Q4 2022 Masonite International Corp Earnings Call
Okay.
Welcome to Masonite fourth quarter 2022 earnings conference call during the prestige and 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 Richard Leland, Vice President Finance and Treasurer. Please go ahead Sir.
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 as Chris Hall, our president of global residential.
Issued a press release and earnings presentation yesterday reporting our fourth quarter 2022 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 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.
Information about risks can be found under the heading risk factors and make nice most recently filed reports on Form 10-K, and our subsequent form 10, Qs, which are available at SEC Gov and at Masonite Com.
<unk> 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 fourth quarter results and then Howard will provide some closing comments and we will begin the question and answer session and with that let me turn the call over to Howard.
Thanks, Rich good morning, and welcome everyone.
Turning to slide four I.
I am pleased to report that 2022 was another year of significant growth for masonite.
Full year consolidated net sales increased 11% year over year, while adjusted EBITDA was up 8% adjusted EPS grew 19% driven by both an increase in earnings as well as the impact of share buybacks executed throughout the year. We also delivered a 400 basis point improvement.
And return on invested capital, reaching an impressive 18%.
Our North American residential segment led the way with a strong year year over year, 17% increase in net sales and 23% increase in adjusted EBITDA for the year.
While consolidated adjusted EBITDA margins contracted 50 basis points due to the impact of inflation and volume deleveraging in our architectural and Europe segments adjusted EBITDA margins in our North American residential segment expanded by 100 basis points.
Price cost management was key to achieving both top and bottom line growth in 2022.
When we entered the year, we did not anticipate that we would soon experienced dramatically higher inflation and continued supply chain disruptions significantly higher interest rates and economic turmoil in Europe .
We took actions to limit inflation, where possible and work with our channel partners to increase prices in a timely manner aligned with our disciplined price cost management philosophy of capturing fair value for our products.
We are fortunate to have an experienced team that was able to adapt to the changing environment from an operating perspective, while maintaining focus on execution of our doors that do more strategic initiatives and delivering financial results within our original guidance.
During the year, we were successful in growing the mix of solid core and on trend door designs within our overall interior door portfolio as well as the mix of fiberglass doors within our overall exterior door portfolio we.
We have also added incremental production capacity for these products in order to support future growth.
In 2022, we began commercialization of our award winning empower smart door and in the new construction market.
Our retail partners at the home depot recognize the value of this innovative product and we will make the empower door available nationwide later this year.
We also launched the Masonite performance store system, featuring superior protection against the elements versus the leading competitor.
These new premium fiberglass exterior door solutions have generated a tremendous amount of positive publicity for masonite and positioned us as an innovator in this space.
Our vision of unlocking the value of fully integrated door solutions was also key to reaching a deal to acquire enduro products, a leading innovator and manufacturer of high performance door system components.
<unk> has been a supplier to masonite for over 25 years, and we partnered with them to develop both empower and the masonite performance store system.
For those of you who had the opportunity to visit the endurance products booths at the international Builders' show earlier. This month I am sure that you now have a better understanding of the critical role that highly engineered components can play in the overall performance of a door system.
We are excited about future innovations that will come from this acquisition as a key part of our strategy to drive specified demand and product leadership in the market.
Likewise, we're encouraged by the progress we made in 2022 on initiatives related to delivering consistent and reliable supply.
During the year, we completed over 3000 continuous improvement kaizen events as part of our M. Vantage program and further diversified our global supply chain to make it more resilient. We also modernized our production network with two new plants that will allow us to service, our customers with greater efficiency and flexibility.
We expect these new plants to become an increasingly important part of our production network as we ramp up their production volumes.
Let's turn to slide five.
Despite three years of significant unforeseen macroeconomic challenges our team has been able to maintain a track record of consistent performance and impressive double digit growth across key financial metrics.
Our three year compound annual growth rates at the end of 2022 for net sales and adjusted EBITDA were 10% and 16% respectively.
Meanwhile, adjusted EPS had a 39% CAGR in the growth rate for ROIC was 29%.
As I've said before our team is tightly aligned around a clear doors that do more strategy focused on operational excellence product leadership and engaging with customers to enhance the value of the masonite brand.
These financial results indicate that our strategy is taking us in the right direction.
And I am confident that the changes, we're making to the company will have lasting benefits.
In the short term however conditions are likely to remain choppy and we will need to remain agile in order to continue this strong performance, while the housing market works its way through a period of more significant demand headwinds.
On slide six we've outlined some high level assumptions, we're making about the market for this year and into 2024 and 'twenty five.
