Q4 2022 MasterBrand Inc Earnings Call
We issued a press release earlier this afternoon disclosing our fourth quarter and full year 2022 financial results.
If you do not have this document is available on the investors section of our website at Master brand Dot com.
I would like to remind you that this call will include forward looking statements meet our prepared remarks or the associated question and answer session.
Each forward looking statement contained in this call is based on current expectations and market outlook and.
And is subject to certain risks and uncertainties that may cause actual results to differ materially from those anticipated.
Additional information regarding these factors appears in the section entitled forward looking statements in the press release, we issued today.
More information about risks can be found under the heading risk factors on our form 10, and other filings with the SEC, which are available at SEC Dot Gov.
And Master brand Dot com.
The forward looking statements in this call speak only as of today.
And the company does not undertake any obligation to update or revise these state.
Statements, except as required by law.
Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables, which are in the press release issued earlier. This afternoon and are also available at SEC Gov, and Master brand Dot com.
Our prepared remarks today will include a business update from Dave followed by a discussion of our fourth quarter and full year financial results from Andy.
Along with our 2023 financial outlook.
Finally, Dave will make some closing remarks before we host a question and answer session.
With that let me turn the call over to Dave.
Thanks, Darrin and good afternoon, everyone first I'd like to thank you all for joining US here today for our first earnings conference call as a Standalone public company.
It's been a few months since our management team and I had a chance to introduce master brand at our Investor Day in New York. Since then we've not only completed the successful spin off from Fortune brands, but also continue to execute well on our near term and long term goals.
Good afternoon, all I'll update you on our transformation progress will provide insights on how we're navigating the current end market conditions.
But before I do so I will give a brief overview of our fourth quarter and full year financial performance Andy.
Andy will provide greater details later in the call and we will share our 2023 outlook.
I am pleased with our strong finish to 2022.
We delivered another quarter of solid financial and operational performance to end the year with net sales of $784 4 million, an increase of over 5% compared to the fourth quarter of 2021.
This year on year growth was driven by the continued benefit of previously announced price increases across our business and strong performance from select brands.
As an example, mantra our affordably priced full plywood construction products grew double digits year over year in the fourth quarter outpacing other parts of our business.
Net sales growth was partially offset by volume declines in the broader business as higher interest rates and general economic uncertainty negatively impacted our customers.
Adjusted EBITDA was $97 8 million compared to $66 7 million in the fourth quarter of 2021.
This increase was due to favorable net average selling price or ASP.
With continuous improvement benefits, which more than offset material logistics and personnel inflation.
Adjusted EBITDA margin was 12, 5% compared to 9% from the comparable period of the prior year, an expansion of 350 basis points.
The fourth quarter performance closed out an exceptional full year.
We ended 2022 with net sales of approximately $3 3 billion.
This represents year on year growth of roughly 15% slightly higher than our expected range of 13% to 14%.
Full year 2022, adjusted EBITDA was $411 $4 million a year on year increase of roughly 29% compared to 2021.
Adjusted EBITDA margins expanded 150 basis points year on year to 12, 6% in line with our expected margin performance.
We achieve our expected net sales and adjusted EBITDA margin performance. Despite the softening in our end markets.
Like to take a moment to provide more color on what we're seeing in both new construction and repair and remodel or R&R.
Since early December we saw a builder channel orders slow more than anticipated as we exited the year.
It's varied by region with new construction market in the southeast part of the U S holding up better than other areas.
Western States traditionally some of the faster growing markets are stable, but activity is slower than this time last year.
Overall for new construction, we've seen the market stabilize through the beginning of 2023, but we are anticipating a challenging year in this portion of our business.
R&R through both our dealer and retail channel has been consistent since the end of the third quarter, albeit at a lower level than in the prior year.
While our higher priced custom product has proven resilient, we are seeing a bigger shift to lower priced product in general.
Our breadth of offering from custom to stock cabinets allows us to shift customers between product lines, our mantra brand, which I mentioned earlier is a great example of a high quality lower priced option, we can offer to customers looking to reduce costs.
As we discussed during our Investor day presentation, our multi brand strategy is designed to move with the market and meet consumers, where they are whether it be in style or price point.
We anticipate similar market conditions to persist for much of 2023 with larger declines in new construction and more moderate declines in our dealer and retail channel servicing R&R.
Andy will provide more detail on our outlook later in the call.
While 2023 looks to be a software environment, we believe and I think theres good data to support this view, but the longer term trends are very favorable for the housing market and the building products companies servicing it.
We look at the significant ageing of the housing stock with the median age of the house now at 39 years in the U S market being roughly under built by 3 million homes as a positive long term backdrop for us.
And if you look at our performance over the last several years, we've built a track record of continuous improvement.
Since we started our transformation in 2019, we've grown net sales by almost $1 billion with.
With a compounded annual growth rate of 11%.
Likewise, we have grown adjusted EBITDA during the same three year period by over $150 million for a compound annual growth rate of roughly 17%.
The exceptional results we've delivered over the last few years is due to consistent execution.
