Masonite International Corporation (DOOR) on Q2 2021 Results - Earnings Call Transcript
Operator: Greetings, everyone and welcome to Masonite’s Second Quarter 2021 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 question-and-answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Rich Leland, Vice President, Finance and Treasurer. Rich Leland: Thank you and good morning, everyone. We appreciate you joining us today. With me on the call today are Howard Heckes, President and Chief Executive Officer; and Russ Tiejema, Executive Vice President and Chief Financial Officer. Tony Hair, President of Global Residential will also be joining us for the Q&A session. We issued a press release and earnings presentation yesterday after the market closed, reporting our second quarter 2021 financial results. These documents are available on our website at masonite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statements contained in this call is subject to risks and uncertainties that could cause actual results to different 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 in Masonite’s most recently filed Annual Report on Form 10-K and our subsequent Form 10-Qs which are available at sec.gov and at masonite.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, a review of the second quarter from Russ along with our thoughts on the second half of the year and our updated 2021 financial outlook. Lastly, Howard will provide some closing remarks and will host a question-and-answer session. And with that, let me turn the call over to Howard. Howard Heckes: Thanks, Rich. Good morning, and welcome, everyone. Before we review our second quarter results, I want to take a minute and thank our more than 10,000 employees who are working tirelessly in a very difficult operating environment to service our customers to the best of their ability. Whether you're an HR generalist working to hire key talent, a supply chain leader seeking high quality best component options, or a production worker in one of our many factories around the world, I know it's been a crazy year-and-a-half. I'm proud of the work that you are doing and the progress we are making as we transform our company to consistently grow through providing reliable supply, winning at the point of sale, and driving specified demand for doors that do more. It's a great time to be at Masonite and I couldn't be prouder of our team. Let's move to Slide 4 for a second quarter overview. We delivered record levels of net sales and adjusted EBITDA since becoming an NYSE-listed company in 2013. Net sales increased 33% year-on-year and adjusted EBITDA was up 20% year-on-year to $111 million. This strong performance was primarily driven by higher base volumes in our residential businesses as we lapped the initial impacts of COVID-19 last year, along with higher average unit price or AUP across all three segments. Adjusted EBITDA margin contracted 170 basis points year-on-year due to the rapid rise in input costs ahead of price realization along with a tougher comp from 2020 due to cost actions taken in the second quarter last year in response to COVID-19. We continued to see rapidly evolving inflation across raw materials and logistics along with higher wages and benefits as the labor market remained tight despite the diminishing impact of COVID-related absenteeism. Russ will provide an update on these trends for the second half of the year along with our updated 2021 outlook. Given the inflationary environment and our expectations for the remainder of the year, we have taken further actions in an effort to maintain a favorable price cost relationship. Since our last earnings call, we've taken two additional rounds of price increases within our North American Residential segment. One was effective late June and the second just became effective for orders received after August 9. We believe these price increases will drive a favorable price cost relationship and return to adjusted EBITDA margin growth later this year, allowing us to still achieve full year 2021 adjusted EBITDA margin expansion. In July, we completed a $375 million bond issuance at historically low rates to refinance our 2026 notes. This refinancing will result in more than $30 million of interest savings over the next five years and provide us with additional capital and financial flexibility as we invest to support our 2025 Centennial Plan. With respect to business and operational highlights for the quarter, we continued to see strong demand across our residential end markets in both North America and Europe with early signs of recovery in our commercial end markets as well. This continued strength, coupled with material and labor constraints across our business has challenged our ability to fully meet customer demand. Our supply chain team continues to identify alternative suppliers as well as materials substitutions where possible. To address tight labor markets, we're using initiatives such as referral, sign on, retention, and perfect attendance bonus programs in addition to wage and benefit adjustments to remain competitive in our local markets. In June, we published our 2020 environmental, social, and governance report highlighting our ESG achievements and priorities. It also included our first comprehensive third-party verified carbon footprint assessment. I encourage you to visit our website to access the report and learn more about our ongoing efforts to extend a positive influence on the environment as well as our employees and the communities in which we operate. While the organization remains keenly focused on near-term commitments to service our customers. We continue to look for the future and make investments that support our growth opportunities. Accordingly, I am extremely pleased that we are moving forward with new facilities in both our North American Residential and Europe segments. We believe these two facilities will provide the additional capacity needed to better service our customers in the future and to do so more efficiently. Now, let me provide you with some more details on these new facilities. In late June, we announced our plan to invest in a new door manufacturing facility in Fort Mill, South Carolina. This facility will assemble interior doors for our North American Residential segment and is anticipated to be operational in the second quarter of next year. Given the continued strength and demand, we believe this new capacity is ideally situated from a logistics standpoint to efficiently service high-growth markets in the mid-Atlantic and Southeast. Being a Greenfield facility, we also have the benefit of designing the site utilizing MVantage tools along with targeted automation from the start, positioning this operation to be a highly efficient addition to our manufacturing network. In our Europe segment, work is underway on a new facility in Stoke-on-Trent, England. This facility will increase capacity for our high growth and margin accretive exterior door business. Masonite entered this business in 2014 with the acquisition of Door-Stop International, which