Q3 2024 MasterBrand Inc Earnings Call
Greetings and welcome to the Masterbrand's third quarter 2024 earnings conference call. At this time all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Barand Pawlak, Vice President of Investor Relations.
Speaker Change: Thank you, sir. You may begin.
Barand Pawlak: Thank you and good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, President and Chief Executive Officer, and Andy Simon, Executive Vice President and Chief Financial Officer.
Barand Pawlak: We issued a press release earlier this afternoon disclosing our third quarter 2024 financial results.
If you do not have this document, it is available on the investor section of our website at masterbrand.com.
I'd like to remind you that this call will include forward-looking statements and either our prepared remarks or the associated question and answer session.
These forward-looking statements are based on current expectations and market outlook, and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.
Barand Pawlak: Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today.
Barand Pawlak: More information about RISC can be found in our filings with the Securities and Exchange Commission, including under the heading RISC Factors in our full year 2023 Form 10-K and updated as necessary in our subsequent 2024 Form 10-Qs, which will be available once filed at scc.gov and at mastergrant.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 any of these statements except as required by law.
Barand Pawlak: 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 scc.gov and at MasterGrant.com.
Barand Pawlak: Our prepared remarks today will include a business update from Dave, followed by a discussion of our third quarter 2024 financial results, along with our 2024 financial outlook for Manning.
Finally, Dave will make some closing remarks before we host a question and answer session.
Speaker Change: With that, let me turn the call over to Dave.
Dave Banyard: Thanks Farrand. Good afternoon everyone. We appreciate you joining us for our third quarter 2024 earnings conference call.
Dave: We released our third quarter financial performance earlier today, and I'm pleased to say that we continue to perform in line with our expectations.
Net sales in the third quarter of 2024 were $718 million, a 6% increase over the same period last year.
driven by our acquisition of Supreme Cabinetry Brands earlier in the quarter.
I'll provide more detail on the acquisition integration shortly, but suffice to say it's going well.
Dave: The growth from our acquisition was partially offset by lower net average selling price in our core business.
Dave: It's worth noting, while we still see a year-over-year headwind from this, the sequential impact is relatively stable.
Dave: Volume was flat in the third quarter as compared to the same period of 2023, as continued strength with our customers servicing new construction was offset by soft demand in the repair and remodel end markets.
Dave: This anticipated margin contraction was due to the timing of price realization compared to sequential inflation in our cost of goods, further investment in our strategic initiatives, and a six million dollar benefit in the third quarter of the prior year that did not repeat.
Dave: If you remember from our last earnings call, we began seeing sequential inflation in some materials and inbound freight.
Dave: This dynamic, as anticipated, is impacting the typical seasonal cadence of our net sales and margins.
Dave: While the third quarter saw seasonally lower than normal adjusted EBITDA margins, the fourth quarter is expected to have seasonally higher than normal adjusted EBITDA margins, resulting in more normalized decremental margin performance for the second half of the year.
Dave: bringing our year-to-date total to 142 million dollars.
Dave: While this is lower than last year, it's important to remember that 2023 benefited from the release of a 2022 Strategic Inventory Build meant to ensure service and delivery through various supply chain constraints at that time.
Dave: Given our performance year-to-date, we feel confident in our ability to deliver on our stated goal of free cash flow and excessive net income for the full year 2024.
Dave: I'd like to provide a brief overview of what we saw in end market demand and our expectations for the remainder of the year.
Dave: Market demand in the third quarter was largely in line with our expectations.
Dave: Customers focused on the U.S. single-family new construction market continue to perform well with year-over-year market growth of mid single digits.
Dave: With only the fourth quarter left, we see no change to our full-year market expectations.
Dave: We still expect this market to grow mid-single digits year-over-year for 2020.
Dave: With that said, we have seen signals of moderating demand from our BuilderDirect customers.
Dave: We believe recent new customer wins, which I'll discuss shortly, will help us mitigate potential choppy end market demand and allow us to deliver continued growth in this portion of the market in the fourth quarter and beyond.