Having a clear strategy is important but it need field results and Thats why execution is a key to success.
The unique culture, we have at Master brand is focused on utilizing the established tools of the master brand way our business system.
Which is allowing us to achieve our strategic goals.
At our Investor Day, we discussed why Master brand is the number one north American residential cabinet business, it's our industry, leading dealer network, our unmatched product and brand portfolio and our operational excellence at scale.
The continuing transformation of the company is how we win going forward and it's what makes me so excited about our future growth potential.
We've made meaningful progress in the fourth quarter on the three key initiatives driving this future growth aligned to grow lead through lean and tech enabled.
Aligned to grow based on the tools of 80 20 helps us identify great customers determining what they want and then deliver exactly the way they want it in the most efficient way.
That's how we get value from aligned to grow.
Spoke about some meaningful aligned to grow successes at our Investor day, specifically around our common box initiative and I'm pleased to say that we continue to make progress in this area.
During the fourth quarter, we moved two more facilities to one of our four common construction platforms.
With our Winnipeg, Manitoba operations now converted roughly 75% of our facilities are utilizing common construction.
Common box is greatly reduced the number of components skus within our operations and eliminated unnecessary complexity.
The important point to remember is this is complexity our customers and end consumers did not notice or value. Therefore complexity, we were not being rewarded for it.
Tom Inbox also allows us to shift volume across our platform, which has proven extremely advantageous as we look to manage capacity in a softer environment.
Since we've now transforming the business to allow us to ship volume across our manufacturing network, we've been able to take three facilities offline in 2022 with no impact to customer service and delivery.
Our business can be cyclical so our strategic transformation aims to create a company that can flex production up and down depending on the market conditions.
This is one reason why we believe we can deliver superior margin performance in any market.
Lead through lean as the next set of tools, we are using to drive future growth for the organization.
Many of you might be familiar with the tools by now and candidly, they're not the differentiator the.
The tools are foundational is the disciplined deployment of them and our culture that sets us apart.
We look at lead through lean as the ultimate engagement tool, we hosted a plethora of events every week empowering associates with the tools and resources, they need to solve problems and drive efficiency.
During the fourth quarter alone the organization held 59 kaizen events and for the full year, we hosted over 350 events identifying roughly $80 million in addressable waste.
Equipped with this information we will prioritize this waste for future cost savings initiatives.
In 2022, our prior initiatives yielded over $40 million and accumulated cost savings.
When we give employees closer to the problem with tools and training they need to address it we see them step forward 60 issue.
This not only engages them with their work, but it also helps us see leadership in action and allows us to promote from within.
Given the continued labor constraints, our ability to develop talent is great for retention.
Why do we say trust the tools empower the team and move forward.
Our last tool and one with a lot of runway left is tech enabled.
We are focused on simplifying and modernizing our technology foundation to drive better insights and outcomes for the business.
We plan to further leverage data and analytics in the back office on the plant floor and with our customers to create value.
During the fourth quarter, we continue to make progress in this area.
The back office, we made great strides on data consistency, we expanded our data lake footprint and usage of recently created digital dashboards, which are standardized multiple key metrics across the business.
On sales orders receivables purchases operations and incentives, providing our team the near real time information they need to make decisions on.
On the plant floor, we're making similar progress we outlined additional automation solutions in the fourth quarter, such as further RFID usage and a pallet serialization implementation.
These initiatives will both improve inventory accuracy and provide better visibility to material movement on the plant floor.
We believe these actions can have a cost savings as early as the first half of 2023.
On the customer facing front, we successfully piloted a third party delivery management software solution.
The software enhances the customer experience for home delivery with improved order information answering the common question where is my order.
As you can see a lot of great operational improvements by the team since we last spoke publicly in December .
Now, let me hand, it over to Andy for a deeper review of our financial performance Andy Thanks, Dave and good afternoon, everyone. I think that it's great to be joining you all here today on our first earnings call.
I'll begin with an overview of our fourth quarter and full year financial results and then I'll discuss our 2023 outlook.
The fourth quarter net sales were $784 4 million an increase of five 3% over the same period last year. This growth was primarily driven by previously implemented price, partially offset by volume declines in certain areas of our business and higher interest rates and general economic uncertainty negative.
Gently impacted the end consumer.
Gross profit was $215 million in the quarter up over 14, 4% compared to $187 $9 million in the fourth quarter of last year.
Profit margin expanded 220 basis point year over year from 25, 2% to 27, 4%.
The year over year growth and margin expansion were driven by higher than higher net asps and continuous improvement initiatives.
Which more than offset inbound logistics material and labor inflation in our factories.
Selling general and administrative expenses were $161 $3 million up 18% compared to the same period last year, primarily due to separation costs personnel related inflation outbound logistics costs and investments in our strategic initiatives, primarily in our tech enabled efforts.
This was partially offset by savings from our continuous improvement initiatives.
SG&A as a percentage of net sales was 26% an increase of 220 basis points compared to the same period last year.
