Masonite International Corporation (DOOR) on Q3 2021 Results - Earnings Call Transcript
Operator: Welcome to Masonite Third 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 a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Rich Leland, Vice President, Finance and Treasurer. Please proceed. Richard Leland: Thank you and good morning, everyone. We appreciate you joining us for today’s call. With me here this morning are Howard Heckes, President and Chief Executive Officer; and Russ Tiejema, Executive Vice President and Chief Financial Officer. Chris Ball, our 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 third 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 differ materially from those projected in such statements. Additional information regarding these factors appears in the section entitled forward-looking statements in the press release we issued yesterday. More information about risks can be found under the heading Risk Factors in Masonite’s most recently filed 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, followed by a review of the third quarter from Russ along with 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. It's good to be speaking with you all again. I am pleased to report that we delivered another quarter of year-on-year growth in both net sales and volume. The strong 11% increase in net sales was driven by higher average unit price or AUP and volume growth in our residential businesses both in North America and Europe. AUP was up year-on-year across all three segments as we continued to benefit from previously implemented pricing actions. As expected, adjusted EBITDA margin contracted year-on-year due to higher input costs ahead of the realization of pricing actions taken in June and August. We have implemented multiple price increases across the business this year to stay ahead of the rising costs in 2021 and maintain a favorable price cost relationship. While we did not realize enough price to preserve margins in the third quarter, pricing actions did offset the dollar impact of inflation in absolute terms. With these actions in full effect, we feel confident we will return to year-on-year margin expansion in the fourth quarter. Russ will discuss this in more detail as it relates to our updated 2021 outlook. During the quarter, we repurchased $41 million of our common stock. This marks the highest amount of quarterly share repurchase activity since 2018. With respect to business and operational highlights for the quarter, demand remained robust across our residential end markets in both North America and Europe. We were pleased to deliver volume growth despite labor availability and logistics challenges that are impacting the markets we serve. In an effort to service our customers, we experienced operating inefficiencies and elevated over time during the quarter. The use of initiatives such as referral, sign on, retention and perfect attendance bonus programs in the quarter in addition to wage adjustments helped drive an increase in applicants, but labor remains a challenge broadly. I am pleased to say that our new facilities in both our North American Residential and Europe segments are moving forward as planned. We expect to see our new Stoke-on-Trent, UK facility operational in the first quarter of 2022 and our Fort Mill, South Carolina facility on line in the following quarter. Both of these facilities are extremely attractive investments, addressing high growth products and regions respectively. We believe this additional capacity will enable us to fully meet demand while increasing efficiency and providing better service to our customers overall. Lastly, I'd like to highlight several organizational changes in the leadership of Masonite including the addition of a Chief Sustainability Officer to our executive management team. Let's turn to Slide 5 for more details. Environment, social and governance has become increasingly important to our shareholders and stakeholders at large in recent years. As a company founded on sustainability, I think it's important to build upon this legacy and ensure we embed a focus on environmental stewardship, social responsibility and good governance more deeply into our business. Accordingly, we made the decision to create a new executive role of Chief Sustainability Officer to effectively drive ESG into our operations, supply chain and product development process. The role requires someone with a strong operational and technical background. It was for these reasons that we chose Clare Doyle, who most recently served as our Senior Vice President, General Manager for the Europe business segment. Clare has a valuable combination of general management experience with a technical background and her five years with Masonite, makes her an ideal candidate to lead our continued ESG journey. This organizational move created an opportunity for us to continue building our leadership talent abroad. I am pleased that Vicky Philemon joined Masonite in August of this year as the new Senior Vice President, General Manager of Europe. Her commercial and marketing expertise as well as her inclusive leadership style and strategic mindset are ideal for this role as we look to build on strong momentum in our Europe business. Vicky was most recently a Managing Director for Morphy Richards, a supplier of small appliances in the UK. She also previously served in senior sales and marketing