

I just wanted to come in over the top of that for a minute and really thank our operations team and leadership because candidly they've been getting kicked in the teeth for the last two years between labor and supply chain challenges.

It's been a real real fight.

<unk> been working hard on a lot of these initiatives that we knew were going to pay off and are paying off and we will continue to pay off not only in a risk segment, but ultimately in architectural in the European team to so hats off really to Randy and the team because it's been a it's been a tough couple of years, but I think we're at.

Is in our DNA, we are an operationally excellent company I'm convinced of that and as I said it will be good for us and our shareholders for a long time.

Yeah, that's great thanks for that color.

And on my second question I guess on the.

The volume in residential.

Obviously your operations have improved.

It has improved but you also talked about some potential choppiness. So could you talk about kind of whether you think volume can can stay in the positive territory as we go through the rest of the year what are some of the puts and takes time.

To the volume there.

Hey, Josh it's Russ I'll share a little bit more color on that I mean, clearly on the heels of the comments that Randy and Howard just shared.

The first quarter has given us a really nice start and the operations team in North American roads in particular their ability to improve.

Production levels and improved service levels, we're really instrumental.

That also allowed as I commented earlier is that our wholesale inventory in the channel was able to normalize in the first quarter and so as we exited the first quarter, we did see demand moderate a little bit as those inventories have become more normalized in nature, but <unk>.

<unk> is still pretty resilient overall back to Chris's comments, we continue to see healthy demand and growth on both the triple R and the new construction side of the business.

I'd say the picture is cloud here once you get to the second half.

And our viewpoint is is it's just good to be prudently conservative given some of that macro backdrop, we're going to take a wait and see approach before we get too specific about what volumes could look like for the balance of the year.

But could you see a little bit of volume softness in the second half in the North American residential business sure, but as Howard mentioned before.

We feel really good about our outlook for the full year.

Relying on a hockey stick to deliver the commentary I offered earlier that we think we're on track to meet or exceed so we'll see how the year plays out.

Wait and see with respect to a specific guidepost for the balance of the year, we'll come back at the second quarter. We think we'll have a little bit more clarity at that point on what the macro backdrop is going to do as we move through Q2, and if appropriate that's when we'll provide more specific guidance for the balance of the year.

That sounds kind of understandable and good luck on the rest of the year.

Thanks, Josh.

Yes.

Thank you. Our next question comes from the line of Mike Rehaut with Jpmorgan. Please proceed with your question.

Hi, Good morning, Doug <unk> on for Mike.

You had stated that your recovery has been quicker to other companies within the building products space and I wanted to know if you guys could give some more color as to why you think that is and do you see yourself continuing on this path of the pace of recovery through the rest of the year.

I think this is Chris here, let me try and take a shot at that Doug as we look at the work that was done on the Q end of Q1 recovery from a manufacturing standpoint, we felt really good about our output and how we've been able to satisfy demand and feedback we're hearing from the channel, especially on the new construction side is there are other product categories and we turned about.

Drags to our extended lead times in and making sure that we've got all of the electrical equipment in place to get the homes closed and so I'd say the timing between when that's how it starts and when the completions finish up that continues to be extended and we feel good and within kind of the demand. We've seen on the books that we have done a nice job of satisfying that demand where.

Hearing that now the delays in closings have not pulled back up because we continue to hear of supply chain constraints, they really move around and if you listen to some of the builder commentary each week brings a different delay with a different segment of the market. So it's really across the supply chain right now that there are challenges and we feel really good about our strategy. How we've executed on it now we've been able they are.

Really meet the demand that's out there so that as that cycle continues to satisfy this kind of backlog and demand will be in position to continue to grow.

Great. Thank you and then just I was wondering if you could give a little bit more.

So on just how you guys feel the progression of sales and margin trends will be going into <unk> and beyond.

Yes, Doug it's Russ I'll take that one so with respect to margins I guess, I'd rewind and remind everyone coming into the year, we expected that on a year on year basis, we probably see some compression in Q1.

More like parity of Q2, and then margin growth in the back half of the year.

And in some respects, we see that flipping a little bit now between Q1 and Q2, we clearly delivered really strong margin results in the second quarter.

As I commented to one of the questions earlier, we see some pressure specifically in Europe and on the <unk>.

The commodity inflation side that puts us under a little bit of pressure for Q2, but despite all of that if you look at the first half in totality, we would expect our first half margins to be flat or even up slightly year on year, and that's a little bit better than our expectation coming into the year.