As a reminder, we classify outbound freight in SG&A, so any inflation in that area increases our SG&A spend.
We delivered net income of $15 $4 million in the fourth quarter compared to $35 $2 million in the comparable period last year, primarily due to the combined impact of intangible asset impairment restructuring charges and restructuring related items as well as additional fortune brands home and security allocations.
And one time separation costs in the fourth quarter of 2022.
These intangible asset impairments restructuring charges and restructuring related items were largely due to our continued strategic transformation, resulting in a leaner more agile manufacturing footprint.
Excluding the impact of these charges along with net cost savings as a standalone company separation costs and defined benefit actuarial gains and losses. Adjusted net income increased 66, 6% year over year to $67 $5 million.
Diluted earnings per share for 12 months in the fourth quarter down from our pro forma diluted earnings per share of <unk> 27 in the fourth quarter last year.
It is important to note at prior year pro forma diluted earnings per share is calculated using 128 million shares outstanding and under U S. GAAP. It is assumed that there were no dilutive equity instruments prior to separation as there were no equity and equity awards of Nbc's outstanding.
Adjusted diluted earnings per share were <unk> 52 in the fourth quarter.
This is a 62, 5% year over year increase compared to our pro forma adjusted diluting diluted earnings per share of 32 in the fourth quarter of 2021.
Adjusted EBITDA was $97 8 million in the fourth quarter, an increase of 46, 6% compared to $66 7 million in the same period last year.
Our definition of adjusted EBITDA includes estimated net cost savings as a standalone company and exclude separation costs restructuring charges and restructuring related items asset impairment charges and defined benefit actuarial gains and losses.
Adjusted EBITDA margin expanded 350 basis points to 12, 5% compared to 9% in the comparable period of the prior year.
Moving on to our full year results, we delivered net sales of $3 3 billion in 2022, an increase of approximately 14, 7% over the prior year.
As Dave mentioned this was slightly higher than the expectations laid out at our Investor day.
Year over year growth was driven by favorable net ASP.
Partially offset by a small volume decline.
Gross profit was $945 million up 20% compared to $783 $9 million last year.
Gross profit margin expanded 120 basis points year over year from 27, 5% to 28, 7% like.
The fourth quarter full year margin expansion was driven by higher net ASP and.
And continuous improvement initiatives, which more than offset material logistics and personnel inflation in our factories.
Selling general and administrative expenses were $648 $5 million up 22, 9% compared to the same period last year, primarily due to higher pre spend corporate allocations from FBA, Jess and the inflationary impact on outbound logistics and labor cost.
We offset by our continuous improvement efforts that allow for better utilization of fixed costs and personnel.
These results include $5 million of strategic investments in the business.
G&A as a percentage of net sales was 19, 8% an increase of 130 basis points compared to last year due to the reasons previously explained.
I would like to note that we will not be discussing operating income as a financial metric going forward.
Operating income was used by FDA jet to speak about the various operating segments performance.
As a Standalone company, we believe our net income EPS and adjusted EBITDA are more meaningful measures to discuss going forward.
However, given we did provide near term guidance for adjusted operating income at our Investor Day, I'm going to briefly touch on how we performed for 2022.
Operating income for the full year with $203 $3 million down 13, 2% from $234 $3 million. In 2021. This is primarily due to higher pre spend corporate allocations from FDA.
On a full year impact of intangible asset impairments and restructuring charges and restructuring related items.
Excluding restructuring charges and restructuring related items asset impairments separation costs defined benefit actuarial gains and losses and parent company allocation adjusted operating income was $375 $3 million.
Adjusted operating income margin for 2022, using historical SBA <unk> reporting methodology was 11, 5% consistent with our guidance at our Investor day.
Net income was $155 4 million compared to $182 6 million in the prior year, primarily due to higher pre spend corporate allocations from CHS separation costs and the full year impact of asset impairments and restructuring charges and restructuring related items.
Offset by the benefit of higher gross profit.
Including net cost savings as a standalone company and excluding separation costs restructuring charges and restructuring related items asset impairments and defined benefit actuarial gains and losses adjusted net income increased 35% year over year to $264 million.
Diluted earnings per share were $1 20, and 2022 down from our pro forma diluted earnings per share of $1 43.
Again.
The prior year pro forma diluted earnings per share is calculated assuming that there were no dilutive equity instruments prior to separation as there were no equity awards of Nbc's outstanding.
Adjusted diluted earnings per share were $2 <unk> and 2022.
This is a 29, 5% year over year increase compared to our pro forma adjusted diluted earnings per share of $1 56 in 2021.
Adjusted EBITDA was $411 $4 million in 2022, an increase of 29, 3% compared to $318 $1 million last year.
Adjusted EBITDA margin expanded 150 basis points to 12, 6% for the full year compared to 11, 1% in the prior year. We are extremely pleased with our ability to deliver strong full year margin expansion.
Turning to the balance sheet, our balance sheet remains strong with cash on hand of $101 $1 million and $265 million of liquidity available on our revolver.