roles at Stanley Black & Decker. And most recently, we announced the appointment of Chris Ball as President of Global Residential. We believe his leadership style, relevant experience and drive for results will be strong assets in helping us achieve our growth initiatives, including delivering on our Doors That Do More strategy. Prior to joining Masonite, Chris served as the President - Americas for Cooper Tire & Rubber Company. Earlier in his career, he held a variety of leadership roles across sales and operations at Whirlpool Corporation, and has an extensive background leading global teams to drive growth. I am delighted to have Chris joined the team and have him here with us today. As we discussed in our Investor Day, we want to have the best team in the industry. The ability to attract and retain talent is a critical differentiator for companies. For these reasons, I couldn't be more pleased with the new hires we made into the organization and the addition of a dedicated CSO to lead our ESG initiative. With that, I'll turn the call over to Russ to provide more details on our financials. Russ? Russell Tiejema: Thanks, Howard. Good morning, everyone. Turning to Slide 7, I'll provide an overview of our third quarter financial results. We reported net sales of $652 million, up 11% as compared to the third quarter of 2020. The growth was primarily due to an 8% increase in AUP, which was up year-on-year across all three segments on favorable price. We also benefited 2% from base volume growth and 2% due to the favorable impact from foreign exchange. As Howard mentioned, we saw a base volume growth in our residential businesses, both in our North America and Europe segments, which was partially offset by declines in the Architectural segment. Gross profit decreased 4% to $154 million as the benefit of strong AUP growth was more than offset by the impact of higher inflation and tariffs on materials as well as higher factory and distribution costs. Accordingly, gross margin contracted 370 basis points year-on-year to 23.6%. Selling, general and administration expenses were $77 million, down 35% compared to the same period last year, primarily due to the absence of $38 million in charges related to the settlement of U.S. class action litigation that were included in the prior year period. Even after excluding these charges, SG&A as a percentage of net sales fell 200 basis points from the prior year to 11.7%. SG&A also benefited from lower incentive compensation expense in the third quarter of 2021, but declines were partially offset by higher personnel costs, including resources to support growth. Net income was $38 million in the quarter compared to a loss of $22 million in the third quarter of 2020. The prior year loss included the negative impact of the settlement charges I just discussed and goodwill impairment in the Architectural segment totaling approximately $90 million of discrete pretax charges in the third quarter last year. Diluted earnings per share were $1.54, up from a loss of $0.89 in the third quarter of last year. Adjusted earnings per share were $1.99, which excludes charges related to the loss on extinguishment of debt and actions taken as part of our previously announced restructuring plans that were incurred in the quarter. This compares to $2.16 per share in the third quarter last year, which excluded settlement, impairment and restructuring costs. As Howard mentioned, our price actions fully offset the impact of inflation in absolute dollar terms. However, factory and logistics inefficiencies due to labor constraints caused adjusted EBITDA to decline slightly year-on-year to $105 million. Adjusted EBITDA margin was 16.1% down 240 basis points from a strong margin level in the prior year quarter. On the right-hand of the slide, we have our adjusted EBITDA bridge, which illustrates the contribution from our strong topline growth. We saw additional year-on-year favorability of $3 million due to foreign exchange as both the Canadian dollar and British pound strengthened against the U.S. dollar. Our cost of goods sold remained elevated in the third quarter. As expected material costs were significantly higher, up $36 million year-on-year. Raw material inflation, higher inbound freight costs and supply chain disruptions all contributed to material cost inflation that approached 20% versus the third quarter last year. We also incurred $19 million of higher factory-related costs in the quarter due to increased wages and production inefficiencies caused by labor constraints. Lack of labor availability exacerbated by pockets of COVID-related absenteeism was a continued headwind. Given the circumstances, we were pleased with how our operations team performed overall in the quarter. Distribution costs were $14 million higher year-on-year as a result of sub-optimized payload and freight lane mix as we shifted production around our network of manufacturing plants to best service customers as well as higher freight rates and inflation in packaging materials. Let's turn to Slide 8 for our North American Residential segment results. Net sales increased 16% from the prior year to $489 million. Base volume contributed 4% to growth in the quarter and continued strength in our retail business, driven by our previously announced new business with Lowe's. The largest driver of growth was a 9% increase in AUP, which was up on favorable price as we benefited