Q3 2023 Masonite International Corporation Earnings Call
Greetings and welcome to the Masonite third quarter 2023 earnings Conference call.
During the presentation, all participants will be in a listen only mode.
After management's prepared remarks investors are invited to participate in a question and answer session. Please.
Please note that this conference is being recorded.
I'd now like to turn the call over to Richard Leland, Vice President Finance and Treasurer. Thank you. Please go ahead.
Thank you and good morning, everyone. We appreciate you joining us for today's call.
With me here. This morning are Howard <unk>, President and Chief Executive Officer, and Russ teach my Executive Vice President and Chief Financial Officer also joining us today for Q&A as Chris Hall, our president of global residential.
We issued a press release and earnings presentation yesterday reporting our third quarter 2023 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 are subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additionally.
Additional information regarding these factors appears in the section titled forward looking.
Statements in the press release, we issued yesterday.
Information about risks can be found under the heading risk factors and May stay. Its 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.
The forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements. Our earnings release and today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliations which are in the press release and the appendix of the earnings presentation.
Our agenda for today's call includes a business overview from Howard followed by a review of the third quarter results from Russ and then Howard.
Closing remarks, it'll begin a question and answer session with that let me turn the call over to Howard.
Thanks, Rich good morning, and welcome everyone.
Starting on slide four.
I am very proud of the masonite team for delivering solid third quarter results in the face of a challenging macro environment, while also making meaningful progress on strategic initiatives that lay the foundation for our future growth.
Net sales in the quarter were $702 million down 4% year over year with rising mortgage rates, putting continued pressure on our end markets.
Despite these headwinds our disciplined focus on price cost management enabled us to hold margins nearly flat year over year and deliver $107 million of adjusted EBITDA.
We continued to generate exceptional levels of cash flow in the quarter driven by the success of our enterprise wide working capital optimization initiatives.
Year to date through September operating cash flow was a record $310 million and notably our free cash flow has already surpassed the low end of our full year guidance.
Also during the third quarter, we held our 2023 virtual Investor day, where we reviewed our long term strategy and financial goals.
The theme for the day was invisible to invaluable, which summarizes the key objectives of our integrated doors that do more strategy.
To drive product leadership with innovation and differentiation that make our doors invaluable to homeowners to.
When the sale with new marketing and customer engagement initiatives that make the masonite brand invaluable.
To deliver reliable supply by leveraging our scale vertical integration and the <unk> advantaged operating systems to make masonite the business partner invaluable.
And to achieve our 2027 financial goals of reaching $4 billion in net sales for more organic growth and strategic M&A, while also delivering between 19 and 20% adjusted EBITDA margins and generating over $1 billion in cumulative free cash flow ultimately, making an investment in Mesa.
Right and valuable to our shareholders.
As I said in my closing remarks at Investor Day, Masonite as an industry leader in residential doors.
We have identified opportunities for both topline and margin growth and I believe we are well positioned with the right team the right assets and the right strategy to convert these opportunities into strong long term financial results and shareholder returns.
In case, you missed the event you can find a complete replay as well as downloadable copies of all presentations at Investor <unk> Masonite Dot com.
Returning to our third quarter business highlights, we saw considerably softer demand year over year as both new construction and triple are continued to be impacted by ongoing mortgage rate increases.
Our team has responded to this sustained market weakness with consistent execution of our 2023 Playbooks that includes a balanced mix of actions designed to maintain margins, while executing our strategic growth initiatives.
Throughout the third quarter, we stay focused on servicing our customers and adjusting to order volatility all while maintaining overall price cost favorability.
We continue to flex variable costs and aggressively pursue savings opportunities to help maintain margins in the near term and effectively coiled spring to realize accelerated margin growth when end market demand strengthens.
Simultaneously, we continue to invest in strategic initiatives to support future growth such as the new Masonite Dot Com website.
Marketing support for mixed improvements and the commercialization of new products recently released in our retail channel.
The acquisition of <unk> earlier, this year has been another bright spot for us.
Our success in achieving the projected synergies and smooth integration of this business has resulted in strong performance highlighted by our second consecutive quarter of mid teens margins and an adjusted EBITDA contribution of $10 million to the consolidated business.
On the heels of the successful enduro transaction, we completed our second acquisition of the year by purchasing Fleetwood subsequent to quarter end on October 19th.
Let's continue to slide five I am thrilled to share more details about our addition of the Fleetwood brand of premium glass doors to the masonite product portfolio.
As you can see in this beautiful picture from a customer location in Los Angeles, Fleetwood doors, unmistakably define a home, enabling a seamless flow between indoor and outdoor living spaces, one open while giving the home security abundant natural light and spectacular views when closed.
You can find many more examples like this on the portfolio pages of their website at Fleetwood USA dotcom.
Turning to slide six.
In the luxury residential glass door market Fleetwood is the leader that is well known among architects and builders <unk>.
Product lineup includes a range of folding slide pockets hinge and pivot doors as well as the accompanying glass walls and windows systems. These.