sells fully finished exterior door systems direct to contractors. In early 2018, we acquired DW3, which includes additional direct-to-contractor entry system offerings, including the widely recognized Solidor brand. Our entry door business has grown in excess of 20% annually, as a result of these investments. And the Solidor business in particular will soon become capacity constrained. As that business grew, expansion took place across multiple facilities. This new build the suit facility will afford us the opportunity to consolidate six buildings into one efficient location capable of supporting continued growth. We anticipate production will start in the first quarter of 2022. Both of these locations are great examples of our commitment to invest in the business for growth. This new capacity will help us execute on the first pillar of our doors to do more strategy, provide consistent and reliable supply. It's foundational for all we do. And these investments are designed to accomplish this goal, and to help us achieve our 2025 Centennial Plan. With that, I'll turn the call over to Russ to provide more details on our financials. Russ? Russ Tiejema: Thanks, Howard and good morning, everyone. Turning to Slide 7, I'll provide an overview of our second quarter financial results. We reported net sales of $662 million, up 33% as compared to the second quarter of 2020. The growth was primarily due to a 19% increase in base volumes as we lap the impact of COVID in the second quarter of last year and benefited from previously announced new retail business in North American Residential. AUP improved 7% year-on-year with increases across all three segments due to pricing actions. We also benefited 5% from foreign exchange and 2% from higher component sales. Gross profit increased 21% to $164 million on higher volumes and AUP, which were partially offset by the impact of rapidly increasing inflation along with tariffs on raw materials, rising logistics costs, higher manufacturing wages and benefits and increased investment in the business. As a result, gross margin contracted 250 basis points year-on-year to 24.8%. Selling, general and administration expenses were 12.5% of net sales, favorable 220 basis points year-on-year, but up 12% in the absolute terms to $83 million. This reflects the absence of cost actions taken in the second quarter last year in response to COVID-19, as well as the impact of wage and benefit inflation and renewed investments in resources necessary to support growth initiatives. Net income was $35 million in the quarter, an increase of 3% from the prior year. Diluted earnings per share were $1.41, up from $1.38 in the second quarter of last year. Adjusted earnings per share increased 49% to $2.23, which excludes charges related to our previously announced restructuring plans, the loss on disposal of our Czech business and the impact of a corporate tax rate change in the U.K. This compares to $1.50 per share in the second quarter last year, which also included charges related to restructuring and the loss on disposal of our India subsidiary. Adjusted EBITDA increased 20% to $111 million dollars which as Howard noted earlier was a record quarterly adjusted EBITDA for Masonite. As expected and per our comments on our first quarter earnings call, the timing of inflation in relation to our mitigation actions, as well as the return of expenses absent last year, put a governor on our adjusted EBITDA growth in the second quarter. While price actions more than offset material increases, adjusted EBITDA margin was 16.7%, down 170 basis points from a strong margin level in the prior year quarter. Moving to the adjusted EBITDA bridge on the right side of this page, you can see the significant year-on-year contribution from our strong top line growth with the benefit shown here for volume, mix, and price being delivered by roughly equivalent contributions from volume and AUP. We also realized year-on-year favor ability of $6 million due to foreign exchange as both the Canadian dollar and British pound strengthened against the U.S. dollar. Countering these tailwinds was the negative impact of a quickly changing inflationary environment on our cost of goods sold. Material costs dramatically increased. And we're $31 million dollars unfavorable year- on-year. Strong demand and sporadic supply chain disruptions also required us to source more material subject to higher tariffs and duties. Coupled with higher logistics expenses to bring raw material into our facilities and move components within our supply chain internally, we experienced material inflation of almost 13% equivalent to mid-single digits as a percentage of net sales compared to the second quarter last year. We also incurred $8 million of higher factory-related cost in the quarter due to higher wages and benefits and production inefficiencies in the architectural segment. Distribution costs were also elevated $10 million year-on-year as a result of freight lane mix as we rebalanced production across our network to best meet customer demand as well as inflation in logistics and packaging materials. Let's turn to Slide 8 for our North American Residential segment results. Net sales increased 29% from the prior year to $493 million primarily driven by a 19% increase in base volume. This increase includes the benefit of lap in COVID-related impacts in the second quarter of 2020 as well as continued strength in our retail business, which includes our previously announced new business with Lowe's. AUP contributed an additional 7% to growth in the quarter driven by favorable price, which was partially offset by a mix headwind as our exterior door production was constrained due to upstream supply chain disruptions. These disruptions also drove outside inflation in our chemicals basket. As Howard mentioned earlier, we have taken additional pricing actions to help mitigate the inflationary environment. I'll speak about the timing of those actions and their anticipated benefits when I discuss our outlook. Adjusted EBITDA in the North American Residential segment was $100 million in the second quarter, a 10% increase over the same period last year. This, too, was a record marking the highest quarterly adjusted EBITDA reported for the North American Residential segment. Adjusted EBITDA margin was 20.3%, down 360 basis points as material inflation and higher logistics costs in the quarter outpaced mitigation actions. Adjusted EBITDA margin was also impacted by a tougher comp from 2020 due to the absence of COVID-related cost actions and investments in the business for growth, specifically our North American investment plan and capacity expansion. Turning to Slide 9 in our Europe segment. Net sales increased significantly year-on-year to $88 million driven by higher-base volume as we lapped COVID-related restrictions that resulted in the idling of our U.K. and Ireland operations for approximately half the prior year quarter. Underlying residential end market demand remained healthy with increased new housing builds and sustained robust demand in the