Then in the second half of the year, we would continue to see.

Year on year margin expansion across both quarters as we fully realize all the price cost initiatives that are in place.

<unk> running what we believe will be a relatively stable supply chain environment, albeit at higher inflation levels.

And so now not unlike our commentary at the beginning of the year, we acknowledged that volume and end market demand really was going to be the single largest driver kind of on where we fall within our guidance range.

Volume is still we believe the number one influencing factor in the second half of the year as to how much strength, we can drive through the business.

Got it. Thank you guys. Good luck.

Thanks, Doug.

Thank you. Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Thanks. This is norm accounts go on for Trey. Thanks for taking my question and congrats on the strong quarter.

Thanks Noah.

So first it sounds like you are making really good progress on the doors that do more and I was wondering if you could break out the positive mix impact that had on price in the quarter.

And how do you think.

Just sort of frame up the magnitude of that benefit.

As we move throughout the balance of the year.

Yes, no it's Russ I'll take that one.

We did see some favorable product mix in the quarter.

I wouldn't hazard to break that out specifically and what you saw in our AEP.

But what I would tell you is that within the North American residential business. In particular, you saw favorable trends in solid core, which the growth and solid core doors over index, our overall interior growth.

Our heritage design, which you might recall as our Craftsman style, one of our newer higher style doors within the interior door line.

The growth in heritage indexed at like three X. The overall interior growth and then within exterior doors, we saw higher relative growth index on fiberglass as opposed to the lower end steel. So all three of those are contributing to mix and I would tie that back to the comments that Howard made earlier, which is.

There's a lot of discussion around doors that do a lot more right thats. Those are the parts of the market, where we believe we're industry leading in bringing products forward that are new to the category and can create a lot of excitement and buzz, but doors that do a little more have a really important role to play in the home, particularly given some of the secular trends, we're seeing with as Howard mentioned.

People using their homes more including in a work from home environment and so the ability to demonstrate the role that a door plays in that new use of the home.

And particularly in sound attenuation to solid core door demand is I think being recognizer, improving as our customers recognize the benefits that a product like that offers so that's what we're referring to with.

With mix benefits and Thats, an area that we're going to continue to lean into because frankly, we think there are very favorable secular trends for our categories that are going to underscore that.

Thanks, that's really helpful.

And then on my follow up.

Still expecting margin expansion in the back half of the year and I think you just said volume and the uncertainty there is going to be the biggest driving factor, but I guess if we.

We assume.

The market today is healthy and maybe you could hit on low single digit volume growth in the back half of the year is it reasonable to assume you could have EBITDA margins in the 17 plus percent range like you had in <unk> here.

Yes, it's Russ again, let's defer that until we've got better visibility into the back half.

If you look at the strength that we have demonstrated so far in pricing, we think that that will probably carry through a little bit more of at a greater degree than what our viewpoint was coming into the year, but we still think it is prudent to consider there is some offset risk and that in volume in the second half of the year, how large that risk could be.

It remains to be seen as Chris mentioned, we're seeing nice resilient demand levels across both new construction and triple our for now but.

But at the end of the day, there's still a lot of cloudy macro factors out there and that in combination with the inflation pressures that we're seeing.

We don't want to get too far over our ski tips with respect to how much margins.

Margins could expand in the second half of the year, we're going to get better visibility on that we believe over the next few months and we'll revisit it on the Q2 call I'd just like to add one thing Noah.

Laid out this centennial plan that suggests $4 billion in revenue and 20% EBITDA margins by 2025 and as I said in my prepared remarks, we think we're on.

Nice glidepath certainly towards the top line and while we weren't able to grow margin rates last year due to a lot of unforeseen circumstances, we think that margin progression is going to continue this year and we are focused on that 20% rate, so whether or not we can get to 17. This year certainly.

If we can we will.

We're really focused on 20% plus in 2025.

Yes that all makes sense I appreciate the time guys.

Thanks Noah.

Thank you. Our next question comes from the line of Jay Mccanless with Wedbush. Please proceed with your question.

Good morning, everyone.

Great quarter.

Thanks, Joe.

Just two for.

Just to really flesh this out.

The concern you have about second half volumes is related to the builders being able to pull more homes through the cycle rather than any concerns about big box demand is that.