Net debt at the yearend was $877 $9 million, resulting in a net debt to adjusted EBITDA leverage ratio of two one times.
This net debt to adjusted EBITDA ratio is based on the adjusted EBITDA provided in our earnings release, which vary slightly from the adjusted EBITDA under our credit agreements.
Credit agreement definition also excludes the management equity computation, we've chosen to leave this item in our definition of adjusted EBITDA because it is indicative of ongoing operations.
Full year operating cash flow was $235 6 million compared to $148 $2 million last year.
Year on year improvement in operating cash flow is inclusive of elevated working capital due to continued inflation inventory built designed to mitigate supply chain disruptions and restructuring related cash outflow and separation costs are.
Our teams have already taken steps to bring our working capital in line with our 2023 outlook, which I will discuss shortly.
Capital expenditures in 2022, or $55 9 million and free cash flow was $179 7 million compared.
Compared to $96 $6 million last year.
Overall the team delivered strong 2022 results in the face of numerous challenges we've achieved year over year double digit net sales growth and adjusted EBITDA margin expansion of 150 basis points.
At the same time, we continued to invest in our business to drive our strategy and deliver the growth and margin expansion outlined in our long term financial targets.
Before turning to the financial details of our outlook, let me build on David's earlier market comments in the operating environment, we anticipate in 2023.
This is in our Investor day, we have seen market conditions further soften.
At that time, we anticipated the market to be down high single digits in 2023.
Now expect our end markets to be down low double digits. This market outlook reflects larger declines in single family, new construction and more moderate declines in R&R they've mentioned.
We believe we will continue to outperform the market. So we will expect our performance to be slightly better from an order intake perspective.
Our net sales will be further impacted by two additional factors first we will continue to benefit from the positive impact of price annualized nation in 2023 due to our previously announced pricing actions in 2022. This benefit will be partially offset by the shift we are seeing to lower priced products in general.
Which will reduce overall asps.
Adjusted EBITDA margins are relatively immune from shifts in product categories, but net sales and adjusted EBIT dollars will be negatively impacted.
Second as mentioned at our Investor Day, our backlog has returned to a more normalized level due to our strong operational performance.
This will present, a headwind of nearly $200 million in 2023 or roughly a mid single digit impact to net sales year over year.
Taking these factors into account, we now expect our 2023 net sales to be down mid teens year over year.
In anticipation of this environment, we have already taken action and continue to take actions to preserve margin performance.
We are proactively executing on pricing strategies supply chain improvements cost controls and continuous improvement initiatives in order to maintain margins.
Coupled with our relatively higher variable cost structure and our flexible manufacturing network. We believe we will have best in class decremental margin performance in 2023.
Our management team and organization have been through these market cycles before and we know how to navigate them and deliver results.
Similarly, we also know that now is not the time to stop investing for future growth. We will continue to invest further in our strategic initiatives, especially in high return areas such as our tech enabled initiatives.
We expect additional corporate expense of about $5 million to $10 million in 2023 for investments in these areas.
We believe we can balance near term margin performance with long term value creation for all our stakeholders.
Given our net sales expectations, our ability to manage costs and our continued strategic investments we expect adjusted EBITDA in the range of $305 million to $335 million with related adjusted EBITDA margins of roughly 11% to 12% for 2023.
In terms of the quarter by quarter cadence through this year, while we won't be providing quarter by quarter guidance I will highlight that we expect to return to a normal seasonal pattern in 2023.
In a typical year first quarter and fourth quarter are lower margin periods with the spring and summer seasons, driving higher sales and subsequent margins.
First quarter 2023 margins will be further impacted by the flushing out of higher price inventory.
Master brand has delivered best in class margin improvements over the last three years and we are on track to continue this performance utilizing the proven tools of the Master brand way in 2023.
I recognize you are looking at us as a standalone company and creating your models for the first time with that in mind I will take this opportunity to provide some brief color on some other areas.
Interest expense is expected to be approximately $70 million to $75 million, primarily related to our $979 million of debt. We intest, we anticipate a tax rate between 25% to 26%.
We are planning 2023 capital expenditures to be in the range of $50 million to $60 million as we pace our investments to align with anticipated future demand.
Given the steps we have already taken to reduce working capital and these other factors, we expect free cash flow in excess of net income for 2023.
Lastly, we expect no meaningful change in 2023 to our shares outstanding of approximately 128 million shares.
In closing Master brand has a history of delivering financial and operational excellence.
While the market backdrop backdrop currently presents a more challenging environment for 2023, we believe our outlook reflects the continued strong performance you should expect from us through the cycle with that said I would like to turn the call back to Dave.
Thanks, Andy before we move to Q&A I also wanted to take a moment to thank our more than 13000 associates without them. We wouldnt have achieved year on year double digit growth in both net sales and adjusted EBITDA for 2022.
Our first priority is always their safety and we're maniacal about it I'm proud to say that in 2022, we achieved an osha recordable rate of 1.0 for a year on year improvement of 5% from 2021.
Over 69% better than the industry average our goal zero, keeping our teams safe as core to our culture.
