Q2 2023 Masonite International Corporation Earnings Call
Welcome to Masonite second quarter 2023 earnings conference call.
During the presentation, all participant lines 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.
Thank you and good morning, everyone. We appreciate you joining us for today's call with me here. This morning are Howard Heck Us President and Chief Executive Officer, and Russ teach them, our executive Vice President and Chief Financial Officer.
Also joining us today for Q&A, Chris ball, our president of global residential we issued a press release and earnings presentation yesterday reporting our second quarter 2023 financial results. These documents are available on our website at masonite Dot com.
Before we begin let me remind you that this call will include forward looking statements. Each forward looking statement contained in this call are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements.
Additional information regarding these factors appears in the section entitled forward looking statements in the press release, we issued yesterday.
More information about risks can be found under the heading risk factors and masonite. It's most recently filed annual report on Form 10-K, and our subsequent Form 10-Q, which are available at SEC Gov and at Masonite Dot com.
Forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements.
Our earnings release and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations which are in the press release and the appendix of the earnings presentation.
Our agenda for today's call includes a business overview from Howard followed by a review of the second quarter results from Russ and then Howard will provide some closing remarks, and we will begin a question and answer session and with that let me turn the call over to Howard.
Thanks, Rich good morning, and welcome everyone.
Beginning on slide four I'm pleased to report that Masonite delivered strong financial results in the second quarter executing effectively against a mixed macro backdrop, while making continued progress on key strategic initiatives.
Net sales in the quarter were $742 million down 3% year over year as macroeconomic conditions continue to suppress demand in our end markets. However, adjusted EBITDA of $118 million was equivalent to last year, despite lower volumes with margins, improving 50 basis points to 16%.
Due in large part to the ongoing execution of our 2023 playbook initiatives.
Year to date operating cash flow hit a record high $218 million for the six months ending in June thanks to the outstanding work. Our teams are doing to optimize working capital levels across the company.
As noted in the press release issued yesterday, we are excited to announce that we will host a virtual investor day on September 19th to discuss the growth opportunities. We are targeting over the next several years the execution of our doors that do more strategy and our long term financial objectives for value creation I encourage you to add this about your calendar and refer to our press.
Release for details on how to register.
Moving to the business and operations highlights for the quarter.
As expected we saw weaker demand in Q2 compared to last year due to double digit declines in both housing starts and triple our activity during the quarter. We were encouraged to see early signs of an uptick in U S new home construction.
While the scale and durability of this trial is still to be determined. We believe first half volume trends are likely to continue throughout the year with new construction related demand stronger than we originally expected offset by softer than expected demand in triple are resulting in volumes down low to mid teens for the year.
As the industry most through this economic cycle, we remain laser focused on taking action to optimize our performance based on factors within our control.
Price cost management is one of these important levers that we're using to preserve margins in a soft market to effectively coiled spring for accelerated margin growth when demand strengthens.
Our global sourcing team is aggressively pursuing cost reductions on freight and raw materials to help offset ongoing inflation in overhead wages and benefits.
In addition, I am pleased to report that we're also on track to capture the cost benefits from our previously announced restructuring actions.
And the <unk> integration synergies that we projected at the beginning of the year.
Speaking of endure up the business delivered an excellent quarter with margins improving year over year. The team is doing an outstanding job and we remain confident in the value of this acquisition will bring to both our customers and our investors.
We continue to optimize our manufacturing footprint in North American residential business with the closure of another legacy plants are second this year and the opening of a new hybrid facility in Texas.
These moves reflect our ongoing strategy to modernize and reshape our network to deliver a superior level of service that differentiates us in the market I will talk about this in more detail in just a moment.
Overall, we're very happy with the performance in the quarter, we improved margins, we generated formidable cash flows to fund our capital allocation priorities and we remain confident in our ability to deliver our full year outlook.
Now, let's turn to slide five.
Earlier this year, we presented our 2023 playbook, which includes a number of margin opportunities and growth initiatives as outlined here on the left side of the slide.