These products are highly customized but all take advantage of the unique technology and manufacturing processes that have been developed by Fleetwood to meet or exceed the strictest quality standards.
Fleetwood door panels can range in size up to 20 feet tall, and 12 feet wide and are made with custom design precision hardware components to operate effortlessly, while being able to withstand the extreme weather that often comes with some of the most exquisite views in the world. In fact, we would hold several patents and trademarks for products.
With energy saving and weather resistant features.
When evaluating the business we saw several compelling attributes first.
<unk> business strategy of bringing innovative door systems to the residential market the salt life I'm living problems with a special focus on customer service and building close relationships with channel partners is highly aligned with our own doors that do more strategy.
Secondly, the acquisition allows us to more effectively address the large patio door market and indoor outdoor living trend, but with a focus on premium aluminum framed glass segment, which we view as more differentiated than the mainstream sliding vinyl patio door segment.
And third as we said at our recent Investor Day, we are intent on adding high value better and best products to our comprehensive range of doors that do more.
The acquisition of Fleetwood provides an immediate lift to our portfolio of best products and helps us move closer to our 2027 goals.
Moving to slide seven let me give you more detail about Fleetwood, which has been family owned it since its founding in 1961.
The business is located in Corona, California and operates a modern 200000 square foot manufacturing facility. This is also the site for the administrative headquarters as well as R&D laboratories, which include onsite Frost wind water as severe weather testing capabilities.
Company has approximately 350 total employees.
About 70% of <unk> revenues come from door systems, and 30% from matching glass walls and windows systems through.
Through targeted advertising and relationships established over many years with some of the country's top architects leawood has built a well known and trusted brand channel partners include more than 200 specialty dealers across the United States and Canada, Although the majority of its sales today about 70% are concentrated on the west coast.
They have had unusually strong results in 2023 due to a large backlog of orders that resulted from supply chain constraints in the prior year.
In 2024, we expect Fleetwood to contribute more normalized results to masonite with an estimated $150 million in net sales and $35 million and adjusted EBITDA. We also expect the business to be accretive to EPS in 2024.
Now that the tax benefits, we expect from this transaction our purchase price would equate to approximately $255 million or seven times pro forma EBITDA on.
Attractive purchase price multiple for a tightly adjacent business with great growth potential and margins in excess of 20%.
As a result, Fleetwood clearly met both the strategic and financial screens, we've established for assessing M&A opportunities.
The current management team at Fleetwood, we will continue to operate the business independently reporting results for our North American residential segment. We are very excited about the future potential for this business and I'd like to welcome all of the fleet with employees customers and partners to the Masonite family and thank you for your efforts to help fleet will continue to grow and thrive.
<unk> as a leader in the market.
Now I'd like to turn the call over to Russ to provide more details on our third quarter financial performance Russ.
Thanks, Howard good morning, everyone.
Let's turn to slide nine for an overview of our consolidated financial results.
Third quarter net sales were $702 million down three 5% from last year, driven primarily by a 13% decline in volume.
This decline was slightly greater than what we were anticipating at the time of our Q2 earnings call. When there was more optimism about macroeconomic conditions in the north American residential market and builder sentiment was trending upward.
Partially offsetting the volume impact this quarter was an 8% benefit from the enduro acquisition and a 1% increase in average unit price or <unk>.
Year over year gross profit decreased 1% to $166 million due to the lower net sales. However, gross margin improved 60 basis points to 23, 6%. Thanks to our continued focus on cost management.
Selling general and administration expenses were $99 million.
Up 19% year over year due primarily to the addition of SG&A from Enduro and an increase in M&A related costs.
Third quarter net income was $41 million compared to $57 million in the third quarter of 2020 to.
The decrease was driven by higher non EBIT costs, including increased depreciation and amortization higher interest expense and cost associated with our previously announced restructuring plans.
All partially offset by lower tax expense.
Diluted earnings per share in the quarter were $1 86.
Compared to $2 54 since last year.
Adjusted earnings per share, which exclude restructuring costs as well as acquisition and due diligence related cost were $2 four.
Adjusted EBITDA for the quarter was $107 million.
Down slightly from $112 million last year.
Adjusted EBITDA margin of 15, 3% was within 10 basis points of prior year, Despite lower volume.
On the right hand side of the slide is more detail on factors that influenced adjusted EBITDA in the quarter.
The combined impact of volume into <unk> turned negative in the quarter as the majority of carryover pricing from 2022 expired.
Material cost impacts turned positive in the quarter. However, as material inflation is broadly stabilized and inbound logistics costs have declined.
Although this is a welcome development it reflects a level of aggregate deflation on material and logistics cost that is still tracking slightly behind what we had originally expected to see by this point in the year.
As we noted on our second quarter earnings call. Our original outlook for low to mid single digit deflation for the full year has been tracking towards the low end of that range.
Keep in mind that one point of material cost deflation is worth roughly $10 million to adjusted EBITDA at a consolidated level.
Yeah.