Through 2023, we expect end market demand to be lower due to the economic impact of steep inflation and higher mortgage interest rates.
We have seen over the past year.
Given these conditions, we're planning for U S housing starts to decline by approximately 20% to roughly one 2 million units in 2023.
And we could also see high single digit decrease in the repair remodel and replacement or triple our market.
In the U K, we are assuming that strong macroeconomic headwinds we see today will remain for the majority of the year during.
During this period, we believe latent demand in each of our markets will continue to grow as people wait on the sidelines for more predictability and interest rates and housing prices.
As economic conditions stabilize we expect the housing market to return to growth.
Factors, such as continuing housing supply deficit, the aging housing stock and elevated home equity should support a rebound to more normalized levels of new home construction and triple our market growth in both North America and the UK.
We anticipate this rebound will start sometime between the second half of 2023 in the first half of 2024 in the meantime, we are moving proactively to adjust our cost structure as a means to both protect our margins near term and position the company for meaningful margin improvements when demand recovers.
Turning to slide seven.
We have developed a detailed 2023 playbook with actions designed to offset volume deleveraging preserve margins and drive free cash flow, while continuing to selectively invest in strategic priorities to fuel growth.
The first part of our playbook is focused on efficiency and margin initiatives.
Disciplined price cost management has been a hallmark of our operating strategy. We have successfully increased our prices steadily in recent years in our research shows that homeowners still expect to pay more for doors than what they actually pay in the market. Today, we are committed to capturing fair value for our products, regardless of the business cycle or macroeconomic.
Yeah.
At the same time, we are also focused on maximizing benefits from the cost side of the equation wherever possible.
We've started to see early signs of moderating inflation on certain materials and logistics costs and our sourcing team is working aggressively to capture these benefits as we move through the year.
We have a highly variable cost structure and our operations team are working to flex labor cost with volume, while also identifying areas to trim fixed overhead wherever possible.
This cost discipline will extend to SG&A as well as we scrutinize spending while protecting investments to maintain our momentum for important growth initiatives.
As we announced in late December we have started executing a restructuring plan to better align our commercial organization structure with the long term business strategy and continue to drive cost efficiencies through an optimized manufacturing footprint.
In total we expect our restructuring initiatives to yield between 15 and $20 million of annualized cost savings without impacting our ability to deliver outstanding service levels and ramp up production capacity when needed.
And since closing the acquisition of Enduro in early January our integration teams have been working quickly to implement plans to capture synergies. We continue to expect the majority of the $8 million of cost synergies identified during due diligence can be achieved in our first year of ownership.
The second part of the playbook summarized on the right hand side of the slide includes key initiatives that will ensure we continue to position ourselves for longer term growth with progress on each of the three pillars of our doors that do more strategy.
These three pillars as you may recall aligned our teams around winning the sale with brand leadership and strong channel relationships driving specified demand with product leadership and consistently delivering reliable supply.
With respect to winning the sale we are realigning realigning our commercial resources to engage more deeply with our channel partners and increase our focus on joint business planning category management and customer experience.
In the area of product leadership, we will continue our efforts to drive mix by increasing the awareness and availability of our higher value products and developing solutions that make life and living better we.
We also plan to leverage the newly acquired talent and Knowhow from enduro to accelerate the development and commercialization of new products.
Finally, our work to establish ourselves as a supplier of choice in the market by delivering reliable supply of high quality products remains relentless in 2023, we will continue to implement and vantage continuous improvement projects aimed at taking our service levels to new highs.
We fully anticipate 2023 to be another volatile year, but expect that execution of this playbook will allow us to maximize our financial performance in the near term, while enhancing our competitive position and optimizing the business to capture the benefits of rebounding volumes at even higher margins in the longer term.
With that I'll turn the call over to Russ to provide more details on our fourth quarter and year to date financial results as well as our 2023 outlook Russ.
Thanks, Howard Good morning, everyone turning to slide nine I'll start with an overview of our fourth quarter financial results.
We reported net sales of $676 million.
Up 6% as compared to the fourth quarter of 2021.
The growth was driven by a 16% increase in A&P, which included positive impacts from both price and mix.
This increase was partially offset by a 7% decline in volume and a 3% decrease from unfavorable foreign exchange.
Gross profit increased 6% in the quarter to $143 million and gross margin remained flat year over year at 21% with higher A&P offsetting the impacts of lower inflation, I'm, sorry, lower volume and inflation.
Selling general and administration expenses were $88 million up.