from three previously announced price increases, including modest benefit from the August price increase. Given our backlog and the timing of orders, we did not anticipate seeing a benefit from this increase until the fourth quarter. Adjusted EBITDA in the North American Residential segment was $91 million in the third quarter, down 6% from the same period last year with an adjusted EBITDA margin of 18.7%, down 450 basis points as rising costs in the quarter outpaced pricing actions. The material inflation and operational factors noted on the prior slide were a sizable headwind to the North American Residential business. We continue to look toward the future and invest for long-term growth. In the third quarter, we made significant progress on new product development and in our targeted capacity expansion initiatives, such as our Fort Mill, South Carolina facility. Turning to Slide 9 and our Europe segment. Net sales increased 14% year-on-year to $84 million. Base volume was up 3% as we saw continued strengthening in our interior door business, while output in our exterior business was impacted by lingering materials availability issues. Both businesses faced a challenging labor market in the UK and were impacted by COVID protocols. AUP was up 11% year-on-year on favorable price, which offset inflationary pressures in the quarter. We saw a 7% benefit from the favorable impact of foreign exchange due to the continued strength of the British pound against the U.S. dollar year-on-year, and a 1% increase in the sale of components and other products. These gains were partially offset by an 8% decline due to the previously disclosed sale of our business in the Czech Republic during the second quarter. Adjusted EBITDA was $17 million in the third quarter, up 11% year-on-year. Adjusted EBITDA margin remained strong at 19.8%. Price fully offset the impact of inflation, while we faced mixed headwinds from the relative strengthening of our interior business. We are particularly pleased with the margin performance of the Europe segment, which has demonstrated step level improvement in the last two years due to portfolio optimization and the growth of our exterior door business. Our new Stoke-on-Trent facility will allow us to add capacity for this margin accretive portion of the business. With equipment installation now underway, we are pleased to see this facility progressing as planned. Overall, another strong quarter for our Europe segment. Moving to Slide 10 and the Architectural segment. Net sales decreased by 13% year-on-year to $75 million driven by a 15% decline in base volume due primarily to labor constraints, including COVID impacts. These labor constraints coupled with improved order flow in the quarter drove backlog growth and extended lead times. The sale of components and other products also decreased by 3% year-on-year. These declines were partially offset by a 4% improvement in AUP driven by price actions as well as a 1% increase from favorable foreign exchange. Adjusted EBITDA margin contracted to 1.4%. While we continue to realize favorable price, this was more than offset by the impact of lower volume and inflation. We were encouraged to see signs of recovery in the commercial construction market. This is the second consecutive quarter of inbound order growth in our project business and base volume growth in our quick ship business. We believe continued progress on our optimization plan should result in our ability to capitalize on this commercial end market recovery as it accelerates in 2022. Slide 11 summarizes our liquidity and cash flow performance for the quarter. Inclusive of unrestricted cash and accounts receivable purchase agreement and our undrawn ABL facility, our total available liquidity ending the quarter was $614 million. Net debt was $472 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.2x. Cash flow from operations was $100 million through the end of the third quarter, down from $219 million in the first nine months of 2020. Lower cash flow levels were anticipated given our need to rebuild net working capital from historically low levels at the end of 2020, along with natural increases in working capital from rising sales volumes and higher cash taxes and cash payments related to the settlement of U.S. class action litigation. Capital expenditures were approximately $47 billion in the first nine months of 2021. As Howard mentioned, we continued to execute on our share repurchase program in the third quarter, purchasing over 369,000 shares for approximately $41 million at an average price of $111.37. If you recall, in August, our Board approved an incremental share repurchase program, allowing the company to repurchase up to a total of $250 million of its outstanding common shares. At the end of the third quarter, we had $227 million available under the remaining authorizations. This repurchase program is an important means for us to return value to shareholders as evidenced by our activity this quarter. Now let's turn to Slide 12 to discuss our updated outlook for the consolidated full-year 2021. As we entered the second half of 2021, we saw three factors driving our topline growth. Favorable conditions in our residential end markets both in North America and the UK, our efforts to increase capacity to support customer demand and additional pricing actions across our segments to help mitigate inflationary pressures. These remain