We currently have projects underway throughout the company that address all parts of this playbook, but today I'd like to highlight one of our significant growth initiatives centered on enhancing value for our customers with superior service.
During the quarter, we opened a new hybrid production and distribution center the Dallas Metropolitan area. This facility was launched in collaboration with channel partners. As a result of joint business planning focused on optimizing our collective supply chain.
Consistent and reliable supply is one of our strategic pillars, and an area, where we continue to raise the bar.
In addition to pre hanging in finishing doors at this site for the retail channel we are leveraging the space to pilot new make the stock program for the wholesale channel.
This program will allow us to fill orders for full pallets of high moving Skus in just three days this was less than half the time it would take to fulfill a request through the traditional make to order process.
This hybrid facility and new quick ship program is a great example of how we're leveraging our supply chain optimization to improve service and using strategic investments and reliable supply to create win win opportunities together with our channel partners.
Dallas and the South Central region are high growth housing markets and an ideal place for both masonite and our channel partners to benefit from these capabilities.
My Congratulations go out to the sales and operations teams have brought this project to life and my sincere.
Our appreciation to our business partners, who are embracing and benefiting from our doors that do more strategy I'm.
I am pleased with the progress, we're making on all of our growth initiatives and I look forward to discussing them with you in more detail at our upcoming Investor day now.
Now I'd like to turn the call over to Russ to provide more details on our second quarter financial performance Russ.
Thanks, Howard and good morning, everyone.
Let's turn to slide seven and start with a review of our consolidated financial results.
Second quarter net sales were $742 million down 3% from last year in.
In line with our original expectations, we saw a 15% decrease in volume as well as a combined 2% decrease from unfavorable foreign exchange and component sales.
These were partially offset by an 8% benefit from the enduro acquisition and a 6% increase in E. P.
The volume decline continues to reflect soft end market demand in our north American and U K residential markets.
Year over year gross profit decreased just 1% to $178 million, but gross margin improved 40 basis points to 24% on strong execution of our cost management initiatives.
Selling general and administration expenses were $99 million up 9% year over year due to the addition of SG&A from enduro.
Second quarter, net income was $48 million compared to $59 million in the second quarter of 2022.
The decrease was driven by higher non EBITDA costs, including increased depreciation and amortization higher interest expense and cost associated with previously announced restructuring plans, all partially offset by lower income tax expense.
Diluted earnings per share in the quarter were $2.16 compared to $2.58 last year.
Adjusted earnings per share, which exclude restructuring costs were $2 30.
Adjusted EBITDA was $118 million consistent with last year.
Adjusted EBITDA margin, however, improved 50 basis points, which like gross margin was driven by excellent cost management.
On the right hand side of this slide is more detail on factors that contributed to the solid delivery of adjusted EBITDA in the quarter.
The combined benefit of volume and a U P remains favorable as carryover price and positive mix was enough to offset volume declines.
Material costs overall remained slightly unfavorable despite reductions in inbound freight.
Factoring in distribution cost also had a net negative impact on adjusted EBITDA in Q2 as cost management and continuous improvement initiatives, only partially offset the substantial impact of volume deleveraging and wage and benefit inflation.
Our operations team remains keenly focused on implementing further actions where possible to align costs with current production volumes.
SG&A had a positive impact on adjusted EBITDA, primarily driven by savings from our restructuring actions.
You will see on the acquisition lined it enduro contributed about $10 million to our consolidated results.
As Howard mentioned, the enduro team delivered a strong second quarter.
Despite experiencing similar end market softness that impacted our core north American residential business and Dora delivered an adjusted EBITDA margin in the mid teens up 50 basis points year on year due to cost management and steady progress on unlocking synergies.
Moving on to slide eight let's look at highlights from the North American residential segment.
Second quarter net sales were $585 million.
This 4% year over year decrease was driven by an 18% decline in volume and a combined 1% decrease from unfavorable foreign exchange and lower component sales.