remodeling market supporting strong growth in both our interior and exterior door businesses. We achieved the strong top line performance despite material and labor availability impacting our Europe segment. AUP also contributed to year-on-year growth due to previously implemented price increases. In response to the current inflationary environment, we have recently taken further pricing actions in Europe as well. To further optimize our portfolio in the segment, we completed the sale of our Czech business near the end of the second quarter. This business did not have the scale necessary to serve as a platform for growth in Europe with net sales of approximately $20 million annually and generating only mid-single digit adjusted EBITDA margins. Adjusted EBITDA was $17 million in the second quarter, up significantly year-on-year as we lapped COVID-related closures in the prior year. Adjusted EBITDA margin was consistent with the first quarter at 18.9% despite mixed headwinds from the relative strengthening of our interior business. Overall, a strong quarter for our Europe segment. Moving to Slide 10 in the Architectural segment. Net sales decreased by 11% year-on-year to $76 million, as a 16% decline in base volume was partially offset by a 4% improvement in AUP driven by price actions. Volumes were impacted by lingering weakness in some of the commercial end markets we serve, while manufacturing constraints including material and labor availability issues also impacted output in certain plants. Adjusted EBITDA margin contracted to less than 1%, primarily due to the impacts of lower volume. Favorable contributions from price were more than offset by inflation in the quarter. Adjusted EBITDA margin was also negatively impacted by a large capital project to upgrade essential equipment in one of our factories. The project was successfully completed but resulted in extended downtime and was a headwind to second quarter financial performance. As discussed last quarter, we have a three-phase optimization plan and are executing against it. We completed two facility closures as part of Phases 1 and 2 and we expect to see the associated cost savings in the second half of 2021. We continue to make progress on Phase 3 and are currently evaluating our flush door capabilities. Our belief is that once this plan is complete, we will be able to take advantage of the commercial end market recovery, which we believe will be early 2022. Slide 11 summarizes our liquidity and cash flow performance for the quarter. Inclusive of unrestricted cash and accounts receivable purchase agreement and our ABL facility, which remains undrawn, our total available liquidity ending the quarter was $591 million. Net debt was $463 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.1 times. Cash flow from operations was $33 million through the end of the second quarter, down from $103 million in the first six months of 2020. These lower cash flow levels were expected given our historically low net working capital at the end of 2020 coupled with the natural increases in working capital from rising sales volumes along with anticipated higher cash taxes and the cash payment of $31 million in June related to the settlement of U.S. class action litigation. Capital expenditures were approximately $29 million in the first six months of 2021. We continue to execute our share repurchase program in the second quarter purchasing nearly 284,000 shares for approximately $32 million at an average price of $114.28. Our board of directors and management continue to view Masonite shares as an attractive investment opportunity. Accordingly, the board recently approved a new share repurchase program allowing the company to repurchase up to $250 million of its outstanding common shares inclusive of approximately $40 million remaining available under the existing share repurchase authorization approved in May 2018. This repurchase program remains an important means for us to return value to shareholders. As Howard mentioned earlier, subsequent to quarter end, we successfully completed a $375 million bond issuance in July. Acting on historically low rates, we entered the market with the objective of fully refinancing $300 million of notes due in 2026. In addition to extending the maturity date to 2030, the coupon rate was significantly reduced from 5.75% to 3.5%. We will record debt extinguishment costs in the third quarter, but this refinancing will result in more than $30 million of interest savings over the next five years and provide an excellent foundational layer in our capital structure. I was pleased with the team's ability to execute on this deal quickly, taking advantage of favorable market conditions. Let's turn to Slide 12 to discuss some of the key dynamics we expect to shape, Masonite’s operational and financial performance in the second half of 2021. Overall, we see three factors driving strong top-line performance for Masonite in the back half of the year. First, we anticipate continued favorable conditions in our residential end markets both in North America and the U.K. U.S. new housing starts remain up significantly year-on-year, which when coupled with an existing backlog in the North American Residential business and a steadily recovering new housing market in the U.K., should result in healthy demand for our residential products across the balance of the year. Second, we have worked hard to enhance our capacity to support this customer demand. Actions we've taken in the first half of 2021, such as adding shifts and new equipment in certain door assembly and fabrication facilities are intended to provide incremental capacity for some of our most constrained product offerings. As a result, we expect volumes in our Residential businesses will continue to be up year-on-year in the second half of the year. While select commercial end markets have shown initial signs of improvement, we still anticipate soft volume in the Architectural segment through the balance of 2021. Third, as discussed earlier, we have implemented additional pricing actions across our segments to help mitigate inflationary pressures. In our North American Residential segment, we expect to benefit from two additional price increases since our first quarter earnings call. Due to the timing of these price increases, late June and mid-August, coupled with the existing backlog I just mentioned, we would not expect to realize a significant benefit in the third quarter, but should see the full benefit of both increases during the fourth quarter. These price increases, along with pricing actions taken in our Europe and Architectural segments, should drive acceleration in AUP growth as we progress through the second half. From a cost perspective, we expect the environment to remain challenging for the rest of this year. We have seen inflation continue to exceed our expectations. As of our last call, we expected material inflation could reach 7% for the full year. Given the further increases we experienced through the second quarter, coupled with our outlook that this headwind