Up 35% year on year, primarily due to higher wages and benefits as well as people investments to support strategic growth projects.
SG&A as a percentage of sales was 13, 1% in the quarter.
Fourth quarter net income was $31 million.
Compared to a $25 million net loss in the fourth quarter of 2021.
The improvement resulted primarily from higher gross profit as well as the absence of charges incurred in the fourth quarter of 2021, including $60 million related to goodwill impairment and the architectural segment and a $23 million pension settlement charge.
These benefits were partially offset by the higher SG&A just noted.
Diluted earnings per share were $1 38.
Compared to a loss of $1 <unk> in the fourth quarter of last year.
Adjusted earnings per share were $1 72 down.
Down 14% compared to the fourth quarter of 2021.
Adjusted EBITDA in the quarter decreased 4% to $91 million, while adjusted EBITDA margin declined 150 basis points to 13, 5% as.
This continued strength in the North American residential business was offset by headwinds in Europe and architectural segments.
Among the year on year drivers of adjusted EBITA performance shown here on the right hand side of the slide you can see how the strong positive contribution from AEP was offset by the negative impact of significant material cost inflation volume deleveraging impact on factory and distribution costs and higher SG&A.
Regarding material cost, we did start to see inflation moderating in some categories for purchases made in the fourth quarter. However, we did not realize these benefits in the P&L as we continue to work through higher priced inventory on the balance sheet a trend that is likely to continue through the first quarter.
Let's turn to slide 10 for a review of our North American residential segment.
Fourth quarter net sales increased 7% to $528 million on strong price and mix.
Total A&P growth was up 16% inclusive of three points of positive mix.
Volume, however decreased 7% year over year, driven primarily by softening end market demand in our wholesale channel.
We witnessed some additional inventory destocking in the wholesale channel during the quarter, although it was modest in comparison to the third quarter.
In the retail channel, we saw linked quarter decrease in demand driven by softening point of sale, but as yet we have not seen any significant inventory destocking and retail.
Adjusted EBITDA was $94 million in the quarter up 6% from the same period last year with an adjusted EBITDA margin of 17, 8% virtually unchanged despite volume deleveraging.
As part of the restructuring plan announced at the end of the quarter the management team and our North American residential segment began our reorganization of manufacturing operations and the commercial team.
These changes are intended to more efficiently service, our customers with greater emphasis on category management and joint business plan.
We expect to start benefiting from the positive financial impact of this restructuring work in Q2 of this year and we expect to substantially complete all planned restructuring actions by the end of the year.
As Howard mentioned, we closed on the Enduro acquisition on January 30 of this year and their financial results will be included in reporting for the North American residential segment starting in Q1.
The integration is in full swing and we have more than a dozen functional teams working to onboard the new business and share best practices in areas, such as environmental health and safety and vantage continuous improvement sourcing and product development.
Howard and Enduro, President Bruce <unk>, who have stayed with the company post acquisition have already met with many of our customers to discuss the acquisition and the opportunities we see to innovate and grow as a combined company.
Turning to slide 11, and our Europe segment.
Net sales of $61 million were down 18% year on year.
We're down 5%, excluding a 13 percentage point headwind from unfavorable foreign exchange.
<unk> grew 6% on price increases and surcharges, we previously put in place to offset inflationary pressures on the business.
Volume, however decreased 11% in the quarter.
The ongoing economic headwinds in the U K contributed to weaker than expected demand in the triple our market.
And we did not experience the seasonal bump in exterior door sales around the holidays that we normally see.
In addition, our raw material supply issue of constrained production of some of our higher value interior doors further impacting volumes and beating our A&P increase.
Adjusted EBITDA for the segment was $4 million in the fourth quarter down 58% year over year with an adjusted EBITDA margin of seven 4%.
We made good progress on SG&A overhead and material cost reduction initiatives in the fourth quarter as planned but these improvements were more than offset by the impact of deleveraging exacerbated by the volume reduction being most pronounced amongst our higher A&P products.
In 2023, our team in Europe is staying focused on two key areas of improvement.
Additional right sizing of cost to match end market demand and maximizing material cost savings by proactively managing the European supply chain.
Moving to slide 12, and the architectural segment.
Net sales increased 30% year over year to $83 million driven by a 29% increase in A&P and a 3% increase in volume.
The increase in A&P came from both price taken to offset inflation as well as mix benefits driven by increased shipments of higher AEP project work.
The segment returned to volume growth in the quarter with the quick ship business performing well.