Partially offset by 5% A&P growth and a 10% lift from the enduro acquisition.
Constrained to end market demand and customer inventory adjustments largely accounted for the volume decline this quarter with the balance attributable to our purposeful decisions to prioritize margin over unit volume.
Adjusted EBITDA in the quarter was $118 million down 6% from last year.
Adjusted EBITDA margin remained above 20% despite dilution from enduro as our 2023 playbook initiatives fully offset the impact of meaningfully lower volumes.
Enduro delivered great results in the quarter. The team is slightly ahead of plan and delivering the expected $8 million in annualized synergies and they continue to focus on maintaining their customer service and product innovation edge in the market.
During the quarter. We also began the nationwide rollout of our masonite performance door system at retail.
This best in class exterior fiberglass door system uses patented enduro components, and a 64% better at keeping air and water out then the leading competitor.
This is the second nationwide retail product introduction this year following on our barn door launch in Q1.
And is a great example of how we are executing on our strategy to drive product leadership and mix shift in the North American residential market.
Now turning to slide nine and our Europe segment.
Net sales of $66 million were down 11% year over year, driven by a 9% decrease in volume and a 2% decrease in component sales.
Adjusted EBITDA was $3 million in the quarter with an adjusted EBITDA margin of 4%.
Margin was down year over year, primarily due to volume deleveraging, particularly in the higher margin exterior door business.
In Europe , we do most of our business in the U K market, which continues to experience a high single digit inflation and steadily rising interest rates.
Our sales decline there was general generally reflective of overall market dynamics.
New home completions were down 11% in the quarter with triple our activity tracking down 9% for the full year.
We took some limited price increases in Europe in July to offset inflation on material costs wages and benefits and overhead and we continue to carefully manage price cost.
The housing and Triple our markets are both forecasted to grow modestly in 2024 as consumer confidence and the cost of living stabilizes.
In the meantime, our sales and marketing teams are focused on a new wave of customer engagement activities aimed at improving masonite share of wallet and offsetting current overall market softness where possible.
Moving to slide 10, and the architectural segment.
Net sales increased 16% year over year to $88 million driven by a 24% increase in our U P. Partially offset by a 5% decrease from lower component sales.
And a 3% decrease in volume.
Adjusted EBITDA was $7 million in the quarter up from breakeven in the prior year and up $2 million sequentially from Q1 2023.
Driven by carryover price and a particularly favorable mix of high a U P project work in the quarter.
Overall this business continues to benefit from the hard work that the team has done to manage price cost stabilize our supply chain.
And optimize our processes to drive both efficiencies and customer service improvements.
In Q1, we announced the initiation of a formal review of strategic alternatives for the architectural segment and that review remains in progress.
A number of outside parties have expressed interest in acquiring the business and divestiture remains an option for us.
We will continue to keep you informed as we move forward through this process.
Let's turn now to slide 11 for a summary of our liquidity and cash flow performance at.
At quarter end, our total available liquidity was $637 million.
Including $317 million in unrestricted cash.
Net debt was $788 million, resulting in a net debt to adjusted EBITDA leverage ratio of one eight times on a trailing 12 months basis down from two one times at the end of the first quarter.
Cash provided by operations was $218 million through the end of the second quarter compared to $34 million in the same period of 2022.
As Howard noted earlier, the significantly higher cash generation is being driven principally by strong execution of our enterprise wide working capital reduction program.
Year to date capital expenditures of approximately $58 million continued to track with our full year outlook.
Year to date free cash flow was $160 million.
<unk> us well to achieve or surpass the upper end of our outlook for the full year.
During the second quarter Masonite repurchased approximately 159000 shares of stock for $14 million or an average price of $90 58.
We also repaid $9 million of long term debt in the quarter in line with the amortization required under our term loan a.
And with that I'll turn the call back to Howard for closing comments.
Thanks Russ.
In summary, I'm very pleased with our financial results for the quarter and with the great work. Our teams are doing to prioritize and deliver improvements throughout our business.