the three driving factors yet the dynamics behind them have evolved as we approached the end of the year. Residential end market demand remains resilient. However, labor and logistics constraints in the markets we serve are impacting building products companies as a whole and our customers. As a result, we have seen the building process elongated, creating a potential lag in near-term order rates. We expect this impact will be transitory and we remain bullish about the long-term health of our residential end markets. U.S. new home construction has not kept pace with demand. And as a result, the U.S. housing stock is under built. In addition, the aging of the existing stock has created robust growth opportunities in the repair and remodeling market. Coupled with an improving commercial end market, we feel positive about our demand backdrop as we approach 2022. Second, our team has worked hard to enhance capacity, however, the broader labor and logistics environment continues to impact our ability to service demand. Unless these conditions improve ahead of our planned capacity expansions, we would expect this to be an ongoing production headwind. Lastly, we have successfully implemented additional pricing actions across our segments to mitigate inflationary pressures. In our North American Residential segment, we expect to realize the full benefit of all three previously implemented price increases during the fourth quarter. These price increases along with additional actions taken in our Europe and Architectural segments should drive continued strength in AUP during the fourth quarter. With these dynamics in mind, we now expect year-on-year consolidated net sales growth of 15% to 17% compared to our prior outlook of 17% to 20%. This updated outlook reflects a slight decrease in the benefit of foreign exchange. From a cost perspective, we expect the environment to remain challenging as we exit the year. Material inflation rates have trended largely as expected, peaking in the third quarter and now moderating slightly albeit as significantly higher levels on a year-on-year basis. We continue to expect material inflation to be in the low teens for the full-year inclusive of tariffs in inbound freight. As mentioned earlier, we expect the labor market to remain tight with continued year-on-year wage and benefit inflation. In addition to the incentive programs, we've instituted to attract applicants and retain employees, we have increased factory wages overall at historically high rates. Distribution costs are expected to remain elevated as we continue to ship production across our manufacturing network to best serve our customers. This will likely result in freight lanes and payloads that remain somewhat inefficient, which coupled with higher freight rates and inflation in packaging materials will yield increased distribution costs for the balance of 2021. With the full benefit of the pricing actions in effect, we believe we will not only cover the dollar impact of inflation in the fourth quarter, but the margin impact as well. Based on these assumptions around the price cost relationship and slightly lower volumes, we now expect adjusted EBITDA to be in the range of $415 million to $425 million compared to our prior outlook of $435 million to $455 million. We continue to expect a return to adjusted EBITDA margin expansion during the fourth quarter, and now expect full-year margin will be in line with that of 2020. Moving to earnings per share. We now expect adjusted EPS in 2021 will be in the range of $7.95 to $8.25 with cash taxes of $45 million to $50 million. There is no change in our assumptions for capital expenditures as we continue to invest in the business for future growth. We now expect full-year free cash flow of $115 million to $135 million. Given the cost and operational backdrop we face this year, we are pleased with our financial performance. Our expectation to maintain adjusted EBITDA margin levels year-on-year is a testament to the strength of our operations team. We believe we are positioned for even stronger financial performance next year, and expect to deliver full-year adjusted EBITDA margin expansion in 2022. We'll share more specifics on our fourth quarter call when we provide our outlook for 2022. And now I'll turn the call back to Howard for some closing comments. Howard Heckes: Thanks, Russ. I'm pleased with the results this quarter, and extremely thankful for the hard work and dedication of our more than 10,000 Masonite employees. As we approached the end of this year, it is fair to say that 2021 has proven itself to be even more challenging year from an operational standpoint than 2020. For these reasons, I'm even more proud of our ability to deliver another quarter of both year-on-year net sales and volume growth. Higher AUP in all three segments was the primary driver of growth and offset the dollar impact of inflation in the quarter. Growth was further supported by continued strength in our residential end market demand, but our ability to service these customers was impacted by labor and logistics constraints. We strengthened leadership capabilities to support future growth with the appointment of new leaders in both our Europe and North American Residential Business segments. We also named our first Chief Sustainability Officer to help drive our continued ESG journey. We plan to drive further growth through our continued