Dave: Shifting to the repair and remodel market, serviced by our dealer and retail customers.
Dave: Demand remained relatively soft through the quarter as consumers continued to be hesitant about committing to large purchases.
Dave: General economic and political uncertainty, specifically today's general election, appear to have consumers staying on the sideline when it comes to big-ticket items, resulting in our customers continuing to see slow quick traffic and extended decision times.
Dave: This, coupled with low housing turnover, remains a near-term challenge to a repair and Romano recovery.
Dave: Looking briefly at the Canadian end markets, both the new construction and repair and remodel markets remain soft year-over-year as expected.
Dave: Similar to the U.S., housing affordability remains a challenge and new housing remains weak, despite the multiple rate reductions in Canada.
Dave: We expect soft end market demand to continue in the fourth quarter, in line with our previous outlook.
Dave: As you can see, ed market demand has largely played out as anticipated.
Dave: and we see no meaningful change for the remainder of the year.
Dave: Accordingly, we are reiterating our full year 2024 outlook, which Andy will speak to in greater detail shortly.
Dave: Since our last earnings call, the Federal Reserve reduced its target interest rate by 50 basis points and is signaling future rate reductions.
Dave: While further actions by the Federal Reserve could stimulate demand, we expect the benefit would not be seen in our business until sometime in 2025.
Dave: Accordingly, we expect to enter next year in a similar end market demand environment as the one we see now.
Dave: As I mentioned, our performance was only possible because of the dedication of our associates.
Dave: Their disciplined use of the MasterBrand way has allowed us to make meaningful progress across all three of our strategic initiatives, Align2Grow, Lead3Lean, and TechEnabled.
Dave: We continue to execute on these initiatives in an effort to drive efficiency and grow the business in targeted areas.
Dave: As recently as our first quarter earnings call, I discussed how our Align to Grow initiative was driving growth through new product and channel-specific packages launched for our large builder partners.
Dave: We saw excellent results from those efforts, with many of these top builders awarding us new business.
Dave: We believe similar Align to Grow efforts currently underway will produce the future growth we need to outperform the market conditions and ultimately ensure we're well positioned to achieve our long-term financial targets.
Dave: Our Leap Through Lean initiative continues to drive a culture of problem solving at all levels of the organization.
Dave: Our associates, equipped with the tools of the master brand way, are driving continuous improvement throughout the company with some of the greatest savings we realize in quality processes.
Dave: The Quality Team continues to leverage near real-time data provided by our enhanced digital infrastructure to improve and lower the cost of quality.
Dave: Collectively, our continuous improvement efforts this year have positioned us to achieve our goal of delivering an incremental 50 million dollars in savings, and we believe we have more opportunity in future periods.
Dave: This is just one example of how our tech-enabled initiative is helping our associates to perform their jobs more efficiently and enhancing our products.
Dave: Beyond our four walls, we continue to focus on improving our connection with channel partners through the rollout of MasterBrand Connect, our improved customer portal.
Dave: Better positioning our customers to win business is a key focus for us and we believe improving their ability to focus on the end consumer will enable our customers and ourselves to gain share and outgrow the market.
Dave: As you can see, there are a variety of ways we are investing in the business for growth, regardless of market conditions.
Dave: Now let me provide you with an update on the Supreme integration and how we're creating value through operational and commercial synergies in this acquisition.
Dave: We have already begun to make progress.
Dave: Following the close of the transaction, our supply chain and operations teams began to solidify plans and act.
Dave: Given these facilities are within 15 minutes of each other, it provided an obvious opportunity to bring elements of these two industry-leading teams together.
Dave: Through this center of excellence, we plan to begin realizing our targeted savings, offering our customers enhanced levels of service, and reestablishing our commitment to staying a fixture in the local community.
Dave: With our dealer integration well underway, we're quickly working on equipping both Masterbrand and Legacy Supreme dealers with new product offerings.