Our continuous improvement initiatives are helping to reduce complexity and order backlog. However, we still have not reached the production levels necessary to cover fixed costs and therefore, adjusted EBITDA was a slight loss for the quarter.
We are targeting $5 billion of cost cutting initiatives in the architectural segment this year, including actions taken as part of our restructuring plan implemented at the beginning of January .
The sales.
And volume improvements in this segment were certainly positive developments however.
However, returning the segment to a reasonable level of profitability is taking longer than anticipated and.
And we are now actively exploring strategic alternatives for the business.
We expect to have a better understanding of the possible courses of action in time for our next earnings call and hope to share more information with you at that time.
Let's move to slide 13 to recap our full year financial results for 2022.
Net sales for the year were up 11% due primarily to AEP growth of 18%, partially offset by a 4% decline in volume a 2% decrease from unfavorable foreign exchange and a 1% decrease from a combination of lower component sales and the impact of a divestiture in the Europe segment.
In the second quarter of 2021.
Gross profit of $674 million represents an increase of 10% over the prior year.
While gross profit margin declined slightly to 23, 3% down 30 basis points as the benefit of improved gross margins in the North American residential segment was more than offset by the margin contraction caused by inflation and volume deleveraging in the Europe and architectural segments.
Selling general and administration expenses were $345 million up 12% compared to last year, but flat year on year as a percentage of net sales at 11, 9%.
Net income was $214 million for the full year, an increase of 127% while diluted earnings per share were $9 41.
Up 144% and adjusted earnings per share increased 19% to $9 73.
Full year, adjusted EBITDA increased 8% to $446 million.
While adjusted EBITDA margin contracted 50 basis points to 15, 4%.
On the right side of the slide we provide a full year adjusted EBIT bridge, which clearly illustrates the extent of the price cost management that was required this year given the magnitude of inflation that materialized across the P&L, but most notably in material costs.
Inflation on raw materials, and inbound freight was approximately 20% for the full year far exceeding the low to mid teens rate, we expected at the beginning of the year.
Moving to slide 14, we have a summary of our liquidity and cash flow performance as of year end 2022.
Our total available liquidity was $888 million at the end of the fourth quarter inclusive of unrestricted cash our upsized ABL facility.
And accounts receivable sales program and a $250 million term loan facility that was put in place in the fourth quarter to fund the enduro acquisition, which was ultimately utilized upon closing the transaction in early January .
Full year cash flow from operations was $189 million as compared to $156 million in 2021.
The year over year increase is largely attributable to lower use of cash required to fund working capital.
Capital expenditures for the full year 2022 were approximately $114 million.
Up from $87 million in the prior year drew.
Driven by incremental investments in our new plants and capacity enhancements for the production of higher value added products that we expect to drive ongoing mix improvements.
During the fourth quarter Masonite repurchased approximately 124000 shares for $9 million at an average price of $76 58.
For the full year, we repurchased approximately 2 million shares slightly over 7% of total shares outstanding for $149 million.
On slide 15, we provided our consolidated full year outlook for 2023 based on our current viewpoint of various end market factors that Howard outlined earlier.
We are focused on efficiency and margin initiatives across the business.
As well as efforts to drive significant free cash flow improvements to preserve our capital deployment flexibility, including continued investment in areas, such as operational capability and product leadership, which will be valuable in positioning masonite for further revenue and margin growth when demand strengthens.
As a reminder, our planning assumptions in North America include U S. New housing to decline by approximately 20% and triple our volumes to decline by high single digits.
In the U K, we are planning for a weak economic backdrop to continue throughout 2023.
Blunting near term residential construction investment, despite an aged existing housing stock and under built new housing sector.
We believe these factors could result in a mid teens decrease in organic volume year over year in both our North American and European markets.
For the architectural segment, we are assuming that we will achieve volume growth in 2023, and we can as we continue to improve throughput in our architectural door Assembly plants.
At a consolidated level, we expect to benefit from a low single digit tailwind driven by carryover benefits from our 2022 pricing actions as well as positive product mix.
That said, while we will continue to invest in various sales and marketing initiatives to drive mix in 2023. It is possible, we could see partially offsetting headwinds related to relatively stronger sales into multifamily construction in the U S where lower priced stores are more prevalent.
FX headwinds are expected to have a negative 1% impact on net sales with a more pronounced impact in the first half of the year before easing in the second half.
In total we expect overall net sales to be flat to down 5% in 2023 or down 7% to 12% when excluding the impact of the enduro acquisition and foreign exchange.