Execution of our 2023 playbook is effectively supporting margins and enhancing our long term competitive position with an optimized manufacturing footprint deeper engagement with our channel partners and expanded consumer access to our best in class products.
And theres more to come.
We continue to invest in our doors that do more initiatives to fuel growth differentiation and category leadership and we look forward to sharing updates with you about continued enhancements to our business in future quarters.
Right now demand in our end markets is constrained, but consistent with our original outlook and we remain confident in the medium and long term secular tailwind that underpinned demand for our products.
Our solid first half gives us confidence in our full year financial outlook initially shared with you in February .
As we work through the back half of the year, we expect that end market performance will continue to depend heavily on the macroeconomic environment, but we believe that our 2023 playbook positions masonite for optimal performance in both this year and next.
We're taking advantage of a significant opportunity to rightsize, our working capital and year to date have delivered the highest level of cash flow since masonite became a public company in 2013.
Finally, we hope that you'll join us for our 2023 Investor day scheduled for September 19th or Russ and I will be joined by other masonite leaders to give you a deeper insights into our business our strategy and our plans for growth over the next several years now.
Now I'd like to open the call to your questions operator.
Thank you Mr. Heck, Yes, if you would like to register a question. Please press star one.
Using a speaker phone please lift your handset before entering your request.
We ask that you limit yourself to one question and one follow up.
Ladies and gentlemen, as a reminder to register a question press Star one on your telephone at this time.
One moment, while we poll for questions.
Thank you. Our first question comes from the line of Trey Grooms with Stephens. Please proceed with your question.
Hey, good morning, everyone.
Good morning.
Hey, good morning, first I wanted to kind.
Kind of touch on the volume trends.
Howard I think you mentioned first half volume trends should continue through the balance of the year.
You know with the uptick that we've seen in and some of the single.
Single family housing start data and also you know some of the more Pos.
Positive commentary, we've been hearing from homebuilders.
And at what point would you would you guys expect to see a benefit from that or maybe an uptick in your volumes going into single family.
Yes, Trey this is Howard great. Great question, we're certainly encouraged by the recent uptick in U S single family housing starts it's a positive trend in and as we've said many times the midterm and long term secular tailwind for demand for our products are strong it's a matter of pegging when that's going to hit right keep in mind.
In the first half single family housing starts were down 21% and Theres more doors in a single family home than a multifamily hill and so we need that single family home to uptick as you said, so that's an encouraging sign.
But the flip side of that is we think triple our is going to be weaker than we had originally projected but consistent with what we saw in the first half. So when I said, we expect second half volumes to be consistent with sort of that new home construction is better than we expected going into the year.
And that'll be strengthened by single family starts certainly and triple are slightly worse than we expected going into the year the volumes really.
Consistent with how we expected the year play out.
Just a matter as I said, Trey or at what time is that going to flip for us.
Third late third fourth quarter first quarter next year, a little difficult to peg, but we think the playbook is right to allow us to deliver optimal performance and we're very confident in the long term tailwind.
Got it thanks for that and then you.
You know I think maybe you touched on it just a little bit but any color you could give us kind of on the you know your thoughts on the channel inventory levels out there as we're kind of you know.
Progressing into maybe the seasonal.
Slower period, but also head of what maybe could be up.
Better demand picture next spring.
Hi, Tracy I'll, let Chris take that one yeah Christmas closest to that so go ahead, Chris Yep alright. Thanks, So trade on that one just as a reminder, our business is pretty evenly split between that triple our side as well as new construction on the new construction side, which is mostly our wholesale business that services that we see the inventory position is relatively.
Balanced obviously, there's some green shoots happening in the near term here, but as we look forward and we look at where we're sitting at today. We think we're in a very good position to provide that reliable supply and make sure that we're able to capture that demand as it returns as Howard discussed on a triple our cider, which is more of the retail side of the business, we haven't seen a correction there.