investment in the business, specifically new product development and targeted capacity expansions. With the uncertainty around the labor market, we believe this incremental capacity will help us better service customers in these dynamic times. Finally, we've updated our 2021 outlook to reflect the continued impact of labor and logistics constraints we believe we will see across the markets we operate in and our expectation that we will achieve a favorable price cost relationship in the fourth quarter and full-year. Despite the significant inflation and operational challenges our team has faced this year, we expect to maintain adjusted EBITDA margin in line with that of 2020 and we believe the actions we have taken position us for margin expansion in 2022. And with that, I'd like to open the call to questions. Operator? Operator: Thank you, Mr. Heckes. Our first question is from Josh Chan with Baird. Please proceed with your question. Joshua Chan: Hi. Good morning, guys. Thanks for taking my questions. Howard Heckes: Good morning, Josh. Russell Tiejema: Good morning, Josh. Joshua Chan: Good morning. I guess, since Chris is on the call, I was – just figured to send one his way. So Chris, you've been on the job for about two months here or so, could you just share some of your initial thoughts about what you feel are the strengths of the business and where might be some opportunities, where are you focusing your time in the near-term? Good to meet you, Chris. Christopher Ball: Yes. Sure. Great to meet you too. Yes. To start off with – before joining the company, I spent a bit of time researching the products and also, digging in on the Investor Day presentation and the strategy. And over the first couple of months here, I've spent a lot of time with our customers, actually had a chance to visit a few of our manufacturing sites. And I've also been really spending a lot of time with the team as part of my ramp up. And I'd say one of my biggest observations and kind of takeaways has been early on that our opportunity is frankly, a lot bigger and more compelling than what I originally thought coming in. We talk a lot about the Doors That Do More strategy and becoming more consumer-centric. And when I look at it through the lens of our customer partnerships and really what we can do in the market, we'll get the overall kind of industry macros. And also frankly, the talent level that we have in inside the company really has been above expectations experience for me as I've walked in the door. So I'd say, generally, we've got the right strategy. I see a ton of potential. Right now, it's all about turning that into execution and frankly, I'm really excited to roll up my sleeves and get a chance to dig in as the months come along here. Joshua Chan: That's great. Thanks for the color there. And then my follow-up is I guess, on the overall demand cadence. So is the revenue reduction solely due to production and so whereas anything that's not produced is there in terms of extended backlogs is, could you talk a little bit about the cadence of underlying demand relative to the guidance there? Russell Tiejema: Yes. Josh, it's Russ. Let me share a little bit of perspective on that. But first of all, I'm going to assume your questions that’s highlighting more on the North American Residential business. I would say, in North America, what we've seen is the retail demand has been very steady, very resilient. We see continued demand for products in the repair and renovation channels. On the wholesale side for largely new build, what we saw is that order flow was strong early in the quarter, June and July. And then we saw a drop off in September. Now it's since recovered – has recovered into October and we're seeing early signs of continued recovering into November. So what we're attributing this to is what we're hearing a lot from our channel partners about some air pockets down channel with the builders and the contractors. The fact that they're also struggling with labor as we and everyone else in the industry are and they're also struggling in some cases getting other materials that they need to the job sites when they need them. And that's creating an elongated build cycle. And so we would attribute that slow down in September to that slowing order flow down channel from our distributors. And it's allowing them to manage their inventories prudently as they go into the end of the year. But we are seeing recovery there. Joshua Chan: That's great color. Yes. Thanks for the time guys. Russell Tiejema: Thanks, Josh. Howard Heckes: Thanks, Josh. Operator: Our next question is from Michael Rehaut with JPMorgan. Please proceed with your question. Margaret Wellborn: Hi. This is Maggie on for Mike. Thanks for taking my question. Howard Heckes: Good morning, Maggie. Margaret Wellborn: First just following up on the question about topline cadence. I just want to make sure that I'm kind of understanding everything correctly. So it seems that for 4Q the commentary around the labor and logistics impacting the build process, it seems that you'll see a volume decline particularly as you're going to see more of the price come through just that that's kind of how it seems to work out to get to the full-year guidance. But can you talk about how you're thinking about the volume cadence specifically into 2022? Russell Tiejema: Yes. Hey, Maggie. It's Russ. Maybe let me start that and provide a