Turning to adjusted EBITDA drivers for 2023, we anticipate that material costs will decline modestly driven by ocean freight, although we were unlikely to recognize savings until the second quarter was higher cost materials are consumed for inventory.
For the year overall, we anticipate material costs inclusive of inbound freight to.
To decline low to mid single digits heavily weighted toward the second half of the year.
Inflationary pressures are expected to continue in other parts of the business such as wages and benefits and various factory overhead costs, which collectively are likely to be up low to mid single digits in 2023.
These higher costs as well as the impact of some strategic investments planned in our factory and distribution operations will be partially offset by savings from our restructuring and cost actions.
Based on this cost overlay to our net sales outlook, we expect adjusted EBITDA to be in the range of $415 million to $445 million.
Yielding a consolidated adjusted EBITDA margin that is essentially flat year on year, despite the impact of volume deleveraging.
With respect to margin cadence across the year, we expect adjusted EBITDA margins to be down meaningfully year over year in the first quarter against a very difficult comp, reflecting lower gross margins as we clear higher cost raw material from inventory, while seen only modest benefit from our cost management playbook and restructuring actions.
These initiatives will bear incremental fruit as we progress through the year, yielding first half margins that are down modestly and second half margins, which are up modestly year on year.
On a segment basis, we expect that our core North American residential segment will continue to be the primary driver of margin resilience for the full year.
Although pressured in the first quarter for the reasons I just noted.
Adjusted EBITDA margins in Europe are now expected to face further pressure as a result of volume headwinds and be in the high single digits for the year.
In architectural results are expected to show modest, but steady improvement across the year.
Based on an assumed tax rate of approximately 25% higher interest cost of approximately $60 million, reflecting incremental financing for the enduro acquisition.
And approximately $22 8 million shares outstanding we expect that full year adjusted earnings per share in 2023 will be in the range of $7 25 to $8 25.
We expect cash taxes in 2023 to range from $60 million to $70 million and for capital expenditures to be between $100 million and $150 million inclusive of investments in our new enduro business.
Free cash flow generation will be a major priority for us in 2023 and key to this effort will be our ability to drive a reduction in working capital.
As such we have already initiated several work streams aimed at reducing inventories and optimizing our performance with respect to payables and receivables.
On the basis of these assumptions for adjusted EBITDA and these key cash flow drivers, we anticipate 2023 full year free cash flow in the range of $220 million to $250 million, yielding a free cash flow conversion ratio of at least 125%.
And with that I'll turn the call back to Howard for closing comments.
Thanks, Ross in summary, I'd like to thank all of our masonite employees around the globe for their dedication and hard work in 2022, I am very pleased with the team's ability to execute with agility and deliver growth I'm, particularly proud of the fantastic financial results, we delivered in our North American residential.
<unk>.
The tight alignment of our experienced team around our doors that do more strategy has played a key role in helping us deliver double digit compound annual growth through three years of market volatility while building on our position as a supplier of choice.
Im encouraged by the speed at which we are moving on the <unk> integration and excited to be working together now as one company to bring innovative new door solutions to market.
In 2023, we're hitting the ground running with a detailed playbook for becoming a leaner stronger business focused on reducing costs maintaining margins, despite volume deleveraging and unlocking free cash flow.
I believe these actions will position us for additional margin growth when demand ultimately rebounds.
And finally, we are excited to take the next steps in our doors that do more journey towards best in class reliable supply product leadership and customer engagement to deliver to continue creating long term tangible value for our channel partners for homeowners and for our investors now I would like to open the call to your questions operator.
Thank you Mr. Hawkins, if you would like to register for a question. Please press star one if you are using a speaker phone. Please lift your handset before entering your questions. Your questions. 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 Telus.
At this time.
Our first question comes from Michael Rowe with.
J P. Morgan. Please proceed with your question.
Hi, everyone. This is Andrew on for Mike. Thank you for taking my question I wanted to ask if you could speak to the year to date demand trends across your segments and channels.
Okay.
Sure Andrew This is Howard.
I would say that not much has changed year to date from the fourth quarter.
Look very similar to the fourth quarter relative to volume.
And I would say.
In the ballpark with our with our guidance for.
We're capping our first our first quarter last year was the best quarter of the year by quite a long shots of the comps are pretty difficult, but generally looks a lot like the fourth quarter. So far.
Okay great.
And then.
I wanted to ask what are you currently seeing in terms of backlog and any type of forward visibility that provides.
There is no real meaningful change in backlogs.
I think our lead times are consistent within our normal.