Dave: While the full benefit of this commercial opportunity will take some time to realize, we know many of our dealer partners are excited by it.
Dave: Overall, I remain extremely pleased with the progress our combined teams have made on the integration.
Dave: Their professionalism and performance to date gives me further confidence in our ability to identify and act on other value creating acquisitions in the future.
Dave: With that, I'll turn the call over to Andy.
Andy Simon: Thanks, Dave. I'll begin with an overview of our third quarter financial results. Then I'll provide our thoughts around the final quarter of 2024 and our full year outlook.
Andy Simon: This growth was partially offset by a 3% decrease in our legacy MasterGram business due to lower net ASP from the anticipated impact of normal seasonal promotion activity on price and product mix.
Dave: Volume and foreign exchange were roughly flat compared to the same period last year.
Dave: Gross profit margin was 33.1% compared to 35.1% in the third quarter of last year.
Dave: driven primarily by lower net ASP product mix.
Dave: These gross margin headwinds were partially offset by additional cost savings from our strategic initiatives and continuous improvement efforts and lower variable compensation compared to the prior year.
Dave: As a reminder, we expect the benefits of our previously announced price actions will start to take effect in the fourth quarter. This is reflected in our current guidance, which I will speak to in a moment.
Dave: and Personnel and Distribution-related Inflation Partially Offset by Lower Variable Compensation Expense.
Dave: This decline was primarily driven by acquisition-related costs, the previously discussed gross margin performance, restructuring charges, and higher interest and amortization expense.
Dave: Harshly offset by lower variable compensation and positive net income contribution from Supreme.
Dave: Income tax expense was $10.3 million, representing a 26.1% effective tax rate compared to $18.2 million, or a 23.4% effective tax rate in the third quarter of 2023.
Dave: The higher rate relates to non-deductible expenses from the Supreme Acquisition in 2024, and favorable state and local income tax items and the mix of earnings in different jurisdictions in 2023.
Dave: Adjusted diluted earnings per share were $0.40 compared to $0.49 in the prior year quarter.
Dave: Adjusted EBITDA was $104.5 million compared to $109.8 million in the same period last year, with both the Legacy Masterbrand and Supreme Businesses performing as expected.
Dave: Turning to the balance sheet.
Dave: Net debt at quarter end.
Dave: On a pro-forma basis, the trailing 12-month net debt to adjusted EBITDA leverage ratio was 2.3 times, which includes a full year of supreme adjusted EBITDA. These ratios were in line with our expectations.
Dave: Total liquidity was $458.8 million at quarter end.
Dave: We continue to anticipate lowering our net leverage to less than two times within two years of the supreme transaction date, assuming no additional M&A activity.
Dave: Operating cash flow was $176.9 million for the 39 weeks ended September 29, 2024 compared to $336.5 million in the comparable period last year, in line with our expectations.
Dave: The impact of this inventory release, mass incremental working capital improvements made in 2024 and our shared services ability to collect and pay invoices and negotiate improved terms, which again, benefited both our days payable outstanding and our days sales outstanding year over year.
Dave: Capital expenditures for the 39 weeks ended September 29, 2024 were $34.6 million compared to $21.4 million in the prior year period. The year-over-year increase relates primarily to timing of projects.
Dave: Free cash flow was $142.3 million for the 39 weeks ended September 29, 2024, compared to $315.1 million in the comparable period last year.
Dave: Given our primary capital allocation priorities are investing in the business and reducing our net leverage, we did not repurchase any additional shares of our common stock in the third quarter.
Dave: This leaves our total share repurchases unchanged year-to-date at 371,000 shares and $21.5 million left under our existing repurchase authorization.
Speaker Change: Turning to our outlook, as Dave mentioned, end market demand is playing out as we anticipated, and we still expect our full year 2024 end market demand to be down low single digits year-over-year as stated last quarter.
Dave: Despite these soft conditions, we expect to benefit from our past and current strategic initiatives and investments for growth, as well as our previously announced pricing actions.