little bit of color on what we think Q4 looks like, and then Howard may want to jump in with a longer-term view. But if you take a look at our revised guide and what that implies for Q4, it would suggest that we're going to be up net sales wise, call it, 6-ish percent, right, mid-single digits. Couple of things that you need to take into account. We did have a 53rd operating week in the prior year. We think that's worth as much as 6% of growth. And then we also have the impact of the divestiture of our Czech business, which while small is roughly a point on a consolidated basis. So if you were to take that that implied guide for the fourth quarter net sales growth and normalize it for those factors, you'd be looking at more of a mid-teens growth, which when you lay that on top of 16.5% growth in the fourth quarter last year, you're looking at a two-year stack of circa 30%. So those are some factors I'd want to make sure you take into account. Now that said, do we think it could be even stronger than that if we had full access to labor and materials for certain of our products? Yes, we do. We are seeing the same supply chain and labor constraints that most everyone across the industry is seeing. And we're not planning for that to suddenly and miraculously recover in the fourth quarter. So we're taking that into account when we assume our volume is probably going to be flat to modestly down and then most of the increase is going to be driven by price. Margaret Wellborn: Okay. That makes sense. Go ahead. Howard Heckes: I'm sorry, Maggie. If I can just weigh in a little bit into 2022. We think the macros continue to be really strong. Demand is going to be good for our product. As Russ said, we've had some labor – pretty well documented, I think broadly labor challenges, they do seem to be improving. We're starting to see some increased applicants in September and early October, and it's a matter of getting them into our facilities and getting them trained. It did create some inefficiencies in Q3 and as Russ said, likely into Q4. But this isn't a long-term – I don't believe this is a long-term problem. We just got to get through this situation, but demand is going to be good into Q1 and 2022. Margaret Wellborn: Got it. That's really helpful. Thank you. And then just second one on price cost. You mentioned that with the full impact of your price increases coming through in 4Q, you expect to fully offset inflation. I just wanted to confirm that you're expecting to offset with the price increases that you have already announced and implemented. And then I was wondering if you could talk a little bit about how you're thinking about the potential for further price increases into 2022? Russell Tiejema: Yes. So obviously, Maggie, it’s been quite an unusual year with inflation. We commented that we're upwards of 20% inflation in Q3. We think that might moderate just a little bit in Q4. So we've had to be a very aggressive in price, much more so than I think historic, I've only have two years of history here, but we've taken multiple price increases across our businesses with that ultimate goal of staying ahead on this price cost relationship. We were able to cover inflation in real dollar terms in Q3. We think that in Q4 with the full effect of the most recent August increase, we'll get back to margin growth. As far as the future goes, we always look again to keep that price cost relationship favorable to understand what consumers are willing to pay for our products. We'll obviously want to continue to differentiate with products to provide more value and mix with AUP, but we're going to continue to do the right things. Pricing is going to continue to be an arrow in our quiver for an arrow that we will shoot right to ensure that we have positive price costs relationship. Margaret Wellborn: Got it. Thank you. Operator: Our next question is from Mike Dahl with RBC Capital Markets. Please proceed with your question. Christopher Kalata: Hi. This is actually Chris Kalata for Mike. Thanks for taking my questions. Howard Heckes: Hi, Chris. Christopher Kalata: I just wanted to touch on the full-year 2022 comments you made on margins expecting those to be up year-over-year. I was hoping maybe you could help flush out some of the drivers there. Obviously, it sounds like price costs you expect to improve through the year. It also looks like you guys put out a fairly sizable price increase at the start of the year for your interiors door products. I was wondering how much you expect that to be – that the price cost dynamic could be driving that outlook relative to overhead leverage and some of the other margin drivers out there? Russell Tiejema: Yes. Chris, it's Russ. Let me kick off with this one. As we look into 2022, there are probably two primary factors that will take into account. One is the fact is, as we've already talked about, we put a significant amount of price in place across 2021 in our North American Residential business, right. An increase at the beginning of the year, one in late June, one in early August. And we're going to see the full benefit in Q4 and then into 2022. Now we make it a practice not to talk prospectively about price, that's not yet in the market. So I'll withhold commentary on the pricing strategy or anything that's been announced in early 2022. What I would say though, is that, we are formulating our viewpoint on what inflation looks like, which