Factory and distribution costs were negative as expected due primarily to the combined impact of volume deleveraging and inflation, partially offset by continuous improvement and cost control initiatives.
On an adjusted EBITDA basis, SG&A was up just slightly due to incremental investments in strategic growth initiatives.
Outside of those expenses, we were able to offset inflation on wages benefits and other SG&A with restructuring actions and careful cost management.
And lastly, as Howard noted earlier, the Enduro acquisition contributed $10 million of adjusted EBITDA in the quarter.
Turning to slide 10, let's look at highlights from the North American residential segment.
Third quarter net sales were $553 million down 5% year over year, driven by a 14% decline in volume and a 1% decrease in <unk>, partially offset.
Offset by a 10% benefit from the <unk> acquisition.
Soft end market demand accounted for most of the volume impact in the quarter.
The wholesale channel was down mid teens, including the impact of decisions to prioritize margin over unit volume.
In the retail channel was down low double digits on weaker Pos.
Due to lower triple our spend and modest inventory adjustments.
Price cost remained positive in the quarter. However, <unk> was down slightly now that we've lapped all 2022 price actions.
Product mix continued to be a modest tailwind in the quarter.
Okay.
Adjusted EBITDA in the quarter was $109 million.
Down 5% from last year.
Adjusted EBITDA margin decreased 20 basis points year over year to 19, 7%. Excluding enduro. However segment margins were actually up 20 basis points.
Although enduro margins are modestly dilutive to the overall segment. The business is performing very well delivering strong mid teens EBITDA margins and running ahead of our original synergy estimates due to strong collaboration across all areas of integration.
Enduro has embraced the doors that do more strategy and these results reflect the positive impact of work done on reliable supply and customer engagement.
In terms of product leadership, the Enduro engineering team has partnered with the sales force to support the nationwide rollout of the Masonite performance store system.
While continuing to focus on joint product development efforts on higher value exterior door systems.
As we said in our recent Investor day, the doors that do more strategy is our north store, which helps differentiate us in the door industry.
And it is always nice to get affirmation from our customers.
In the third quarter, we were honored to have two of our largest customers the home depot and Lowe's.
Recognized us with millwork partner of the year awards for the hard work our teams have done to deliver consistent and reliable supply for our leadership in bringing new and innovative products to the market and for our collaboration on sales and marketing initiatives.
We have partnered with both a home depot and Lowe's for many years on joint business planning initiatives and it's great to see our efforts bearing fruit.
So a big shout out this quarter to the makes <unk> that are working to activate the doors that do more strategy with our customers.
Now turning to slide 11, and our Europe segment.
Third quarter net sales were $65 million.
Down 2% year over year.
7% lower volume was offset by a 7% favorable impact from foreign exchange.
But <unk> was lower by 2% due entirely to the mix impact of relatively weaker results in exterior versus interior doors.
Adjusted EBITDA was $4 million in the quarter with an adjusted EBITDA margin held roughly flat year over year at 6%. Despite these incremental volume and mix headwinds.
In the U K, which accounts for over 90% of our Europe segment sales, new home completions were down year over year by 14% and indications are that the triple our market is down over 20%.
Our interior door business, which primarily serves new construction meaningfully outperformed the market. Thanks to service levels, which allowed us to win a larger share of wallet with our customers.
We expect this tailwind to diminish through year end as new construction slows seasonally but remain focused on maintaining the service levels as a competitive advantage.
On the exterior door side of the business. We are seeing sales declines that are more in line with the triple our market.
Homeowners in the UK are still facing exceptionally high cost of living challenges and have cut back discretionary repair and remodel projects.
Historically, we see elevated exterior door sales in Q4 in the run up to the holiday season, but we are not expecting that to occur this year.
While the macroeconomic situation in the UK is not ideal our Europe team is aggressively managing price cost to offset inflation, while maintaining service levels and executing targeted marketing initiatives to win new business.
Moving to slide 12, and the architectural segment.
Third quarter net sales increased 4% year over year to $81 million driven by an 18% increase in A&P, partially offset by 10% lower volumes and a 4% decline in component sales.
Adjusted EBITDA was $5 million in the quarter up from breakeven in the prior year.
We are pleased with the year over year improvement in the quarter, but our expectations are somewhat muted for Q4 as the pace of orders through the quarter has slowed in line with the softening end market.
With respect to the strategic review that has been underway for the architectural segment. We continue to expect that a complete or partial divestiture of the business is the most likely outcome.
Until recently, we were negotiating exclusively with one party to achieve a sale of the entire segment.
As you can imagine a carve out of an entire business is complex.
Those negotiations ultimately reached a point, where we did not feel value would be maximized on behalf of our shareholders.
As a result, we are now in discussions with other interested parties with respect to either a full or partial divestiture.
We will update you further when we have concluded the likely outcome of this next stage of the process.
Let's turn now to slide 13 for a summary of our liquidity and cash flow performance.
At quarter end, our total available liquidity was $663 million, including $360 million in unrestricted cash.