More so than ever the concept of safety extends beyond physical.
We're a leader in our industry and that leadership extends to being a good steward of resources. Accordingly, we're working to build an inclusive environment, where employees feel safe coming to work and bringing their authentic selves.
Tomorrow, we will recognize international women's day, as a company and.
In advance of that I would just like to thank all the women of master brand for their contributions to our success.
We've worked hard to bring many of the employee resource groups over during the spin from Fortune brands are female focused EOG included.
Sage or support advocate grow and empower is for all women and their allies is.
Its purpose is to empower and raise the visibility of women through networking professional development engagement and business opportunities I know the group has some great events planned for tomorrow, and I look forward to them.
Now with that I will open up the call to Q&A operator.
Thank you Mr <unk>.
Wed like to register a question. Please press star one and if you are using a speaker phone. Please lift your handset before entering your request.
Confirmation tone will indicate that your line is in the queue and ladies and gentlemen, as a reminder to register a question. Please press Star and then one on your telephone at this time.
One moment, while we poll for questions.
And our first question comes from the line of Adam Baumgarten with Zelman. Please proceed with your question.
Hey, everyone. Thanks for taking my questions, maybe just to start Dave If you could give an update on how the company's strategy is progressing year to date give some really good color at the Investor day on some of the evolution you guys who've driven in the business, but maybe sort of since the investor day and kind of updates would be super helpful.
Yeah sure. Thanks, Adam.
We've made a lot of continuing to make a lot of great progress on our strategy since the Investor day.
I'll kick off a couple of examples on each of the sections starting with aligned to grow.
There's really two key components to aligned to growth the aligned part, which is we've talked a lot about how we build our product set and our set factories that are that have common characteristics to them that allow us to move production as necessary to meet the market and.
A great example of that it's an unfortunate situation, but it's an example, where this really helped US I don't know if you remember back in January there was a lot of <unk>.
Severe weather in the southeast.
<unk> news with Tornados in Selma, Alabama, where we were impacted by that as well we have a plant in the south South Eastern Georgia, and the building we share the building with another.
Tenants the buildings was damaged with a tornado during that time.
The best news of it all of course is that our team acted promptly and well and everybody was in the storm shelter when the.
Tornado hit but.
We sustained some damage to our to our building so that plant has been closed since then.
We anticipate at this point that the plant will be back up and running by the end of March.
But this applies to align to grow because we were able to effectively move that production and none of this impacted any of our customers.
So that just shows the flexibility that we have within our network.
It also shows I think that.
All of our associates are really keyed into safety and can act quickly, but I think within a line to grow.
A great example of how we're able to move quickly when things change and this is why don't we hope obviously doesn't happen regularly.
The second part of the line to grow.
Growth and aligned to grow really focuses the organization on where the pockets of growth or whether.
Whether that be in a particular channel with a particular customer or with a particular product set we launched a new product in early January I would say RTA product.
Ready to assemble cabinet products based on the mantra platform.
We've started.
Putting that product out in select markets through here in the first quarter and it's doing quite well so far so.
This initiative really helps us align the organization.
From from the consumer all the way back through our supply chain.
Continue to drive forward with that.
I'll talk briefly about the other two.
Lead through lean and tech enabled that a lot of ways go hand in hand.
Lead through lean is all about tackling the toughest problems that we had in the organization and empowering all of our associates to tackle those problems with the right tools and the nice part about checked a lot of the work. We're doing in tech enabled is they are facilitating a lot of that work as well and I'll give you. A quick example of something that we've done over the last couple of months.
We do these lean events not just in the factory floor, which is a traditional place for these events, we do them in the back office as well in our back office teams have reduced transactions over the last couple of months by 60% and they partner with the tech enabled initiatives and that team to when you finally.
Find the waste and sort of eliminating the tech enabled team can come in and really accelerate the elimination of that waste by permanently.
Eliminating it with automation or other techniques.
So we have so those teams are working hand in hand really drive results across every part of the business, which has been which has been great.
Okay.
Great. Thanks, that's super helpful. Just on the on the 2023 revenue guidance I think you mentioned at one point.
Are you outperforming the market, but it seems like Thats, maybe not necessarily the case given the mid teens revenue decline versus the market down low double digits can you maybe walk through in more detail kind of what's driving that and if you expect that to reverse at some point or even go the other way.
Yes sure.
I think the one way the one word I would use to characterize the market at the moment is dynamic.
And what I've learned what we've learned over the past couple of months.
But the underlying demand is there and we saw that early in the year when interest rates kind of stabilized in the later part of 2022 into early 'twenty three people jumped right back into the market. So I think it's.
The challenge, we're facing is that dynamic movement of interest rates and this market is the consumer is much more interest rate sensitive, but I think.
Certainly been in the last few years and that they've been in a long time and so.
We looked at the market.
We're not going to try to react to these near term swings because it's not a good way to run your business. So we're looking through that and picking an endpoint and we've built our operational footprint or capacity or supply chains around that and so thats what youre seeing from US is picking that aim point out into the future, where we think the market is.