Dave: This gives us confidence in our ability to outperform the underlying market in the fourth quarter and deliver our anticipated organic full-year net sales outlook below single-digit declines.
Dave: As stated last quarter, we expect our quarterly net sales to be relatively consistent across the third and fourth quarter, a departure from normal seasonality.
Dave: Trade downs and promotional activity are anticipated to continue at a similar pace, but we expect the impact to moderate from a year-over-year perspective as we continue to lap the onset of these in 2023.
Dave: Additionally, we expect fourth quarter net sales to benefit from recently implemented price actions.
Dave: We also anticipate the traction we're getting with new products and channel-specific offerings will allow the fourth quarter to outperform normal seasonality in what is typically a lower quarter within the year.
Dave: We anticipate Supreme and our integration efforts to continue to perform in line with our expectations in the fourth quarter contributing mid-single digits to our net sales growth percentage for the full year.
Dave: On a combined basis, we are reiterating our full-year 2024 Net Sales Outlook, a year-over-year increase of below single digits.
Dave: We are also reiterating our expected adjusted EBITDA range of $385 to $405 million and related adjusted EBITDA margins of 14% to 14.5%, flat year-over-year to slightly up compared to full year 2023.
Dave: Our expected interest expense remains unchanged at approximately $73 to $76 million.
Dave: Similarly, our anticipated tax rate of 24% to 25% remains consistent with our prior guidance.
Dave: We continue to expect our full year adjusted diluted earnings per share to be in the range of $1.50 to $1.62 which includes the favorable impact of Supreme.
Dave: It's worth noting, again, that absent the exclusion parameterization, the Supreme Acquisition would still be accretive to adjusted diluted earnings per share in fiscal year 2024.
Dave: We are raising and tightening our range for capital expenditures from $65-75 million to a range of $80-85 million, inclusive of one-time integration CapEx of approximately $9 million, driven by the timing of projects and the availability of certain equipment.
Dave: This combined investment at the midpoint remains modest at approximately 1.5 times appreciation, though slightly above our stated long-term goal of 1.3 times.
Dave: Despite our revised capital investment range, we continue to expect free cash flow to be in excess of net income in 2024, which includes the impact of Supreme. Now I'd like to turn the call back to Dave.
Speaker Change: While the end markets remain choppy at this time, we're pleased with our financial and operational performance this year.
Dave Banyard: This organization has come a long way since I joined in 2019.
Dave Banyard: Our ability to execute in this environment while investing in the business for near and long-term growth is something I'm extremely proud of. Our continued focus on our stated strategy, investments for growth, and the supreme acquisition, are positioning us to not only participate in the eventual market recovery, but meet our goal to outperform the market over the long term.
Dave: As always, we appreciate your support and look forward to updating you on future calls.
Dave: Now with that, I'll open up the call to Q&A.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Dave: You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Our first question comes from Garyx from Loop Capital Markets. Please proceed with your question.
Garyx: Hi, thanks. Good evening. Nice quarter. I was hoping you could go into some more color on your view that you can grow volumes and do construction, despite the air pocket you're anticipating and just the visibility you have on the volume side there.
Speaker Change: Thanks, Derek. Well, first off, I will say the market in new construction is still growing.
Speaker Change: and we're seeing that in coming into the fourth quarter as well as what we saw in the third quarter.
Speaker Change: but it was there and so you know, I think that you have a combination of
Dave: A little bit of a normal seasonal slowdown this time of year. You have that air pocket. It just gives us pause to say, you know, this could there could be an air pocket on the other side of it when they get closer to completion, which is when we go into it on the flip side of that. We have won a lot of really good new business in the single family new construction.
Dave: a part of our business and that those wins occurred earlier in the year. It takes some time to to actually get to the point where you're installing the cabinets and we think that's enough to kind of cover us through this. So we expect.
Dave: So it'll be a little muted compared to prior quarters in terms of the year-over-year growth. We still see growth for our business in that area in the fourth quarter.