Net debt was $736 million, resulting in a net debt to adjusted EBITDA leverage ratio of one seven times on a trailing 12 month basis.
Down from one eight times at the end of the second quarter.
Subsequent to quarter end to fund the Fleetwood acquisition, we used $200 million in cash and borrowed $85 million against our ABL.
$15 million of which has already been repaid.
Cash provided by operations was $310 million through the end of the third quarter compared to $83 million in the same period of 2022.
A reduction in core working capital has been a key driver of our improved cash flow.
Thanks to actions implemented so far this year, we have reduced total core working capital as a percent of trailing 12 months net sales by over 400 basis points from 24% a year ago to 20% at the end of the third quarter. This year.
Year to date capital expenditures are approximately $86 million remaining on track with our full year outlook.
Year to date free cash flow was $224 million.
<unk> us well to reach or exceed the upper end of our full year outlook of between $220 and $250 million.
During the third quarter Masonite repurchased approximately 106000 shares of stock for $10 million at an average price of $94 five.
We also repaid $10 million of long term debt in the quarter in line with the principal amortization required under our term loan a.
Turning to slide 14, I'd like to review some of the factors likely to influence our results in the fourth quarter and going into 2024.
Over the summer there were signs of green shoots emerging in the housing markets with builder sentiment, improving and a broad expectation that we could see a more stable interest rate environment.
Since that time uncertainty has reemerged as a common theme.
Two key drivers of our end market performance mortgage rates and existing home sales have yet to trend favorably.
The average 30 year fixed mortgage in the U S is now at a 23 year high.
Meaning that most buyers in the market, aged 50 year younger have never experienced home buying with financing cost at this level.
Large new homebuilders are coping with the situation by buying down rates, but that is not helping in the existing home sale home resale market, which is at its lowest since 2010.
Given the dearth of existing homes available for sale and mortgage rates that make switching costs much higher for existing homeowners.
There was an expectation of more renovation in place, which could partially offset a lack of renovation dollars typically invested following existing home purchases.
This is yet to materialize likely as a result of higher interest rates and tighter credit standards impacting home equity borrowing.
We are consistently hearing from others in the building products industry, including our retail customers at large and discretionary renovation projects are the areas of greatest weakness and the triple our market.
With these choppy end market dynamics still in place today, we expect ongoing headwinds in North America for both wholesale and retail volumes in Q4.
With the competitive environment that continues to require consideration of tradeoffs between price and volume.
In the U K, we are expecting that sales will continue to remain weak through year end without the typical seasonal bump in Q4 as noted earlier this.
This weakness is likely to continue into 2024.
Taking all of these factors into account and excluding any impacts from our acquisition of Fleetwood we are still expecting to achieve our original full year guidance.
With consolidated net sales likely to fall within the middle of our guidance range and adjusted EBITDA likely to be closer to the bottom end of the range.
Speaking of <unk> in Q4, we realized just over two months of results from the acquisition.
The contribution from adjusted EBITDA is likely to be limited given upfront integration costs and purchase price accounting impacts.
Now I'd like to turn the call back over to Howard for some closing comments.
Thanks Ross.
Clearly our markets are going through a period of adjustment to higher mortgage rates and homeowners are pausing to consider the best time to either move or invest in a renovation.
Despite these short term headwinds we remain confident that other macroeconomic realities such as the under built an aging housing stock and significantly improved levels of home equity will ultimately drive a resurgence of demand in both new construction and Triple R.
We also believe strongly that secular tailwind that favor the door business in particular provide an additional tailwind as people are spending more time in their homes, many working remotely and looking for the value added benefits that doors can provide including privacy securities.
Kyle light.
<unk> and connectivity.
Against this backdrop, we are intently focused on controlling what is in our control by executing on our 2023 playbook initiatives and carefully managing price cost to preserve our margins and position ourselves for optimal performance when the market turns.
This approach also applies to our intense focus on cash flow and are highly coordinated effort to unlock working capital across the company.
I am very pleased with the significant results. Our team has delivered so far this year and I'm looking forward to achieving additional benefits in 2024.
Continuing to deliver strong cash flow and maintaining a healthy balance sheet are key elements that support our capital allocation strategy.
The recent acquisition of Fleetwood marks the second important M&A transaction that we have completed this year.
Both of which are helping us to reshape our business by putting emphasis on our differentiated better and best door systems and enhancing our leadership position in the market, while moving us closer to our 2027 financial goals.
Overall, we believe we are actively moving in the right direction to create value for homeowners channel partners and investors. We are building momentum with our doors to do more strategy navigating through short term market dynamics, while laying the foundation for strong performance for years to come.
We continue to be excited by the opportunities we see within the approximately $27 billion North American market for door systems, and we are confident that our people our assets and our strategy uniquely positioned masonite to take advantage of these opportunities.
Thank you for your continued interest and support now I would like to open up the call to your questions operator.
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Today's first question is coming from Michael Rehaut of Jpmorgan. Please go ahead.
Hi, guys. Thanks for taking my question. This is Andrew <unk> on for Mike.