will strengthen in the third quarter before moderating, we now expect material inflation will be in the low teens for the full year inclusive of tariffs and inbound freight. Due to the tight labor market, we are seeing higher year-on-year wage and benefit inflation. In North America, we have seen wage and benefit increases averaging over 5% this year across our hourly employees. The employment incentives Howard noted earlier present an additional cost headwind but are expected to improve our ability to hire and retain qualified employees. Yet, we anticipate that labor availability will remain in constraint. Distribution costs also remain elevated as logistics inflation we see the shipped material between our plants also impacts our outbound shipping costs to customers. We also expect that our mix of freight lanes could remain somewhat suboptimized as we continue to flex production across our manufacturing network to provide the best service levels possible in the current supply chain environment. Our manufacturing and supply chain teams are working incredibly hard and doing an outstanding job under the circumstances to manage through this difficult supply chain environment. Further, we remain confident that the incremental price actions we have taken will allow us to fully offset material and logistics cost headwinds for the full year. With these factors as a backdrop, on Slide 13, we provide our updated outlook for the consolidated full year 2021. Based on the continued strength of residential demand and incremental pricing actions, we now expect year-on-year consolidated net sales growth of 17% to 20% compared to our prior outlook of 12% to 15%. This updated outlook reflects a slight increase in the benefit from foreign exchange from 2% to 2.5% due primarily to further strengthening of the Canadian dollar and British pound. Given the challenging cost environment I just outlined, coupled with when we anticipate fully realizing the benefits of our additional price actions, we expect adjusted EBITDA to remain in the range of $435 million to $455 million, unchanged from our prior outlook. With the full benefit of pricing not expected until the fourth quarter, we anticipate additional adjusted EBITDA margin compression until that time. However, we do expect to return to adjusted EBITDA margin expansion in the fourth quarter and for the full year. Our adjusted earnings per share and cash tax expectations remain unchanged as well. We expect adjusted earnings per share in 2021 will be in the range of $8 to $8.60 and cash taxes will be $45 million to $55 million. We believe capital expenditures will now be in the range of $85 million to $100 million for the full year 2021 and increased investments to support growth. We now expect full year free cash flow of $130 million to $160 million reduced from our prior outlook to reflect the impact of higher net sales and material costs on our working capital balances and the slightly higher capital expenditures. Now I'll turn the call back to Howard for some closing comments. Howard Heckes: Thanks, Russ. We are very pleased with the results this quarter given the challenging operating environment as we reported record net sales and adjusted EBITDA, both the highest since becoming an NYSE-listed company in 2013. While adjusted EBITDA margins were impacted by inflationary headwinds in the quarter, we’ve taken further pricing actions to help mitigate these impacts which should provide incremental benefits as we progress through the second half of the year. We are encouraged by the continued strength in the residential end markets and initial signs of recovery in the commercial end markets. This strong demand gives us confidence to continue investing in the business, including larger capital projects to add new capacity. We are proud of the progress made on our ESG journey. We invite you to visit our website’s dedicated ESG page to view this report. Lastly, we've updated our 2021 outlook to reflect a strong demand as well as recent pricing actions taken that should allow us to maintain a favorable price/cost relationship for the full year and drive year-on-year adjusted EBITDA margin expansion for 2021. And with that, I'd like to open the call to questions. Operator? Operator: Thank you. Our first question comes from Josh Chan with Baird. You may proceed with your question. Josh Chan: Good morning. I guess to start off, maybe could we talk about the cadence of raw material inflation? I guess you posted a $31 million headwind in the quarter. And it sounds like you think that that gets worse before it gets better. But maybe could you talk about the shape of that material headwind that you expect and some color behind that perhaps. Russ Tiejema: Yes Josh, it's Russ. I'll take that one. What we saw is really across Q2 the inflationary headwinds continue to increase such that we exited the second quarter. It's been a pretty strong rate of inflationary increase and that was why in our prepared remarks, I commented that we expected the inflation to be even worse in the third quarter before it moderates somewhat in the fourth quarter. So, that curve we see from an inflationary standpoint. Again, approximately 13% in the second quarter getting worse in the third quarter moderating back to the probably low to mid-teens level in the fourth quarter, such that we see again that low-teens rate for the full year. That's our current viewpoint. Josh Chan: Okay, that's helpful. So - and the idea that it moderates in the fourth quarter, have you started to see some stabilization in sort of the raw material costs at least on a sequential basis? Russ Tiejema: Yes, I would say generally, that's true. The areas that we're focused on most carefully are wood and chemicals. Those are the two baskets where we have seen the most inflation as the quarter progressed in Q2, and where we think there's probably the greatest opportunity for additional inflationary pressure in Q3. But we do expect those - both of those baskets to moderate somewhat as we get deeper into the year. Josh Chan: All right that's great. And then I guess my last question is, on some of your internal initiatives, I mean, obviously price is a key component to offset that - the raws, but could you talk about other things that you're doing in terms of sourcing and substitution, and how big of an impact can those mitigation efforts have in the back half? Russ Tiejema: Yes Josh, it’s Russ. Let me just follow that up by saying that our sourcing team frankly, they've been working their tails off to manage what's been a pretty fluid supply chain environment. We see continued supply chain disruptions that's, no secret we're seeing that across the industry space generally. And so whereas, entering the year, they probably would have expected more of their time and head space to be devoted to material substitutions, supply chain, moderate supply base modifications, qualifying alternative materials from alternative sources at lower cost. They're now, having to devote more of their time to actually managing some of these supply chain