Operating parameters and backlogs are.
Steady Theres really no Chris I don't know if you have anything to add yes.
I think that's right.
That's all for me thanks, so much thanks.
Thanks, Andrew Thanks, Andrew.
Our next question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
Hey, Mike.
A lot of helpful detail.
Also a lot of moving parts for us, particularly on those.
Those drivers that you outlined.
Towards the end of the guide so.
If I if I look at it at a high level you've got the good guys on price and cost outs then you've got.
Alright, and then.
Material costs, then you've got.
Some remaining inflation, you've got some investments you've got some potential.
Mix headwinds.
When you balance those out.
Getting to the flat margins that really a function of at the end of the day.
It's price and the cost outs offset.
The volume growth and then some of these other things mix other investments.
Are there.
Other inflation are offset by the material costs are.
Any additional help walking us through that bridge that you already outlined would be great.
Sure Okay, Mike, Yes, Ross, let me take a shot at it I think I think I can probably give you a fair bit of color that will help you think through the dynamics, particularly for the North American residential businesses, obviously, the core earnings engine for the company.
If we step back and look at each of the segments again high level.
North American residential for the year, we would expect.
To deliver net sales, that's down low single digits, including enduro and and this.
<unk> will deliver a flat margin, we believe despite the impact of volume deleveraging.
And some dilution from a door.
On the Europe segment, we're expecting that net sales, excluding FX are going to be down call. It high single digits to low double digits and theyre going to be in that high single digit margin as I mentioned during my prepared remarks.
And then architectural we're expecting net sales to be up modestly and theyre going to continue to show operational improvement through the year such that we're planning for call. It a mid single digit margin for the overall year. So thats kind of a headline view of each of the segments. Let me double click a little bit on North America, and I think that will help walk you through some of the drivers in <unk>.
How they pass through on the bottom line.
So recall for North America, we said that our planning assumptions are around residential new construction down about 20%.
And triple are down about high single digits.
Blended that would equate to call. It a mid teens volume decline in the business offsetting that is low single digits of average unit price that's going to be a combination of carryover pricing from 'twenty, two and some mix tailwind.
That together would indicate organic net sales down call. It low double digits, then you add in enduro, which endurance is likely going to be down a little bit year on year also just because there'll be facing the same end market headwinds that the broader businesses, but inclusive of enduro you would.
End up with net sales in the North American residential business for the year that are down modestly call. It a point or two now.
Now how does that pass through on the EBITDA line.
We're predicting that decrementals on that volume loss, we're going to be in the 30% to 35% range.
A majority of that is going to drop through but not all of it because there is some mix element in there it is not all pure price.
As I commented earlier material deflation for the overall year is expected to be low to mid single digits and again think about that as against a material basket, that's circa 40% of net sales.
And then you've got a number of inflationary pressures in the rest of the business factory overhead accounts wages and benefit for our labor that's going to present, an incremental headwind that's going to be offset in part by some of our restructuring savings, but not fully.
You walk all that down and Youll get to an EBITDA number for North American Res Thats also down just modestly year on year and so youre looking at flat margins. Those are the planning assumptions that we baked into the guidance does that help.
Yes.
Incredibly helpful. Thank you for that level of detail.
Great and then my second question I mean look Theres a lot of encouraging trends early on about empower and I know, there's a lot of excitement there.
Especially as you look at that.
Full nationwide rollout in the second half.
You do.
Your your hardware provider on the box side is kind of in process of being acquired by a competitor.
How are you thinking about contingency planning around potential outcomes, there and does that play into that rollout at all because I think that second half timing pretty much coincides with when the ownership changes.
That particular provider and any thoughts on that.
Yes sure Mike This is Howard.
You say that yields have been a valued partner with the launch of empower.
Generation, one obviously, there's nothing that fundamentally limits us from using other block smart lock systems into new generations of empower and really thats dictated by customer demand and in fact, some of the key learnings as we've gone out and reached out to builders because of there.
Contracts and relationships with other large brands. So we certainly are able to do that but at this point, we have a good relationship with you and what are we obviously don't see any reason for that to change. So we have flexibility and we and we like our partnership with Yelp.
Got it okay. Thanks Howard.
Our next question comes from Trey Grooms with Stephens. Please proceed with your question.
Good morning. This is actually know Macao is going for <unk>. Thanks for taking my questions.
Sure.
First I wanted to zoom in on some of the mix benefits in North America residential clearly it sounds like last year.
There was some benefit there, which I think it was 3% in the quarter and youre, assuming some of that.