A way to simplify it maybe for in terms of how youre thinking about it for the back half of the year.

Yes, absolutely.

Okay Alright.

I think I've said that a different way so I just want to make it crystal clear where the concern is.

I guess my other question would be.

Can you frame historically, what the split has been between interior and exterior doors and have you seen with work from home. Some of these new floor plans that we're seeing that you're actually seeing a shift higher in interior versus the historical split.

Jay It's Russ historically, what we've seen is circa 80% of our unit volume has been interior, 20% exterior I don't know that we've seen any meaningful shift in that actual split of the business. Thus far what we are seeing is that.

This emerging trend around higher mixed product particular for interior doors.

Seeing start to materialize.

Thats an area that we'll continue to monitor and frankly lean into when it comes to our product development and marketing efforts.

Got it okay. Thanks for taking my questions. Thank you.

Thanks Jay.

Thank you. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.

Morning, everybody and nice start to the year here.

Just from a high level perspective, I think you guys are about a year into since you had the investor day.

And you talked about getting $1 billion in sales between the doors that do more and acquisitions.

Curious if you could just update us on how that's progressing I don't think theres been any acquisitions to date, so curious how the pipeline looks as well as the.

The doors that do more I don't know if you can quantify how the progress you've made but just how youre feeling about progress towards that $1 billion or so a $1 of sales in 2000 and this in turn out Centennial planned.

Yes, just any thoughts on progress toward that.

Yeah. Thanks, Thanks, Kevin for the question.

Yes.

Right on our radar screen right, we knew that to get to $4 billion would include some.

Innovative new products as we define.

Drive specified demand pillar of our strategy as well as some strategic M&A and we said that our capital deployment strategy focuses on organic growth, which is supporting these new programs that we've talked about as well as M&A. We haven't done any deals recently as you've said that doesn't mean, we're not interested but it's got to be the right deal to.

Tie in to that strategy right strategically if it helps us deliver consistent reliable supply or helps us to drive specified demand or helps us to win at the point of sale, we will be active in our pursuit of those targets and we continue to believe that thats going to be an important part.

Our strategy going forward as far as the doors that do more yes. We continue to have significant enthusiasm for empower were working with quite a number of builders on specifications. We remain very encouraged and believe that this would be.

An important part of our doors that do more growth and we have a lot more exciting products in the pipeline that were.

Very excited to launch over the coming months and years.

It's a long term strategy, but we believe that we can change the way people think about their doors in the homes. So we're I'm tickled by the progress, particularly.

A lot of our attention has been redirected to day to day running of the company right with the supply chain and things like that but great progress I believe Kevin. Thanks. Thanks for the question.

Yeah.

And just for a follow up on the architectural business you mentioned turning profitable is the expectation here in the quarter. It sounds like March I think you said turn profitable so.

Is the expectation here that maybe just slightly profitable in <unk> and then would you expect to then the next couple of quarters to keep getting better from there and more and more profitable as the quarters go on just curious the progression you expect.

Part of that business.

Yes, the soured and yes, that's exactly right. So we did deliver modest profit in March that was we sort.

Sort of hit bottom in December but sequentially January February March made improvements and back to profitability in March we do expect to generate.

Modest profit in Q2, and we expect to see sequential improvements in profitability in that segment through the end of the year and obviously the next milestone is to get back to the sort of pre pandemic margin levels, which are in the double digits sort of low teens and obviously, we're going to work to continue to drive beyond that but that is the progression that we expect to see.

In that segment, we made a lot of nice progress in the quarter on eliminating backlog and improving our service metrics and getting our labor stabilized and theres been a nagging supply chain problem with one particular component that unfortunately, we use in most doors that we think we've generally resolved and so a lot of nice progress in the quarter and Thats.

What's going to lead to the profitability going forward.

Okay, great. Thank you very much thanks.

Thanks, Kevin.

Thank you there are no further questions at this time I'd like to turn the floor over to Mr. Hawkins for closing remarks.

Thank you Devin and thank you all for joining US today. We appreciate your interest and your continued support and this concludes our call.

Operator, if you'll please provide the replay instructions.

Thank you for joining <unk> first quarter 2022 earnings Conference call. This conference call has been recorded the replay may be accessed until may 18th to access. The replay. Please dial 8776606853 in the U S or 01612.

For one side outside the U S enter conference I'd 13728054. Thank.

Thank you, everyone and have a wonderful day.

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