Going.
And so we think it's going to be steady in that direction. Obviously, we will have the seasonality of the spring and summer that we normally see and we're seeing we think we're fairly back to that seasonality.
I think it's fair to say we've changed our view slightly from what we talked about at the Investor Day, where we said that we were going to.
The market to be down high single digits, we're now saying down low teens.
The big change there has been in the builder side, the single family New construction and what we're seeing there the change that we saw coming through 2022 and into the early part of this year is that the builder backlogs have started to come down and they've completed houses and then obviously at some point you catch up to the starts level.
Initial our initial thoughts on when that was going to occur have come in a little bit. So that's what's driving that move from high single digits to low teens.
So that's the market that we're looking at.
I think theres a couple of additional factors that Andy highlighted in these are things that are what they are first and foremost is our backlog is very different at the beginning of this year I'd actually say our backlog is normal amount, which we had inflated backlogs for 2021, and 2022, which is not an operating environment that we're used to or that we like it extends lead.
Times, it's it can be difficult to operate through and that backlog is not present anymore. So I wouldn't characterize our backlog is down it's certainly down compared to the beginning of 2022 by that roughly $200 million.
That's revenue that's just not going to be there in this year, so that takes a big chunk outright there but.
But I think our backlog is normal now and we like that we have good visibility into what customers are looking for and can move quickly on that so you combine those two and you've got a downdraft on the flip side, we see ourselves gaining share. This year, we commit to gaining 100 basis points of share every year and we are.
Our annualized price increases or price increases didn't occur all on January one 2022. So there is price and utilization that occurs throughout the year as we go and when you basically take all those things together you end up in mid teens down so we still think.
We still think we have opportunities to do better.
Maybe there's a difference there and backlog position, we got out of our backlog I think quicker than most we were operating without a backlog towards that.
Middle part or early part of Q4.
Because of our operational performance and what that has helped US do is see the path forward. So we've been able to adjust our fixed cost to be prepared for the current market environment.
Okay got it and then just just lastly, a couple for me.
The kind of the biggest drivers behind the better than previously expected decremental margin guidance and then just to clarify on the mixed piece I know the trade downs effecting asps, but just to confirm that's not.
EBITDA margin impacted if anything could it be actually accretive to margins with the tree Andrew Yes, let's take the pieces that you've asked you've talked about the decrementals and we feel that our decrementals now 20% or better.
A couple of things on that one as we've gotten after the fixed cost side of things ahead of this so we come into the year feeling that.
Done the fixed cost actions that we needed to to get there and then on top of that our funnel.
I think Andy highlighted some numbers around that that.
Our funnel of continuous improvement is really filled in nicely.
We know we have a team that can execute on that so we're confident in that.
Your second question.
Remind me again sorry.
Yes.
Just on the trade down impact is that I know what her to asps, but does it it seems like it doesn't have a negative impact on the percentage margin.
Just on EBITDA margin, just maybe some clarity around that.
Yes, I mean part of the efforts of the last few years is to really.
Has been to really get all of our product categories into our profitability range that we're happy with and so.
A lot of strategic implications, we want to be able to bring the right product that the consumer wants at the right cost to that consumer and so and this is the kind of market where people are thinking about certain trade downs, we see that and we've spent a lot of time over the last three years building that engine that can make.
Product in any price point that we're happy with.
Got it thanks, a lot best of luck.
Thanks, Ed.
And the next question comes from the line of Garik <unk> with loop capital markets. Please proceed with your question.
Oh, hi, Thanks for taking my question and thanks for all the color.
<unk>.
First question is just on the end markets, particularly on the R&R side of the equation you highlighted.
Got you.
The weaker outlook on the new residential piece, but.
Just curious over the last several months since Investor day is your outlook on the R&R side changed at all.
No I think R&R has been very steady.
Even going back into the third quarter of last year. So I think we have good visibility of the pace of that market, there's going to be some ups and downs.
With interest rates, because some people do borrow against their home to do those projects. So you see a little bit more activity when theres.
Interest rates are down, but I think generally speaking the pace has been.
Has been very steady.
Last year third quarter into today.
Got it.
Wanted to follow up on the price mix.
Just wanted to be clear here.
Good mix.
Would more than offset the pricing carryover I just wanted to make sure I heard that but also just wanted to get your thoughts on.
Pricing.
Maybe a little bit of a softer market if youre seeing any degradation in debate in your bidding activity.
Yes so.
Maybe it's maybe I was unclear I think.
We are in different from a margin standpoint on the products, we sell for the most part.
Within a range so I.
I Wouldnt say that Theres, a degradation of margin from a shift to lower price point product and I also wouldn't say that.
<unk>.
Trumping, what I'll say, the price and utilization that will see in the first part of this year. So.
Sorry, if I mischaracterized that but we will price will help continue into 2023.
To your other question around price again for US It comes back to the starting point is.
We want to move our customers into the price point that they are comfortable with so they have the cost position that they are comfortable with.