disruptions. And we're putting that, frankly, as our priority one to make sure that we can maintain their service levels as best as possible in this current environment. So, I would say our outlook does not necessarily reflect as much progress on the sourcing saving side, including finding alternate suppliers that will allow us to avoid some of the tariffs that we've been paying. But supply chain resilience is number one priority right now. Howard Heckes: Let me just add to that, Josh. This is Howard. We think about servicing our customers first and foremost. And so, the supply chain is one aspect and finding appropriate sources of supply, and labor is the other. So, labor's been difficult this quarter and we are beginning to see some signs of improvement of some of the states that had federal unemployment benefits rolled those back. The federal unemployment benefits generally end in September. We expect to see some improvements, but getting qualified labor and getting materials in our shop to service our customers is our priority. Operator: Our next question comes from Michael Rehaut with JPMorgan. You may proceed with your question. Michael, your line is now live. You may proceed with your question. Michael Rehaut: Good morning, everyone. Just to round out the questions around price and cost here, just to be clear. It seems that you kind of reiterated your outlook for a favorable or positive price cost relationship the full year? I just want to make sure thinking about it right that essentially first quarter was positive second and third quarter is negative, and fourth quarter was turning to positive. Is that the right way to understand the quarter-by-quarter progression? Russ Tiejema: Yes, Mike it’s Russ. You’ve got that correct. That is essentially the cadence that we see. And some of that's driven by the timing of the incremental price increases that we've taken. As we remarked, one was effective in late July, so orders after - I'm sorry, late - June 21, orders after that date. And the third increase with orders effective actually after today, one of the things that puts a bit of a governor on our ability to realize that prices. We do have an extended backlog at this point. And so, we're not really realizing any price on the June increase until we got to the very end of July, early August. And the August price increase just implemented, we really don't expect to see any benefit until the fourth quarter. So once you get to the fourth quarter, you see the full benefit of both of those price increases laid over the top. But in the meantime, again, when you see the increasing inflationary headwind that I have - I commented on exiting Q2 and through Q3 that is what leaves us exposed from a margin perspective in the third quarter alone. Certainly, recovering to we think healthy margin expansion in the fourth quarter. Michael Rehaut: Thanks for that, Russ. And just also kind of thinking about the degrees of magnitude here, I know you mentioned that in the previous question you expect the worst inflation in 3Q combined with not having the full impact of the offsetting price increases? So, from an EBITDA margin perspective, particularly as we think about North American residential which obviously drives the majority of robust here on a consolidated basis, should we be looking for a greater amount of year-over-year margin contraction 3Q versus 2Q? Russ Tiejema: Yes, I think that clearly is a risk that we would see even more compression in the third quarter, but again to my comment a moment ago, a pretty strong snapback in the fourth quarter. Those comments that I gave a moment ago were for the consolidated business. But to your point, Mike, the largest single part of that is North American Residential. And we would expect that trend to play out in that segment as well. Michael Rehaut: Right. One last question - touch one, if I could just on architectural. You mentioned that you remain on track with your improvement plan and that you're expecting some cost savings to flow through in the back half of the year. From a degree of magnitude standpoint as well, you're kind of a little bit better than breakeven, let's say, in the first half of the year? Should we be thinking maybe mid to high single-digit margins, EBITDA margins in the back half because I assume that you're not necessarily at the point where you're getting back to like a low double-digit, low mid double-digit type of dynamic? Howard Heckes: Yes, Mike this is Howard. I think that those assumptions are about right. I think the second half margins are in the sort of same zip code as what we had in the second half of 2020 that - our expectation as we start to see some of these improvement projects take hold. And as we begin to see some volume return I mean, it's been really a volume leverage story there. That's been really problematic for us. And we are beginning to see some very early signs of recovery. As far as quoting and whatnot it's not necessarily translating into order volume yet. But we would expect through the third and fourth quarter that some of these mid-teens volume reductions would begin to improve. And I think that's going to be helpful. So I think that that margin assumption is reasonably close. Russ Tiejema: Yes, Mike it’s Russ. One thing that I might just add, some perspective on the results in the second quarter is, as we commented on, we did see some extended downtime due to some major capital upgrades in one of our plants. We also saw some inventory costs associated with clearing inventory at one of the sites that we recently closed. So, you take those two items together, that was circa $2 million worth of impact in the quarter. So again, these investments that we're making to better position that business going forward did represent a cost in the quarter. If you were to adjust those out, I mean clearly, that would add a few points to margin in the second quarter alone for the segment. Operator: Our next question comes from Mike Dahl with RBC Capital Markets. Mike, you may proceed with your question. Mike Dahl: Sorry, I'm sorry to stick with the cost topics, but I wanted to understand a couple of different things when we're thinking about price cost neutral or price cost favorability. If I look from a dollar standpoint, it does look like price covered materials in 2Q, but obviously, if you just cover materials dollar-for-dollar, that's margin dilutive? So are you telling us that we should be expecting from a dollar standpoint price cost to be unfavorable in the third quarter or is that just from a margin standpoint? And I guess the second part of that is obviously, costs have surprised to the upside all year in such a dynamic environment, how do you change the way that you forecast and incorporate those forecasts into your guide? Russ Tiejema: Yes, Mike. It's Russ. With respect to the price cost on a dollar basis, yes, you're right. We were clearly favorable in the second quarter. And in the third quarter, taking into account material and logistics, we would expect to be slightly unfavorable. So it really is when we get to the