is the second item as we go into 2022. And we're taking that into account when we set our pricing strategy. We think inflation is going to moderate somewhat on a year-on-year percentage basis as we go into 2022. Now the first half of the year, we're going to continue to see some significant headwinds just because of the comp because we've seen material inflation accelerate significantly across 2021. It went from 7% in the first quarter to circa 13% in the second quarter. To approaching 20% in the third quarter, probably it will level off and drop a little bit on a percentage basis from that in the fourth quarter. So we're going to see some continued inflation in material next year. And that's going to be taken into account when we set pricing. And as Howard said, it's always going to be around maintaining a favorable price cost relationship. And so we're taking that inflationary pressure into account as well as inflation that we anticipate could continue on the labor and logistics front. Christopher Kalata: Understood. I appreciate the color there. And just touching on the kind of production capacity and that outlook into next year, obviously labor and supply constraints are likely to be longer lasting. So with all your new capacity announcements, I mean, how are you thinking about just general production capacity kind of into the back end date of next year given all the moving pieces? Howard Heckes: Yes. Thanks for the question, Chris. We've made a couple of announcements on new plants and obviously those will have a pretty significant impact on capacity generally, but we've also been taking action throughout the year on targeted equipment in certain factories and incremental shifts in order to increase capacity, all of which are coming on line and helping. Now when we talk about shifts, we've talked about labor and it's been a challenge to go out and recruit a full shifts of people. And so it's taken longer than we might have hoped. Now, as I said, we're starting to see an increase in applicants sort of across the Board starting in September, but there's a number of capacity initiatives going on to ensure that we can best service our customers. The most significant are which are the plants in South Carolina and in the UK for our exterior business. But lots of capacity projects going on across the network. Christopher Kalata: Got it. Appreciate the color. Operator: Our next question is from Reuben Garner with The Benchmark Company. Please proceed with your question. Reuben Garner: Thanks. Good morning, everybody. Howard Heckes: Hi, Reuben. Russell Tiejema: Hi, Reuben. Reuben Garner: Maybe just a follow-up to a question earlier. Russ, I think you mentioned distributors maybe being hesitant on the inventory side. If I heard that correctly, if not, please correct me. But my question is more on the retail side. I know you don't necessarily have a – not all of your products are inventory. But are you seeing any hesitancy from the retailers to, I guess, take advantage of a seasonally soft period to load up on as much product as they can to get ready for next year after all the inflation and maybe the slowdown in R&R that we saw over the summer? Russell Tiejema: Yes. Reuben, it’s Russ. To clarify, I don't know that I use the word hesitant. I think it's just a matter of as builders and contractors down channel from our distribution. As they're starting to see their building process or their building cycle elongate, as they're seeing delays across other material categories and some difficulty in some cases scheduling their labor and their subs at the pace that they originally anticipated. That's forcing them to slow their pace of build a little bit and that's slowing order flow back up into the distribution channel. And so the distributors are just being smart about managing their inventories that go into the end of the year. Again, I think I used the word air pocket. We are seeing clear evidence that the order flow is now recovering in October into November. So that feels like more of a temporary pause as people digested that kind of step level change in the build cycle. And now we're expecting the strong demand backdrop that still sits behind new construction generally to create new flow through demand. On the retail side, again, I'll go back to what I said before. It's been steady. We’ve not seen any dramatic inflection up or down in a retail demand that order flows remained pretty consistent and no evidence that it's going to bounce around a lot between now and the end of the year. Howard Heckes: And that demand, I think – this is Howard, is POS demand as well as inventory, I think that the retail inventory has improved slightly, but it's not like they're growing their inventory significantly, which is what's driving that demand. I think POS has been good at retail steady as Russ says throughout the quarter and year. Reuben Garner: Got it. Thanks for clarifying, Russ. And then you mentioned a number of factors that seemed to be in large part one-time on the cash flow side this year. Can you maybe quantify for us the factors? Or it said differently, can you help us with ways to think about the free cash flow profile of the business moving into next year? Russell Tiejema: Well, I think the two primary factors I would point to for this year are one, our rebuild in working capital. We ended 2020 at historically low working capital level. So we expected that we