And we do a lot of work to help them using our various product categories to do that so if they need a lower priced product or a lower cost basket to build a kitchen, which obviously is a big part of what builders are asking for right now we help them move into a different product category that can help them do that and many.
Weighs more meaningful way than just a price reduction so that's our that's our first.
Approach to this I will say there is we have retail partners that we do have some of the price index on.
Around the commodities that go into the product and thats going to ebb and flow.
The nice part about that is it.
Typically results in material cost out as well they usually are fairly closely matched and so we follow along in those retail customers are able to take advantage of that.
Our approach so far I'll say.
We're not out of the inflation world yet.
We're going to find out more information soon here on where that pace is going but we're still seeing inflation in certain parts and so I think it would be.
While demand has slowed compared to a year ago, I think you'd have to be careful about assuming that we're seeing any deflation because thats not the case.
Okay.
This is my last question just on the decremental margin coming in better than.
And what you would.
We indicated.
I'm wondering if you could speak to the.
The sustainability of the permanence of some of these.
These initiatives to drive better Decrementals, whether it's if we're.
We're going to be in a longer downturn, how sustainable is this new.
20% decremental level.
If the market does improve.
You can drive better normal incremental margins.
I mean, what you've just stated as kind of the goal of the strategic initiatives that we built.
Starting with aligned to grow is designed to identify where in your portfolio you have gaps in terms of profitability.
Youre not servicing the customer law, you are providing something that youre not getting paid for all these kinds of things and so it starts there.
And then it moves on.
Lean efforts, which really.
After every bit of waste that we have in the organization.
For good or bad we have a lot more to do there there's a lot of ways still in our organization, we know that.
So that in my view, just as opportunity and then to me the tech enabled part of it as I highlighted in my example earlier really accelerates the stickiness of change because.
When you automate something almost make it permanent and so yes, it's aggressive that's the kind of company, we want to be and.
We're going to continue to go after the waste that we have an organization and at the same time use these tools to help really show our customers that we're the right partner to grow with.
We think both of those have good effect on the P&L at the end of the day.
Great I appreciate all the help.
And the next question comes from the line of Tom Mahoney with Cleveland Research. Please proceed with your question.
Hello, Good afternoon, I wanted to ask about the components of inventory growth year over year at the end of the year.
You spoke to efforts to move to working capital and move it lower.
It's early in the year in particular, but through the year can you size those efforts or speak to what.
What youre doing on those fronts.
Yes, let me just start and I'll turn it over to Andy to be more specific.
<unk>.
Are the majority of our inventory Thomas is in.
We're all material, we're not a big finished goods.
Holder, we don't have space for it frankly, and we tend to most of our made to order product ships as soon as it's manufactured.
So we don't carry a lot of finished goods in general.
And I think we are at it.
<unk> direct control over that so that's one that I think we're in a good.
Play songs.
Very similarly, you end up with a steady state of whips and I think we're in a good place there. So the majority of the inventory increases that we saw last year were around raw materials, we actually started investing in that in late 2021 seeing that the supply chain wasn't getting any better and that we needed to make sure we can.
Still deliver at a high service level to our customers and we did that through I'd say the first quarter of 2022, and then started seeing that perhaps you need to change that and.
As volumes start coming down at the same time, we are trying to reduce inventory it takes a little longer but still I'm really proud of the team's effort we had.
We increased inventory by about $70 million last year, but yet still delivered I think.
Really good cash flow for the year and so I think we've got more to go.
And so I think we're going to have another great cash flow year. This year in 2023, as we do that but it was it was a conscious effort on our part to build inventory and we just have to get it back down to the main product Andrew do you want to add anything.
A couple if you remember from Investor Day, we mentioned that inventory was up year on year about $100 million in reality as you'll see in the cash flow was up 70% and thats because we started those initiatives early in October . So we were able to reduce inventory pretty significantly in November and December and so far year to date, we are continuing on our trend.
To reduce that inventory down to more normal levels, and leaving that excess safety stock from a supply chain disruption.
Got it that's helpful. And then in terms of facilities you talked about three facilities offline in 2022 are those.
Able to come back as demand returns are there any.
He further facility.
Closures or plans contemplated in the outlook and the better Decrementals that you are guiding to today can you talk to that.
Sure.
First and foremost we one of the first things side.
Address slide joined the company three years ago was capacity and we've been consistently investing in the right capacity. Since then since 2000 early 2020.
<unk>.
So in the facilities, we took offline this year are coming.
Several different flavors, so bear with me one of them was a facility that we don't need anymore that was offline and we will be selling that building at some point.
One of them is a situation where our efficiency and this is this is in.
In Winnipeg, Manitoba up in Canada, we've got and the efficiency down in that portion of the business that we didn't need to buildings. So we're holding onto your own looks we have some growth ideas that we might use it but we were able to drive efficiency in that business enough to consolidate into one building and then the last one.
As more of a situation, where we have the capacity we don't need it right now so I'd call. It more of an idle idling of that facility obviously.
That one will take a little time to get back online but.