Good morning, Andrei Andrei <unk>.
Good morning.
I'd, just like to maybe drill down a bit maybe.
Maybe the drivers of the lowered EBITDA guidance and maybe your expectations by segment what are kind of the big Delta is versus maybe last quarter.
Yes, Andrew it's Russ I'll take that one.
I guess I would set the table by saying at the beginning of the year, we put out a full year guide that we felt was realistic.
And we're in a position to deliver against that despite what have been some ongoing macro headwinds frankly.
<unk> frankly stand a little bit in contrast to how everyone was feeling just a few months ago. When there were some green shoots that we're showing some early emergence in the housing market here in North America.
But that all said I would attribute the divergence in EBITDA.
To closer to the bottom end as opposed to the mid or higher end of the guide to really two factors. One is and we did comment on this last quarter is that material cost deflation is running lighter than we originally expected.
<unk> ended the year thinking low to mid single digits, it's trended toward low single digits, we don't see anything changing around that and then.
The outlook for our business in Europe is under pressure and its weaker sitting here today than it was three months ago.
Would view those as the two primary factors as usual volume in the North American residential business is the swing factor.
If we had seen some incremental strengthening in volumes and a rose I think as many people across the industry were expecting just a few months ago that would've put us in a position to deliver more down the middle of the fairway with respect to EBITDA, but.
Allowed us to offset those pressures that we're seeing in material and in Europe, but in the absence of that that's what informed our view that we should call more towards the lower end for the EBIT Guide.
Maintaining net sales probably down the middle of the fairway.
Thank you that was a that was really good color I mean I just wanted to ask also.
Some of your peers have offered an outlook for the R&R market next year may be flat to slightly down I was curious on your read or any color there.
Yes, well.
Well I'll tell you what.
If you don't mind, Ed let me clear the topic, a little bit more broadly because I think a lot of folks are interested in and how people are thinking about 'twenty, four and again I'm going to start by saying that.
Just a few months ago, the optimism that we were seeing potentially for the second half of 2023 was viewed as a natural tailwind going into 2024.
Now in the absence of some of that macro strengthening that we hope that we might see by this point in the year.
Here right now, we don't necessarily see a big snapback on the horizon for 2024, so we're not yet finalized with our planning assumptions for next year, but let me give a quick overview of how we're thinking about the markets. We're in.
Monitoring all the typical stats that everyone in our sector would be right. So U S housing starts broadly speaking on the new construction side, which is just under half of our business here in North America the forecast.
Our broadly flattish next year, but we are potentially seeing a bit more of a shift back to single family that could offer a little bit of modest volume and mix tailwind for the door business.
On the Triple our side, what you asked about specifically this is an area, where we still see a fair bit of uncertainty and it's going to be dependent in large part on consumer confidence and existing home sales.
As we sit here today, we're expecting that we could see a little bit of a further modest decline in the triple our market.
And then I'll just close off by saying with respect to input cost was <unk>, which is another area that folks are interested in understanding as we look ahead.
Commodities are likely to remain modestly deflationary, but we're still seeing cost increases elsewhere. So it's not as if we're expecting a broadly deflationary market.
J a significance in 2024, so I share all of those details just to kind of clear the deck right now on how we're thinking about 2024 with a provides us we're still working through our budget planning assumptions will come back on the Q4 call and give more specificity about how we see those end markets trending and how that's going to be.
Our results next year at the end of the day, though in the face of what a choppy end market, we're going to keep focusing on what we can control right.
Price cost discipline to preserve margins is driving product mix and commercializing new products to activate our strategy and it's focusing on working capital optimization to continue driving the really strong free cash flow generation you see for the business this year.
And just one thing to add Andrew This is Howard.
Hi.
Peg when this is going to start is the interesting part, but we are so confident in the long term market fundamentals of the business.
Housing is under Bell housing stock is a gene there is incremental home equity so it's going to turn and we feel very confident about that.
Thank you Howard and Roswell those were really great thoughts appreciate it.
Thanks, Andrew.
Thank you. The next question is coming from Mike Dahl of RBC capital markets. Please go ahead.
Hi, This is Chris on for Mike.
Just following up on the 24, Tom Good morning, just following up on the 24 comments.
What's your expectation on.
On margins looking into next year I know you guys said potentially a little bit more low less deflation.
But just on a net price cost basis are you assuming kind of net price cost expansion in 'twenty for what youre seeing today and potentially more challenged end market backdrop.
Too early to call that one Chris as I commented just a moment ago, we're still finalizing planning assumptions for next year and certainly ahead of having those planning assumptions fully aligned we're not going to be in a position to guide sitting here today in early November what margins look like next year, but I wanted to at least give the investment.
Community a little bit of perspective on how we're thinking about end market demand next year.
We'll come back in late February when we release, our full year results and give you a lot more perspective on the drivers of margin for our business next year again I'll come back to the comments I made earlier about the teams very intent focus right now is on what <unk> heard is Paul as coiling the spring right.