Speaker Change: The Softness in the Quarter. It seems like it's pretty consistent of what you saw in 2Q. So just kind of want to make it get a little bit more color. Just sequentially, you know, if there's been any change in the pricing trend.
Speaker Change: and how much of it, the down three, was trade down and mix versus the like for like.
Speaker Change: Yeah, it's been very similar to what we've been experiencing all year. I think I would say the
Speaker Change: The characteristic is it's, you know, it hits more in the pricing promotion side, it's a bit more in the repair and remodel portion of our business. The trade down is more of an effect that you see and
Dave: The mortgage rate hasn't really stabilized at a lower rate, so they're continuing to buy down and they're looking for ways to decrease the cost of the house, and so we're continuing to see that.
Dave: I think if I was to dial back a year ago or more, I'd say maybe we'd be out of that by this point, but we're not. I think the Fed rate cuts are coming, which is good.
Dave: that will help. It's just going to take some time for that to work itself into the mortgage rate, and I think frankly
Dave: Some of the election
Dave: activity you're seeing today is going to help at least clarify for the bond market what might happen in the future, maybe or maybe not. I don't know.
Dave: But I think that's going to hopefully help ease some of the pressure on the rates in the 10-year and that will hopefully get mortgage rates a bit more stabilized. So that's on that side. I think in the repair and remodel market, it's very competitive right now. It's just how the market is. There's not a ton of activity.
Dave: And so you just have to be nimble with your pricing. But, by the same token, we are seeing here in the fourth quarter the effects of the price increase that we've had.
Dave: Pretty much across the board our competitors have followed us on that. So I think there's a general feeling in the market that You know price is there the clients not really
Dave: changing trajectory in the near term at all. So it's, I think we're seeing the benefits of that here so far in the fourth quarter. Yeah, we're seeing in the fourth quarter that price and inflation kind of lay, that will correct itself in the Q4.
Speaker Change: Okay, I just want a commercial synergy view, you know, and discussed a little bit in the prepared remarks, you know, hoping you can go into a little bit more color as to what your plans are there.
Speaker Change: Next step is to identify the kinds of products that you plan to spread across the combined Salesforce and we are done with that portion of it.
Speaker Change: I wouldn't anticipate, partly why we don't really talk about those commercial synergies A in our deal thesis but also in the results because it does take some time for us to bring
Speaker Change: –or your entire commercial network– up to speed. You're learning a whole new product line in some cases.
Speaker Change: And frankly, hard to do.
Speaker Change: It's two different organizations that used to compete against each other and now we're together and my hats off to that entire team for
Speaker Change: How they're going about their work and how excited they are. And that's that's exciting for us. So more to come on that, Derek, I'd say 2025 will be a time where we can really talk with more specificity about.
Speaker Change: and Michael Neuwendig.
Speaker Change: Okay, sounds good. Best of luck.
Derek: Thanks Eric.
Speaker Change: Our next question comes from Adam Baumgarten, Zellman & Associates.
Adam Baumgarten: Yeah, I think, you know, if you...
Speaker Change: I'd say yes, but it's it's hard to say with specificity at this point. I mean, I think we're coming in I mean if you add in the spring where we're anticipating being up in the fourth quarter, but you know, I think it's
Speaker Change: It's a little too early to tell I think our plans have it, you know somewhere around that
Speaker Change: I mean, yeah, sure, yeah.
Speaker Change: Okay, got it. And then just on the promotional environment, you cited that as a part of some of the ASP pressure on a year-over-year basis. Would you deem promotions as kind of normal, or did they kind of accelerate? Because I had the sense that they were kind of normal over the last year or so. Did you see a pickup, or is it just the timing thing this quarter?
Speaker Change: Yeah, I think it's pretty normal. You know, once in a while you'll see something that's a bit more outsized, but I think it's fairly normal, you know, in both the retailer and the dealer side.