fourth quarter we see the benefit of both of those price increases. That positions us to well more than offset not only material costs, but the logistics expense increases that we're seeing as well around freight costs, etcetera. With respect to the constantly moving bogey here on inflation, the sourcing team has worked really hard to try to project forward what supply lines will look like and where they're going to see inflationary pressures. And at this point, we'd like to think they've got a pretty good beat drawn on what the balance of the year looks like, what that looks like by commodity basket and how it looks by segment. But we're going to continue monitoring this environment really carefully. And anything that they can do to continue shifting supply albeit they're challenged to spend a lot of time on that right now, that's going to continue to be a tool of the tool kit. But sitting here today, the outlook we've outlined we think is as good as our visibility report is. Howard Heckes: And it's like anything else. We've had to get better at this, I think, over the last several months because, you're right, it was so rapidly changing early that we weren't as far ahead as I think we should have been. And we're better at that now. So I agree with Russ. I think we got a pretty good beat on it. But we have a pretty intense focus on a lot of the indices and the moving parts because it's moving quick. Mike Dahl: - : Anything you can share on just once these are operational, how you envision whether its changes. How much does this improve your net effective capacity in these categories and also just relative margin profile or anything on relative profitability given these plants will incorporate some of your newer tools and automation and such. Anything you give us in terms of thoughts around comparisons of what these facilities could produce in profitability versus call it just your average current facility? Russ Tiejema: Yes. So let me take a shot at that. I'll start with Europe and then I'll let Tony talk a little bit about North American residential and the logic with the Fort Mill plant. But as you know the European business we have an interior business and exterior business. We enter the exterior market in 2014. And that business has been growing really nicely since that time greater than 20% CAGR in that business. And like with most businesses that grow you begin to expand and Solidor business specifically which is a direct to contractor finished next year door system business has sort of grown up and now comprises six different facilities, five of which are in a residential neighborhood, on a campus if you will. But its five separate buildings were limited by the hours we can work because of noise ordinances. So, for example, we can't work past 10:00 PM any evening. On Saturdays, we can only work 8:00 to noon. And so, we're tapping up against our capacity now where the demand is starting to get to a point where we're not going to be able to service it. So, that becomes a pretty easy analysis. This new facility, one, we believe is going to drive some efficiencies because it's one big facility, and that six separate facilities, but two is going to allow us the ability to continue to grow that business. And as you know, when we talk about our exterior business in the UK, its margin accretive. And so, this one, we believe is absolutely the right thing for continued growth of important margin accretive category. Similar for North America, but I let Tony go into some of the analysis there. Tony Hair: Yes. I think the excitement around the expansion in Fort Mill, South Carolina is we do believe that the residential market in North America is going to continue to be robust. We think there are some positive tailwinds that will continue for a good period there. And so, as we looked at our capacity, this was really an opportunity to step that capacity up primarily into your doors, and do it in a geographic region, frankly, that's really strong for us and one that's been more capacity constrained as we opened the Tijuana facility and began to expand that. It allowed for better service proposition in the West. We've seen more tightness of capacity in the East, and so Fort Mill is located very well to service the southeast up through the mid-Atlantic and northeast. And we believe that by opening a new facility will eliminate some of the constraints we've had in some or others. We've own some of those plants for decades. And frankly, the layout had limited efficiencies, had limited some of the things that we can do in terms of operational change. And so the ability to come in and start from scratch in a big square facility in Fort Mill is going to give us the advantage of really appropriate, really efficient layouts, and frankly some new equipment that we're bringing in to help automation in certain aspects of that operation. So very excited about that and should have an excellent return. Operator: Our next question comes from Jay McCanless with Wedbush. You may proceed with your question. Jay McCanless: Thanks for taking my questions. So it seems like you guys have a high-class problem. The demand is there. You're able to raise price, but you've got these three cost headwinds if you lump logistics and transportation in one bucket, your other input costs, and then managing the labor force. I guess, which one of those three buckets do you feel like you've made the most progress on? And the second question I have is it's great that you're putting the price increases now. How sticky do you feel like these will be as hopefully some of this different inflation buckets hopefully moderate as we move into next year? Howard Heckes: Yes. Good question, Jay. I think that it is a high-class problem. And as I said, we're incredibly proud of the team for how they’ve performed. I think from a material cost perspective, the supply chain team has been working on alternative suppliers for nearly as long as I've been here. And thankfully that gave us some optionality. Now, the demand is so strong that we've had to sort of go back to some of the original suppliers. For example, when tariffs and anti-dumping duties became a real thing, we had good options for some of those products in other areas, regions that weren't subject to the same tariffs. Because of demand, we've had to source product from both the alternative supplier that we found and the original supplier. And as a result, our tariffs have increased now. So we've made a lot of progress there and I'm really proud of the team. But inflation is what inflation is. And so obviously we're eating some of that as well. The HR team has been doing a remarkable job. I mentioned all the different things we're doing whether it's retention bonuses or perfect attendance bonuses. We've had outsized wage and benefit inflation in order to attract and retain key talent. And despite having some challenges there and I think that's pretty common, we read sort of headlines in the paper every day. We're doing a pretty doggone good job of keeping people in the factory. So I feel good