We will have to bring people in and train them.
But we have that available to us should the market turn but I would also say with the existing capacity. We have today, we have upside ability should that market turn differently than how we're forecasting the market today. So we're prepared for that as well as frankly, a further downturn.
We will go after further action, we always want us to get the fixed cost under control as the first one would be have to do.
That's what we did.
For most of the second half of last year.
Got it thank you.
And the next question comes from the line of Tim <unk> with Baird. Please proceed with your question.
Hey, everybody good afternoon.
Maybe just.
Bigger picture question, Dave when you when you think of.
Just the.
The goal to kind of gained share every year for the organization I mean are there.
Two or three specific buckets that you that you are kind of targeting for those share gains or is it just a little bit of share.
A lot of different spots.
Thanks, Tim Great question, I think it's aligned to grow really divides up your thought process into smaller what I'll call digestible.
Chunks.
So it may come across in some ways as smaller.
In a discrete fashion, but I'd say in general you think about we have the best dealer network in the industry and.
But we know we don't have 100% of the wallets of that in every case. So first move is to gain.
Share of wallet in your existing channels and so thats always your first move and you do that with either different service offerings or new products. Like this RTA products that are highlighted earlier. So we've done a lot of that with the monitor product. That's what's allowed us to accelerate the growth of that product what product line.
And then obviously your next move is to go find those channels that you want but you don't have and it's a more competitive dynamic obviously in that and there is some stickiness to particularly in the dealer channel.
To do that.
But we think that aligned to grow really allows us to see the opportunities with the right.
Service offering and then as we further develop our tech enabled initiative I think there is going to we're going to bring forward. Some things that really make that a compelling story. So that's generally the approach you can bucket and those two large buckets if you like.
But I think each one is going to be on the street level.
Within the realm of responsibility that we give to people.
Okay. Okay. No. That's helpful. And then just just from an input cost perspective.
Are you seeing kind of a I guess, a leveling out of input cost at this point I mean are you still see kind of pockets of inflation or any sort of coming the outright deflation at this point.
Yes, so I think theres, a couple of things to add.
Add to that and I'll, let Andy kind of give you guys a breakdown of our Cogs here that might be helpful. But I think first and foremost.
Like price, we sort of still annualizing. The inflation, we saw last year. So that's going to take some time through the year plus our inventory was purchased last year. So some of that has higher cost I will say.
Vast majority if not all of our domestically sourced material is now into what I'd call a normal lead time and a normal safety stock so thats turning a lot quicker.
We're pretty comfortable with the inventory position, we have from a domestic supply chain, which is things like hardwood.
The overseas material, but it just has a longer lead time and you've got to work and we want to be good partners for our suppliers and work with them to manage that inventory level down. So those two dynamics do affect and roll through the P&L here, particularly earlier in the year.
However, we are seeing things if you follow some of the indexes, obviously, there's been some decline or flattening of prices in certain areas and then in others there hasnt been as much.
The key things, obviously, we buy a lot of wood particleboard and plywood.
We do buy resin.
And Thats also oil products are part of our finished products that we buy and then we buy.
Hardware Thats steel and those those are the general inputs, Andy you want to talk a little bit about the breakdown of our Cogs. So yes. So when you look at our cost of goods sold about 50% of it is material and that includes freight and so just like resin, obviously impacted by fuel cost as well.
And then our majority bye bye firewood in wood products.
And then the remaining cost of sales is about 30% labor and then 20% overhead and that overhead is variable and fixed.
Split a little bit.
About 50, 50 between fixed and variable on that overhead.
What's important I mentioned is our distribution cost which includes sprayed out.
Have it in SG&A I believe others have it up in cost of goods sold so we have that down in SG&A and it's about it's usually around mid single digits of net sales and Thats, obviously impacted by steel and oil and great concern.
Okay. Okay, Great and then just I guess last one just how do you think about normalized free cash flow for the organization and I guess for 23.
How would how it 23 kind of perform relative to a normalized cash flow number should be.
So we do anticipate.
2022, our free cash flow was 115% of net income and we again in 2023 plan to deliver free cash flow in access and netting of net income.
A couple of dynamics going on obviously performance EBIT performance as we're going to maintain margins and deliver there.
Well on our way to working capital improvements.
We talked about already on inventory and we will be.
Controlled in our Capex spend we're going to focus our capex spend.
<unk>.
Particularly efficiency related items Tech and tech enabled item and we will keep that Ali control. So again, we expect a strong free cash flow again in excess of net income in 2023.
And Tim.
<unk>.
On it you know this.
Help me, but I think cash is a great measure of performance and it's top of mind for us. So we'll continue to drive that as we go forward.
Great great. Okay, well good luck on the on the on the 23 here. Thanks guys.
Thanks, Kevin.
Thank you at this time there are no further questions now I'd like to turn the floor back over to Karen Pollock for any closing comments.
Thank you operator, and thanks, everyone for joining US we appreciate your interest and support of the company and we look forward to speaking on future calls this concludes our call.
Thank you everyone. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
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