Speaker Change: What may be different is the amount of volume you're getting out of certain promotions, so it may be a little biased that way, but it's on the margin. I wouldn't call it material.
Speaker Change: Okay, got it. And then just maybe some more color on the home builder wins that you talked about that should help support some growth in new construction in the fourth quarter. Were they, you know, large national builders, regionals, maybe just a bit more detail there.
Speaker Change: Yeah, predominantly in the large top 25 and, you know, some in the next 75. We look at the top 100 as relevant.
Speaker Change: opportunities for us, but predominantly in the top 25. And the timing of when those projects kick off is... Part of why we made the comments, we did not prepare remarks. It's just when you... it's indicative of the choppiness across our market right now where you see these little dips.
Speaker Change: and how that plays out. So, I mean, the winds are there, but...
Speaker Change: Crystal clear until they start building the neighborhood. So it's we know they're there. It's, you know, we've been seeing them come in through the third quarter, but it's just a question of the activity level that the builders will continue to have.
Speaker Change: I anticipate, generally speaking, that builders will continue at the pace that they've been going. I don't see anything that tells me that there's a larger deviation from that, either up or down. But, you know, we'll learn more as we go through the rest of this quarter and into next year.
Speaker Change: Okay, great. Thanks. Best of luck.
Speaker Change: Thanks, Adam.
Speaker Change: Our next question comes from Tom Mahoney with Cleveland Research. Please proceed with your question.
Tom Mahoney: I wanted to ask about inventory and you guys have had
Tom Mahoney: With two years as an independent company, can you just give us a little bit of right sizing on how you expect inventory to trend in a typical year and if the build, you're sequentially in the third quarter is.
Speaker Change: Typical of what you see or if there's some other moving pieces that we should consider there as it rolls off for the fourth quarter.
Speaker Change: Yeah, and Tom, just to clarify, I assume you're talking about our inventory?
Speaker Change: internally chat
Speaker Change: Yeah, okay. Yeah, it's Tom. I wish I could tell you that we've had a normal year in the past three years. We frankly haven't. If you remember back this summer, there was a strike in the ports and that facilitated a little bit of inventory.
Speaker Change: to build on our part ahead of that. We potentially have another issue coming in January with that same topic. So I think, I don't think we've had a normal inventory year in the last three.
Speaker Change: But frankly, part of that was we were getting ahead of what was a
Speaker Change: She's a shipping potential shipping challenge. Fortunately. There's only a week or so, but could have been a lot worse And so we were trying to get a little bit ahead of that. So we're bleeding that off now but then we got to think about coming back into the New Year plus you have
Speaker Change: See ya.
Speaker Change: That's good. Good call. It makes sense.
Speaker Change: And then, when you think about some of the storms that have occurred over the last 30 to 45 days, are there any impacts to consider, whether from a supply or supply chain perspective, or from a potential demand perspective, as you guys think about how the business has acted historically around these?
Speaker Change: Yes, supply, no. Demand, I think it's, we didn't call it out because we don't know that it's material in the long run for the business. It makes a little bit of a choppiness in things like reconstruction for a few weeks.
Speaker Change: in business fairly quickly, particularly given the magnitude of the damage along the coastline there in Florida.
Speaker Change: It does, you know, present a situation where you do have a large number of homes that need immediate remodeling, but we tend to not see that come in a big wave.
Speaker Change: insurance claims take a while, I think. And so, we don't necessarily anticipate that as any kind of material movement in the business. And our teams that are based in Florida, whether it be SORM or FINE, we're not on the coasts.
Speaker Change: So generally it's it does, you know, we pay a lot of attention to it We do want to make sure we take care of our associates that live there and work there So we do pay a lot of attention to it, but I don't think it's something to put on a headline for us
Speaker Change: Understood. Thank you.
Speaker Change: There are no further questions at this time. I would now like to turn the floor back over to Farand Pawlak for closing comments.
Speaker Change: You may disconnect your lines at this time. Thank you for your participation.
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