about that. Logistics is hard. I was just talking to our head of the supply chain earlier today. And we continue to see inflation in container costs. And when you source product from elsewhere, you have to get it here. And it's a supply and demand issue. And there has been a number of things that have happened over the last several months to drive those costs up. But we're doing our absolute best to secure containers at a price that is reasonable. But again you take what you can get there right now. So, I'd say we have a little less control over the logistics side of things than we do over the material and labor piece. Jay McCanless: And then in terms of the stickiness of the price increases? Tony Hair: Yes. Jay, it’s Tony. I would say that we're not alone in seeing that inflation. And so it's certainly been justification for our communication on price. And given the really, really strong demand in the end markets, certainly folks have been understanding of that and wanting more products. So we right now feel very good about what we've done on the strategy around pricing and what that will end up guiding with the target toward being favorable price cost. Operator: Our next question comes from Trey Grooms with Stephens. You may proceed with your question. Noah Merkousko: This is Noah Merkousko on Trey. So I wanted to dig in a little bit more on the capacity expansion and sort of how you're thinking about that as the year progresses. It sounds like interior doors remains on allocation. So just any sense of when you'll be able to sort of fix that situation and where you'll have enough product to fully meet the demand especially in the North America residential? Howard Heckes: Yes, that's a good question. Sorry we continue to work really hard on optimizing the output of our existing facilities. Obviously, the two big expansions that we talked about, the one in Fort Mill South Carolina in the U.S. won't have impact in our overall capacity until next year in the second quarter. So that's a longer term investment. We talked - Howard mentioned earlier all of the things our HR teams are doing to try to attract and retain talent and the investments we're making there. That's one of the biggest factors that we have is, simply having all of the people available in each one of those plants to be able to run at full capacity. That frankly has been a challenge, but we're seeing some progress as the government incentives begin to cease and as we've taken different steps and invested more to try to get those people there. Same like materials play. We haven't seen as many material limitations on interior doors as we have in exterior doors. But there have been some. And so as we manage those we're seeing that come back. But I wish I could give you an exact date on when we'd be able to meet unconstrained demand. I don't know what that's going to be. It's pretty volatile - demand fluctuates day-to-day. So, we're working against all those initiatives in an effort to satisfy the customer. To Howard's point, we make decisions every day and we outsize satisfying the customers in some cases, that creates mix in payload and favorability in our distribution and logistics as we shift from non-optimal plants in lanes that we normally wouldn't use. But that's the commitment we have to try to address the customers’ needs. Noah Merkousko: Thanks, that's helpful. And then for my follow-up, what were the investments from the North American investment plan geared towards in the quarter and how were you thinking about the cadence of spending for that in the back half of this year and into next year? Howard Heckes: No, we're still spending in those three buckets we talked about originally when we introduced this plan. First, it's about consistent and reliable supply, and then it's about product innovation, and then it's about down channel marketing. And we said we're going to over indexed in the first two in the early stages and then ramp up the down channel marketing later. And I think that that's essentially true of how we're spending the money today. And we said that that's approximately $100 million over five years, approximately $20 million a year. We under-indexed last year for obvious reasons, we sort of cut spending in 2Q. And so, we didn't quite get to that number. So we said there may be a little catch up this year. But generally, that spending is pretty balanced quarter-to-quarter. Operator: Our next question comes from Stephen Ramsey with Thompson Research Group. You may proceed with your question. Stephen Ramsey: On Europe, thinking about mix and the dynamics impacting margins in the second half and into early next year, will mix be a major impact over that timeframe? And does the new plant, as it rolls out will that change mix in a positive way? Russ Tiejema: Yes Steven, it’s Russ. Well, as we've talked about before, we do have much stronger margins on the exterior door business side of the U.K. business than on the interior door side, and part due to the fact that as Howard mentioned earlier. We're selling fully finished door systems direct to the contractor channel for the entry door business in the U.K. And so, what we have seen over the last several quarters is as the interior door business, which we sell more through the merchant channel or to the builder channel. As the new housing market has fluctuated in the U.K. vis-à-vis the remodel channel, which is where we strongly compete on the entry door side, we have seen mix headwinds or tailwinds respectively. And more recently, there's been a bit of a mixed tailwind just because of the relative growth of our entry door business has been stronger than our interior door business. Now that recovered somewhat in the second quarter. We did see house-build demand come back stronger in the U.K. and our interior business began to tick up and grow at rates more in line with the entry door business. Going forward, again to Howard's point, our focus is on supplying that continued very robust demand on the remodeling market side for exterior doors. And to the extent that we can continue to grow that business that should be margin accretive to the business longer term. But again, we're not going to be getting that facility up and running and really a full rate until we get well into 2022. But that will be a longer term margin tailwind for the business in the U.K. Stephen Ramsey: And then thinking about architectural volumes being down now in the second half, yet the plants are down for restructuring. Is there a way to think maybe about pure demand currently? And as the in-market demand rises over the next several quarters, will the major plant restructurings be done in time to benefit in a greater way from that higher demand? Howard Heckes: Yes, that's certainly the intent. I think the loss of volume in that segment exposed some inflexibility in our network, and that's why we're addressing this architectural business as we are. We've successfully closed two plants. We're analyzing our flush door capability. And the intent is as these markets begin to improve, we're in a much better