Maintaining very disciplined approach to price cost management executing the playbook to flex cost out of the business, while continuing to invest in some of the growth initiatives that really unlocked a lot of long term value that Howard just indicated for our category.
But we'll come back with more specifics on the near term margin outlook for 'twenty for next quarter.
Understood I appreciate that and then just.
On the North American new residential construction side of the business is there any way you could help ballpark what your multifamily exposure is realizing there's a mix shift single family.
Expected declines, but just given the magnitude.
Some sense of quantification there would be helpful.
Hey, Chris This is Chris Paul Here I'll go ahead, and take that first off that the zoom out of the business, we're relatively evenly split between triple or in new construction as you look at India construction segments, it's more heavily weighted towards the single family loans, we don't get clear data on which product goes into which segments, but I would say that the vast.
Majority is going into the single family homes, one of the bigger factors to consider though as you look into next year and you look into the very high multifamily starts that we've had in 2023, we do see that as a helpful tailwind for US as you have single family would be a higher percentage of the overall starts that should be helpful. For us as we go into next year and look at that.
New construction portion of our business that should be constructive for us are helpful for us.
Instead, the Michelle Clark.
Thanks, Chris.
Thank you. The next question is coming from Steven Ramsey of Thompson Research Group. Please go ahead.
Hi, good morning on Fleetwood strong margin profile do you consider that a normalized.
A level to 2020 for outlook for Fleetwood is that a baseline to build off of.
And then on the growth plans for that company do you see that more in wholesale or retail.
Any color on where you intend to take that business over the next couple of years.
Hey, Steven it's Russ good morning, maybe I'll take the first part of the give you a little bit of perspective on the margin profile and the trajectory for the business and then <unk>.
Howard are kristie comment on growth opportunities for it.
First of all if you step back and look at Fleetwood over the last several years. The business has grown really nicely from 2019 to 2020 to their top line grew at a CAGR in the mid teens and they grew their margins or EBITDA margins that is from mid teens to above 20%.
Over that period now they've had a really particularly strong year in 2023, just because they built up some backlog due to some supply constraints in 2022 that they were able to realize in 2023.
So if you were to look at their margin profile in the last 12 months period. It was actually approaching a 30% range. We don't think that thats, a normalized level necessarily theres clearly some volume leverage in there, but they've also been very effective at taking price to the market in late 2022, that's continued to read through and that's in line.
With pricing some of their product lines in line with the luxury market that they serve so that's what's informing our view that as we look into 2020 for that revenue and call. It the 150 range and a low 20% EBITDA margin is probably a realistic near term outlook for the business, but it's a really healthy platform.
<unk> from which we would expect further growth from there.
And Stephen This is Chris I'll take the second part of the question around where the growth comes from as we look forward on that business first off we would does participated in one of the top trends in our industry, which is this indoor outdoor living Howard referenced it when he covered that beautiful picture that shows the type of solutions, you can get with wood products there with their door products in.
With their overall systems around the home. So it's very much on trend for what homeowners are looking for the.
The second piece is the product portfolio and offerings. They have include leading edge designs with a low profile edge with its called the edge product that they just recently launched so very much kind of on the on the cutting edge of what architecture looking for and what builders are looking for and then the third piece you asked around whether it was kind of a retailer or wholesale Fleetwood goes to market through.
Grupo exclusive distributors that really partner with them on addressing the market needs and making sure they are out there.
Going after the builders, who are having homeowners designing products that fit with Fleetwood brings to the market. So the growth comes not just from continuing those partnerships with those dealers, but also looking regionally as we go into expand beyond the west coast, where the majority of the volume is we think theres a lot of the fast growing housing market and again can benefit from those <unk>.
Your living trends they had a need for these products and then also are under penetrated right now from a fleet with dealer standpoint.
That's great and then thinking about.
The combination of juxtaposition Navy.
Shelf space gains that you may have gotten in the retail or wholesale channel.
This year combined with.
Most channels running light through this year given slower volume Q.
Curious just kind of on those two dynamics now and where you see that benefiting you.
In 2024, even if it's a continued challenge here.
Yes, Stephen the way I'd answer that this is Chris again is if you really look at the places where we've been.
<unk> looked at incremental distribution opportunities and going after some of the places where these lightened living needs can be solved.
Our focus if you go back to our strategy and the three pillars that.
Product leadership and reliable supply foundations have opened up new opportunities for us, but it also is giving us the chance with existing partners to go out talk about how we solve the needs and how we can do things like the performance door system National rollout.
And ultimately then winning the seal with how we capture that demand through the end markets and through the channel and so when you look at both the wholesale and retail sides of our business. The joint business planning approach that we're taking with all of our customers is really the way that we're activating that and I've used the proof points of the vendor of the year at both home depot and those are examples of.
Now, we're really going to be able to capture more of that demand still the demand through the market with our product leadership and win the sale and ultimately benefit both our channel partners as well as homeowners and yet.
Great. Thank you.
Thanks Steven.