Has been obviously, a weaker trend on triple or than what we had expected coming into the year, but as you look at our back half guide we've contemplated some inventory correction potentially happening. So we still think kind of back to the earlier comments the years largely playing out as expected and we think that our guide reflects that.
Got it that's super helpful. I'll pass it on and look forward to hearing from you guys in September . Thank you. Thanks.
Thanks drag strip.
Our next question comes from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question.
Hi, good morning, maybe to follow on the Triple our outlook being lowered a bit can you talk to order of magnitude there and if that's solely from the retail channel or if that includes any wholesale.
Yeah, Stephen Good question.
Primary.
Triple our business is driven through our retail channel of course wholesalers participate in that channel as well, but they are more focused on new construction.
And when we say worst we're talking about worse than the the the projections we had to start the year. So we're not expecting triple our to get any worse than it is now it's just slightly worse than it was so remember we said that we thought new construction would be down 20% and we thought triple our would be down.
High single digits.
And what we found is that new construction is sort of down low mid teens and triple our is down maybe low double digits. So the flip in our business is slightly skewed towards triple R. So it slipped a little bit and how that mix is playing out but generally that means volume is as we expected. So this isn't a big.
Meaningful shift, but there is a flip between triple our new construction.
Okay helpful and then on the Texas facility, which I'm sure more of this will be flushed out at the investor event, but a couple of questions there on <unk>.
Are you projecting margin out of the plant to be well in excess of the legacy plant. It is replacing could you walk through the components a order of magnitude of that difference and ultimately our volume is expected to be well in excess of the plant it is replacing.
Yes, Steven it's Russ I'll take that one I wouldn't necessarily think about this facility is focused on a financial or margin play necessarily as focused on a service play right. It's a hybrid facility that has the ability to both hold inventory to execute on this make to stock program that we've talked about.
Out with some of our key channel partners in that region as well as do door fabrication work that could be absorbed from other sites, it's not being absorbed necessarily from the plants that we have announced closure for so this is more about concentrating in one large facility, where we can more efficiently service.
Our customers in an area with inventory that we can turn on a rapid basis, it's supporting our channel partners growth and a key growth market I wouldn't view this as being meaningfully accretive or dilutive from a margin point of view for Chris's any res business.
That's great color. Thank you.
Thanks, David.
Our next question comes from the line of Tim <unk> with Baird. Please proceed with your question.
Yeah, Hey, guys good morning.
Yep.
Hello.
Maybe just kind.
On the on the pricing side.
And I know that you are you still kind of benefiting from some of the carryover price last year.
And specifically I guess across all the businesses, but you.
You know kind of what have you seen in the market around pricing and how should we think kind of the back half and into 'twenty, one should kind of look from a price mix perspective.
Yeah. Thanks for the question, Tim Obviously price cost management is really an important part of our operating philosophy, we've talked about consistently for.
Quite some time.
As I mentioned last quarter.
We protect manage pricing inflationary markets and we protect them manage margin in deflationary times, but really it's important to know there is there's no one size fits all solution here. So we're managing price cost very tightly by product and by segment and by geography and in some cases that means we're going to walk away from business.
With less strategic customers, that's focused sort of solely on finding the cheapest store.
So when given the choice for us between lowering our price and lowering our margins in order to retain volume, which is generally counter to that price cost philosophy, we're generally going to choose to maintain and grow our margins, which is this notion of coil in the spring for volume recovery, because it's important to note that the value homeowner.
Ascribe the doors, which is more than they're paying today in many cases, we want to capture that value for us and for our channel partners.
And we think we're bringing more value through our doors that do more strategy, including things like the service proposition with our new hybrid facility in Texas. So.
It's a it's an interesting environment, obviously today, but we are committed.
Committed to our price cost management philosophy, and protecting those margins to coiled spring for win when demand returns and as we said as I said earlier to <unk> question. The mid to long term secular tailwind for this market are going to be significant.
Okay. Okay. So I mean, I guess just to clarify are you seeing incremental price pressure in the market or is it just you know just overarching way you want it.