position to service those markets from a cost perspective. We are seeing - the ABI has been positive for the last five months that's great news. However, there is a bit of a lag particularly when it comes to doors. We think it's sort of nine to 12 months before that probably translates into door volume. So, you can say it's an opportune time to do some of the things we need to do with some capital equipment. Russ mentioned the capital equipment upgrade that we were successful with, but took some more time to install that has an impact on our financials in the quarter. There's going to be a couple more big projects in the back half of the year which are going to be a bit of a drag. But the time is right to do those because volume is soft. Operator: Our next question comes from Stanley Elliott with Stifel. You may proceed with your question. Stanley Elliott: Thank you all for squeezing me in. Two quick questions and I'll lump them together. Can you talk a little bit about the increase in the repurchase authorization if there's any sort of cadence anything like that that we should expect? And then curious kind of what you're seeing in the M&A environment given the cash flows you guys are generating, and I'll hang up? Thanks. Russ Tiejema: Yes, thanks for the question, Stanley it’s Russ, I'll take both of those real quickly. With respect to our share repurchase authorization, first and foremost, I would say, as we laid out during our Investor Day in early April, the three areas that we plan to deploy cash flow across our business are first and foremost, organic investments inside the business, things around our manufacturing capability, new product launches. In some cases, our digital capabilities to better service customers long-term, those internal investments are top priority. Second priority, would be identifying where M&A opportunities for further inorganic growth lie. I'll talk about that one in just a sec. And then the third priority is the returning cash to shareholders. And there's going to be a little bit of a fulcrum point there with respect to what's available in the M&A market and at points where there are not opportunities to strategically deploy large amounts of cash there. We certainly want to step back and deploy the share repurchase program. So frankly, at our current valuation levels, we see our stock as a really good investment. And this is an opportunity for us to continue deploying cash back to our shareholders where we don't have strong return projects elsewhere sufficient to use the strong cash flow that we're generating, on the M&A front, and as we talked about during the Investor Day also. We want to widen the lens out a little bit and take a look at assets that will help us drive this innovation story in the whole Doors That Do More strategy. We have launched into the market now, our new powered and connected Empower door system that we have essentially installed in model homes with one builder and commitment from another builder to launch that into their offering of high-end custom homes. So, we think that there's an opportunity to continue driving that type of innovation into the door system and assets that will allow us to do that are going to be really attractive to us. So, we'll continue to monitor the environment. We continue to look actively at assets. And nothing specific to talk about, but obviously we'll report back when we see those opportunities present themselves. Operator: That's all the time we have today for questions. Mr. Heckes, I like to turn the floor back over to you for any closing remarks. Howard Heckes: Thank you, operator, and thank you for joining us today. We appreciate your interest and continued support. And this concludes our call. Operator, will you please provide replay instructions. Operator: Thank you for joining Masonite’s second quarter 2021 earnings conference call. This conference call has been recorded and the replay may be accessed until August 24. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside of the U.S., enter conference ID number 13720364. This concludes today's conference. You all may disconnect your lines at this time. Have a great day and thank you for participating.DOOR Ratings Summary
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Masonite International's Rating Slashed at Stifel
Following Masonite International (NYSE:DOOR) fourth-quarter earnings release, Stifel analysts downgraded the company from Buy to Hold, while raising the price target to $133.00 from $119.00. Despite Masonite's earnings aligning with expectations and a positive surprise in North American business performance, ongoing weaknesses in Europe and the Architectural sector led to the downgrade.
Elliott highlighted the ongoing acquisition of Masonite by Owens Corning, expected to close in mid-2024, and emphasized the importance of mergers and acquisitions in the building products industry for achieving scale. The adjustment in Masonite's rating reflects the anticipated successful close of this acquisition without regulatory issues.
Masonite International Announces Restructuring Changes
Wedbush updated its estimates on Masonite International Corporation (NYSE:DOOR) for restructuring moves. The company announced on Dec 29 that it will incur one-time restructuring charges during Q4/22 that will result in incremental cost savings in future years. Masonite indicated in the Q3/22 conference call that it would be looking for cost-saving opportunities, especially in the Europe segment.
Management did not indicate in the release where the cost cuts were focused, and the analysts will look for more color on the Q4/22 conference call, presumably mid to late February 2023.
The analysts maintained their fiscal 2022 AEBITDA estimate of $456 million and lowered their 2022 GAAP EPS to $10.09 from $10.74. Their 2023/2024 AEBITDA moved to $481/$516 million which represents cost savings of approximately $15 million pretax in 2023 and $20 million pretax in 2024. The analysts maintained their Outperform rating and $115 price target on the company’s shares.
Masonite International Announces Restructuring Changes
Wedbush updated its estimates on Masonite International Corporation (NYSE:DOOR) for restructuring moves. The company announced on Dec 29 that it will incur one-time restructuring charges during Q4/22 that will result in incremental cost savings in future years. Masonite indicated in the Q3/22 conference call that it would be looking for cost-saving opportunities, especially in the Europe segment.
Management did not indicate in the release where the cost cuts were focused, and the analysts will look for more color on the Q4/22 conference call, presumably mid to late February 2023.
The analysts maintained their fiscal 2022 AEBITDA estimate of $456 million and lowered their 2022 GAAP EPS to $10.09 from $10.74. Their 2023/2024 AEBITDA moved to $481/$516 million which represents cost savings of approximately $15 million pretax in 2023 and $20 million pretax in 2024. The analysts maintained their Outperform rating and $115 price target on the company’s shares.