Thank you. The next question is coming from Joe <unk> of Deutsche Bank. Please go ahead.
Hey, everybody how are you doing.
Good morning.
Good morning, Yes interesting acquisition, you're doing here with Fleetwood It seems to me to be a pretty clear move outside of your.
Core door category and kind of pushed the concentric circles outward of what <unk> been.
Patootie.
Doors.
Thinking about your doors that do more strategy.
Wondering if maybe it ought to be called more than doors that do more than just maybe you could talk about that blurring of the lines a little bit and as you go and look for new.
And other targets that maybe doing similar things.
What are the considerations I guess around identifying.
Assets that youll be able to integrate successfully I would think at least one would maybe be.
The management team needs to be one that you feel you can retain.
Just kind of let you run with that.
Yes. Thanks, Joe This is Howard it is a it is a great acquisition, we really like this business for a number of reasons first I think their strategy is very aligned with our doors that do more or as you've now pointed more than doors that do more strategy. This is about developing innovative products and services and solving life living.
Right.
You think about these products and you see some pictures and I encourage you to go to their website fleet in the USA Dot com this trend macro trend indoor outdoor living light security et cetera.
These are premium luxury products that really support that innovation two it addresses a large patio door market that we play in today remember when we talked at Investor day, we participate in the hinged patio door market.
We don't play in the vinyl sliding market, which we feel is much more competitive and but this is.
The high end luxury side of that patio door market, which we see as a very interesting growth platform for us.
Three when you think about their products and we think about good better best and again at Investor Day, We talked about the fact, it's hard to sort of pinpoint what is a best door. There is a lot of good and Theres a lot of better I would say that their product platform absolutely addresses this best.
And it's one of the reasons why they can realize the margins that Russ just talked about which we like and then fourth and obviously the growth potential of this business with the high percentage of their revenue being on the west coast with accretive margins to our business and accretive EPS in year, one make this we think.
Really smart a really smart investment now when we talk about more than doors, 70% of their revenue in stores and.
And we talk about folding in hand, sliding pivoted et cetera, 30%, our glass panels that are fixed they don't move or windows systems that tie back to the doors typically in <unk>.
In almost every case the windows are sold in conjunction with the door. The door is the highlight of this business right and the Windows are sold secondary sort of matched the doors. So we still we're still going to call. It the doors to do more strategy Joe.
Understood that's fine by me I'm glad you touched on the point.
Around the high end consumer I don't think you have to look far this earning season to find evidence that that consumer continues to do better.
And I'm just wondering if you feel like that's a trend that is likely to sustain for many years whenever R&R does.
Sort of inflect back to growth.
People have a lot of home equity and I would imagine that this sort of plays.
In line with that trend.
And then just bigger picture as well as you think about.
Skating, where the puck is going with respect to M&A I know.
It is some other things within.
This product.
Assortment on this slide include.
What seems to be Hurricane protection, just wondering how youre thinking about.
Other attributes of products that are interesting to you.
Yeah. So first of all I completely agree with you that this particular consumer typically does better in all cycles and that's important and we certainly expect that to continue to be the case.
As far as skating, where the puck is going and you think about the two acquisitions that we've completed this year first enduro, which is the leading manufacturer of components that go around the door and really allow us to innovate door systems that again are better at keeping air and water out or a better connectivity or a better security.
That was critical to our doors that do more strategy and this is an adjacency. If you will into this patio space, where we think it's a big market, 4% to $5 billion market.
They are at the high end, but you can imagine that there could be some longer term synergies and how we collaborate on sourcing and R&D and product development. So any any company that fits this profile of allowing us to execute our strategy and continue to behave more like.
I.
Consumer durable a D commoditized consumer durable that is going to be important to us as we look at future M&A.
Very interesting thanks for all the thoughts good luck.
Thanks, Joe Thanks, Joe.
Thank you. The next question is coming from Jay Mccanless of Wedbush Securities. Please go ahead.
So I'm just wondering why when you had the Investor day on September 19, essentially had most of the quarter done why not go ahead and released this information then about where you thought EBITA was going to go where you thought sales might end up given that you had the majority of the quarter in the bag already at that.
Point.
Yes, Jay its Russ.
I guess I'd answer that by saying that the purpose of an investor day is not to focus on the near term.
The focus of the Investor day is to focus on the long term and the strategy that our company is pursuing.
And that is what we wanted to highlight on September 19th and what we did as opposed to getting too embroiled in the near term outlook for the business, which is driven let's face it more by a choppy macro environment.
And where we're expecting to take the company long term.
The only other thing I would add Jay is that.
Im really proud of the team in light of the macro environment for delivery.
That earlier, we said guidance almost a year ago.
And we're within the guidance right down the middle on revenue and we said maybe towards the lower end of EBITDA, but again Greg.
In the middle of guidance set almost a year ago. So.
I don't think Theres any.
Real surprises there.
Okay.
What about <unk>.
Hmm.
The Fleetwood acquisition was more compelling to pay.