Continues into 2023, but you also highlighted the risks that.
Relative strength in multifamily could bring so I guess is that multifamily risks included in the low single digit.
Guide.
And then additionally, you know as we think about.
Similarly end market demand there slowing what's the risk that we see consumers start to.
Perhaps potentially trade down and you start reversing the direction of that that mix tailwind.
Yes. This is Russ let me capture the first part of your question Howard maybe have some color.
Relative to overall market dynamics as we look ahead on mix.
If you step back and look at product mix for the North American residential segment over the course of 2022 in total it was on the round about two percentage points, but what that reflects is approximately three percentage points of positive mix. The last few quarters, what youre seeing is the benefits of a lot of our product and mark.
Getting initiatives.
That had been focused specifically on driving up the portfolio of mix and shifting our product portfolio from things like fiberglass and steel and from hollow core to solid core doors. We believe those trends will continue and we've captured that in the guide, but not quite to the degree that we have seen in the most recent quarters as a.
<unk> of this mix headwind that we think could materialize just due to higher relative strength in multifamily versus versus single family, yes, as far as the trade down no actually I think it's the opposite we're really building this marketing engine.
And people after the pandemic became much more aware of the value of the doors can provide and this notion of <unk>.
<unk> solid core and the privacy is real and I hear it all the time from friends and neighbors and anybody else knows that I'm in the nor business.
Solid board are so much better and the cost is not significant that's what's so interesting about our space. So are you going to spend $50 on oil corridor, 80, or 90 or $100 on solid corridor have a completely different experience in your home. So I think when we begin to make people more aware of the pandemic helped us with that we're going to see.
More and more mix shift up to premium doors, the same stores restaurants, a fiberglass versus steel there are unique benefits and as we develop systems with <unk> that are superior and keeping air water out or making your home more secure.
People are going to see that and recognize the benefit the modest cost premium and there'll be value for that trade up.
Got it that makes sense and that's helpful.
For my second question it sounded like in the quarter from North America, but down 7% volume was mostly in the wholesale where you saw some weakness starting to creep in on the triple or the retail side.
And then that continued here year to date, but I guess, you mentioned that you haven't really seen any destocking it in retail.
Net of risk.
As we look at volume through 2023 that could potentially make the.
The high single digit.
Decline for that market, even worse and do you have any sense for where channel inventories are right now for retail.
Yeah sure Noah This is Chris I'll take that so as you said the new construction our wholesale demand in Q4, and we did see some additional destocking. It was less than what we saw in the third quarter. So our views on the new construction side inventories are in line with starts as we start out the year and we have not seen a correction on the triple our size.
Watching it closely and as we see consumer demand and we see overall trends in the market, we're going to be watching it and there is potential in the back half of the year, but it really depends on customer inventory strategies as well as where the market goes so we're watching it but at this point and we think that what we see and what we've guided towards is consistent with what's going to happen in the market.
Got it I'll leave it there and good luck with the rest of the year.
Thanks Noah.
Our next question comes from Steven Ramsey with Thompson Research Group. Please proceed with your question.
Thank you and good morning.
Hey, good morning, maybe you could start.
Maybe start with in times like this where it's slower.
You have an ability to.
<unk> gained share in the retail or wholesale.
Channel and I guess, maybe compare the current times, a slowness to past times and the potential to gain shelf space.
Yeah, It's a great question, Steven as we look at the market generally I'd say, there's always puts and takes so we are aware of any significant we have we're not aware of any lost share we've chosen to cede some share with certain customers, where we don't think that it's good.
<unk> for Us and we've won business on the other side of things, but when you look at those volumes Im speaking specifically about <unk> because as Russ said, it's the vast majority of our of our profitability.
Volumes down 1% on the year pretty consistent we believe with with the market. So some puts and takes and we choose to cede share where it doesn't make sense and we win business on the flip side. So I think that's probably typical.
Typical with what Youll see going forward as well.
Okay helpful and then.
Builders.
Yes to a lower cost or lowering the cost of homes.
Potentially smaller footprints.
For affordability issues can you talk to this being a mix or volume headwind for your products do you have the capacity already.
Already in place to ship with with the builders should they make their move to the next 12 months.
Yes again.
Many of the builders when we talk about mix of Hollow core solid core for example, many of the builders used that opening price point, our corridor theres not a lot of room to go another custom builders, obviously a bit different there so.
I don't know that Theres, a massive trade down opportunity relative to smaller footprints, that's pretty interesting because we talked to a lot of builders and you can imagine home blueprints and most of these <unk>.