Make sure that you kind of optimize price for sure.
Product and by segment.
Well you can imagine 10 are in a cycle like this when demand is soft we have a lot of competitors some bigger national competitors and some smaller regional competitors and they will choose to behave a little differently, depending on the circumstances. So I think it varies a bit by sort of by customer and by region and who is there to supply them.
Again really not a one size fits all I cant say that broadly we're seeing across the country pricing pressure, but there are certainly pockets, where we have.
Opportunities to lower our price in order to retain volume and in those cases, we generally choose not to do that.
Okay. Okay understood and then and then just Russ maybe kind of put into free cash flow I mean really good performance here in the quarter, how would you kind of thinking about that.
Free cash flow for the year and I'm going to try to squeeze one more in I think about it but just enduro.
The contribution there look to be better at least that we model that maybe versus expectation. So just kind of how do you expect that endure a business to kind of trend for the rest of the year.
Okay. So so let me cover each of those two pieces in order to him.
First of all with respect to the cash flow performance.
We are very pleased that the business is responding very well to some very purposeful initiatives that we put in place earlier this year to specifically manage working capital and of the $160 million of free cash flow that you've seen from the business in.
In the first half, which is compares to a very modest use of cash in the first half last year over $90 million of that is driven by working capital improvements and so those strategies that I talked about that they're not just about inventory resetting to more normalized levels now that supply chains are starting to heal its across all areas.
Harmonizing our payment terms.
Where are we strategically place inventory in the network. So that we can run it still maintained very reliable service levels with leaner levels of inventory in the balance sheet and then also harmonizing our AP terms and we think that this is a multi year effort and with multiyear results and if I just step back and give you.
<unk>, maybe some context around the level of improvement we've seen from a working capital ratio of point of view.
When our working capital peaked call it in middle of last year, our core working capital, which we define as receivables and inventory less trade AP. So setting aside accrued expenses. It peaked at almost 25% of trailing 12 month net sales.
We ended the quarter with that at roughly 21% and we think that there's probably.
Our pathway to trend out a little bit lower even by the time, we get to the end of the year and then improve it further across 24 and 25. So that's why I commented as I did during the prepared remarks that that progress and the strong execution. The team has demonstrated that that leaves us pretty confident that we're in a position to hit hit or even exceed the top end up.
The $220 million to $250 million of free cash flow guide that we provided earlier this year.
Turning to endure a the team is doing a really nice job as we commented on around managing cost in an environment, where they are also seeing volume pressures that the broader north American residential market is and Theyre working very quickly on some of the synergy realization is running slightly ahead now.
Now there's some seasonality in that business also right. So I wouldn't necessarily expect that that business is going to deliver mid teens margins through the balance of the year or even for the year in its entirety, but the fact that they're performing as they are in what's a really difficult macro backdrop for the north American res business broadly is very encouraging to us and in longer term.
We're only that much more excited about how the development routine between the door in the system evolves and you know Howard made a comment the other day that stuck with me and I've seen it myself too. It is really cool to watch how the product development teams between enduro and legacy Masonite worked together.
Because one was all about optimizing performance of frame components. The other was all about optimizing performance of the door slab you put the two together and Youre seeing light bulbs go off in new ways and so we think that only improves the long term value realization opportunity from this asset, particularly in the exterior door margin.
Okay awesome. Thanks for the color guys. Good luck on this year.
Thanks, Tim.
Thank you Mr. Heck, Yes, we have no further questions at this time I would now like to turn the floor back over to you for closing comments.
Thank you Christine and thank you all for joining US today. We appreciate your interest and your continued support this concludes our call.
Christine will you please provide the replay instructions.
Thank you for joining Masonite second quarter 2023 earnings conference call.
This conference call has been recorded.
The replay may be accessed until August 23rd to access the replay. Please dial 8776606853 in the U S or to your 161 to 7415 outside the U S.
Enter conference I D number 13739973.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.