Probably a higher valuation than where your stock prices right now versus buying back stock. We're looking at maybe something that you could have acquired a little cheaper.
I sort of hit the key points of what we like about Fleetwood. The result, there is a lot to like about this deal and when you think about being able to acquire a very near adjacent asset.
That's great that has very significant growth potential.
At accretive margins.
Potentially significantly accretive margins.
Or a multiple that is very near where we historically trade.
That felt like a very.
Strategic and proper investment for us.
Jay It's Russ I would just add this perspective also as we've discussed on the Investor day, when we laid out the long term deployment of the cash flow that we expected the business to generate.
<unk> continues to focus on three layers of capital deployment, obviously first and foremost as capital investment organically into the business.
Second M&A and third returns to shareholders and we acknowledged at that time that there is a lot of firepower that we view over the next four years given the highly cash generative nature of the business that we would be able to simultaneously fund all three layers of that strategy and that is our intent today and we will continue to be.
Our intent.
While we didn't necessarily repurchase a lot of shares during the quarter I'll just get in front of that one right now and remind everyone that just like individual share executions company management is held to the standard of only repurchasing shares during an open window or subject to attend <unk>, one trading plan and even during a window when you.
Want to execute a <unk> one plan. If there is any information that council things as potentially material or nonpublic information that does restrict your ability to be repurchasing shares and given the degree of corporate development work underway at the business, including Fleetwood our assessment of architectural et cetera that did limit us on.
And share repurchase execution over the quarter that doesn't mean that that is not a continued priority for us going forward and look at the cash generation power of the business.
We commented I commented during my prepared remarks.
We're on track to meet or exceed the upper bound of our free cash flow guidance for the year at that upper bound.
That would imply.
Cash generation in excess of $11 a share this year, that's a low teens free cash flow yield.
So I wouldn't want people to think that.
We're in any way diverging from our capital deployment plan because there are significant cash generation power of the business that will deploy across all three layers of the strategy just as we discussed at Investor day.
Okay, great. Thanks for taking my questions.
Thanks Jay.
Thank you. The next question is coming from Reuben Garner with benchmark company. Please go ahead.
Thank you good morning, everybody.
Hi, Reuben.
So.
You mentioned I think.
I use the term <unk>.
<unk> this continuing in the fourth quarter can you talk about maybe.
Which category within doors that exterior is that.
More.
The more customized doors.
Monetize the ones where is it certain channels where are you seeing the most.
Competitive pressure from a pricing standpoint.
Yes, Reuben this is Howard.
Cyclical market housing are cyclical and in down cycles capacity is available Thats just natural and then you have an option to all company sort of have an option to either try to pick up volume with special pricing or to maintain margins and some companies may need to pick up volume to keep their factories running for example, but obviously.
As a larger market leader, we find ourselves in a bit of a more unique position and our belief is that more better off our industry is better off our shareholders are better off in the long run if we manage the business with price cost and focus on maintaining margins. So that requires some short term sacrifice some tradeoffs in terms of volume, but we continue to believe it positions.
As to grow when the demand strengthens, which we know it's going to so it's more or less commoditized area, obviously anything thats differentiated and really fundamental to our strategy as we think about our strategy. It's really about de Commoditizing This important category, which.
Has already taken place and a lot of other building product categories and we think now is the time for doors.
Okay. That's helpful and then as I think about.
The strong free cash flow this year.
Maybe help me with puts or takes.
Going into next year or there is still working capital opportunities anything else to think about.
Would you lean into capital investments even in.
Uncertain environment.
24, just given your positive outlook longer term.
Yes, Reuben it's Russ I'll take that one the working capital initiatives that we've launched this year will continue to have some power in 2020 for this this is not kind of a one and done initiatives and the initiatives are balanced across all areas. We've harmonized payment terms to maximize our accounts receivable.
Realization.
We've also harmonized and lengthen our payment terms to maximize AP and we're looking at where we profitably deploy inventory across the network to bring inventory levels down overall.
Thats all had a meaningful impact on our record operating cash flow that you saw this year, but we see some of those initiatives, which werent implemented in many cases by the way until middle of this year is continuing to have tailwind into next year, so, whereas because I commented on the call. We brought our core working capital down from 24% last.
Last year at this time to about 20% now we see a pathway to bring it down further to the high teens in 2024. So again, we will comment on that more when we discuss our guidance for 2024, and how we see free cash flow trending for next year. When we give our guide at the February call.
Great. Thanks, Congrats on the strong execution in a tough environment guys and good luck through the remainder of the year.
Appreciate it Robin thank you.
Thank you at this time I would like to turn the floor back over to Mr. Higgins for closing comments.
Thank you Dana and thanks for everybody for joining US today. We appreciate your interest and continued support and this concludes our call. Operator will you. Please provide the replay instructions.
Thank you for joining Masonite third quarter 2023 earnings Conference call. This conference call has been recorded the replay may be accessed until November 22nd.
Access the replay please dial 877606853 in the U S.
20161 to 7415 outside of the U S enter conference I'd number 13741587.
Kevin.
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