<unk> and model homes, you have options for the spare room, Brian and you can make it a big bonus room or you can put a door on it and make it a bedroom or.
In office.
Standard options that are allowed what builders are telling us is and really since the pandemic people are choosing to make those open rooms closed grows because they need privacy and if it's a closed room you might want to add a closet. So you can make it a bedroom later, if you want to so even though even with.
Square footage potentially coming down although our recent data and when I say recent it's a couple of quarters old suggests that houses where we are.
Growing a bit right as after seven or eight years of shrinking.
But even with footprints coming down as people decided to close that open space, It's a door and when you keep in mind that 18.
On average 18 interior doors per Hong <unk>, 5% and that's that.
That's really important so I know there's some there was some talk recently about the fact that more doors would require either bigger homes or smaller rooms. I don't believe that's the case I think that you've closed that one open room you have the exact same square footage and you have 5% more interior doors and anecdotally, we think that that's a real opportunity.
Yes, Steven it's Russ I might just add that to the extent that there is a volume headwind on the horizon, It's probably more as a result of this mix to multifamily versus single family and Thats been comprehended in the planning assumptions that we use for our guide this year.
Great that's helpful.
Our next question comes from Kim <unk> with Baird. Please proceed with your question.
Yeah, Hey.
Hey, guys good morning.
Maybe just.
Maybe just a strategic question so.
Just on your progress towards getting fair value for your products.
Maybe if you could just update us on where you think the organization is on that journey.
The structural improvement potential there has just been a little loss.
Given all the inflation and the pricing that we've seen over the last few years. So just maybe an update kind of on the opportunity that you still see him on that product.
Yes, Great question Timm this is Howard.
Our research shows and we just the soft periodically in fact, just just did recently that homeowners still expect to pay more for doors and they pay in the market.
That means we're not being we're not capturing fair value for the door remember and I've told you. This 10 times everybody else that wants to listen as well that doors have historically been the invisible man in the hall.
People don't think about them that changed during the pandemic. They now realize that there's value that doors can and should provide privacy security ventilation connectivity et cetera, and so people are now aware and they also don't realize how cheap these products are really and so our operating philosophy has been.
For the last several years to capture fair value for our products and to absolutely remain price cost favorable and to be paid appropriately and thats going to be our philosophy going forward as well so and it's important to remember that we're still absorbing elevated costs due to higher cost materials on the balance sheet. So.
We're not really seeing any deflation, we think that we're not yet capturing fair value for a product we're trying to develop solutions that contractors and homeowners want and specify and all of these things should lead to higher value products.
<unk> greater A&P et cetera.
Okay. Okay. Good and then maybe just on free cash flow is.
As working capital recovery really just the key driver of the free cash flow improvement in 'twenty, three and I guess.
Is there anything thats temporary or one time in your view or is that a pretty reasonable basis for free cash flow to grow off of going forward.
Hey, Tim It's Russ I'll take that working capital is a primary driver of cash flow improvements expected in 2023.
But we don't view it as necessarily quote unquote one time.
We think that there is this is a multi year process to drive much stronger free cash flow generation from the business now that working capital is never it's never been an area that we haven't focused on but candidly in the last two years, it's been an area where.
Our response has been to strategically invest in working capital in particular inventory because in the face of very volatile supply chains that was the way that we could best ensure service levels for our customers. So we carried a much higher safety stocks for many of our raws that we would typically we're now at a point.
Where the supply chains are healing to the extent and between that and our global supply chain team my team's strategy to further diversify our supply base. We think we are in a position to start bringing down safety stocks and surgically reduce inventory levels that is not the only focus area though.
We've got teams that are working on how we can optimize our accounts receivables in our accounts payables balances and so over time. This is going to be a multi year initiative I think that there is plenty of strength for us to continue driving free cash flow generation beyond 2023.
Okay, Okay, great well, thanks for the color guys. Good luck. Thanks, Tim Thank you.
There are no further questions at this time I would now like to turn the floor back over to Mr. <unk> for closing comments.
Thank you Maria and thank you for joining US today, we appreciate your interest and continued support and this concludes our call.
Mario will you please provide the replay instructions.
Thank you for joining maintenance Masonite fourth quarter 2022 earnings Conference call. This conference call has been recorded the replay may be accessed until March nine to access. The replay. Please dial 870 76606853, while in the U S or 201.
Six one to 7415 outside of the U S enter conference I'd number 13735 to four three.
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