would see some recovery or some build in working capital, and that has indeed happened. And ironically enough, on a dollar basis given all the inflation we're seeing in what we're buying for raw material and holding an inventory through the production cycle, and while it's a relatively limited amount of finished goods inventory that we hold is also had much higher values just because we've taken prices up. So you're seeing a pretty significant growth in working capital driven to some degree by inflation. The other factor is, is we are seeing a significant step up in our cash tax load this year as a result of a lot of our net operating loss carry-forwards rolling off. And so that's – you see that on our cash tax guide step up this year from last year. So those two factors have been pretty key in 2021. As I look ahead to 2022, we're still formulating our viewpoint on what cash looks like. We should see working capital probably exiting this year to more normalized level. So I don't know that there is going to be a ton of build next year again, outside of normal business growth and inflationary growth. And cash taxes, we're still finalizing our view on that. But certainly, we're in a position now. As the profit position of the business continues to expand, we're likely to see cash tax positions expand or payments expand as well. Reuben Garner: Perfect. Thanks guys, and good luck managing through the rest of the year. Howard Heckes: Thanks, Reuben. Russell Tiejema: Thanks, Reuben. Operator: Our next question is from Noah Merkousko with Stephens. Please proceed with your question. Noah Merkousko: Good morning, and thanks for taking my question. Howard Heckes: Hi, Noah. Noah Merkousko: So it sounds like order rates in the Architectural segment are starting to see some improvement. Do you still think maybe here in the fourth quarter that the year-on-year declines aren't going to be so steep anymore? Or has that been sort of pushed out till next year at this point? Howard Heckes: Yes. Thanks for asking the question, Noah. The third quarter was certainly a disappointment for us with architectural because we are beginning to see some of the inbound order rates improve as we thought we would. With the ABI turning positive in February and remaining positive, we knew there's a lag between doors. And so we started to see that inbound order rate improve. Unfortunately, we had some situations occur in that business, primarily on the labor front that prevented us from being able to supply all that demand. And so the volume, the topline miss is really internal this year. And unfortunately, we had a couple of big pockets of COVID that took two of our factories not completely out of commission, but pretty significant capacity downfall there for several weeks. And then little things like, this is a story you can't believe it, but we had a tornado go through an area where one of our plants was and so people go to the tornado shelter in the plant, which obviously is a smaller room. We had 18 people in a tornado shelter while the weather pass through. The next day, one of those 18 tested positive for COVID. And so due to our – ensuring that people stay safe, we have quarantine requirements with close contact, and we lost 18 people for a period of time due to close contact. Again, had the tornado not gone through, we would've lost one because we ensure social distancing in our factories to the best extent we can. And so little things like that, we're just like, oh my gosh. We're starting to see that demand recover as we expected and we were not able to capitalize on it in the third quarter. So we remain very bullish on the business. We think we're doing the right things from a structural perspective. Demand is recovering and it's our obligation to be able to service that demand. Noah Merkousko: All right. Thanks. That's helpful. And maybe sticking with architectural here, as we think about a commercial recovery next year, obviously it sounds like labor is going to play a role in possibly governing that growth. But just – what are your early thoughts on what volume growth could look like in that segment for next year? Howard Heckes: As Russ said, we're formulating it. We're right in the middle of our annual operating cycle process. And obviously that business took a significant hit – much more significant hit with COVID. So we would expect to return to volume growth. We're not prepared on this call to talk specifically about that. But we do expect growth in that business. We certainly expect to be able to service that growth better with the things we're doing in our factories. We talked about some structural things that we're doing with equipment, machining centers and flexibility of that network, which has been a series of acquisitions over the last number of years. So I am not going to talk specifically, but suffice it to say, we're disappointed with the performance of that segment this year, and we absolutely expect better results next year. Noah Merkousko: All right. Thanks. Appreciate it. And I'll leave it there. Howard Heckes: Thanks, Noah. Operator: Our next question comes from Kevin Hocevar with Northcoast Research. Please proceed with your question. Kevin Hocevar: Hey. Good morning, everybody. Howard Heckes: Hi, Kevin. Kevin Hocevar: When I think about the – if I back into the fourth quarter – the guidance, and what's implied in the fourth quarter, it seems like the midpoint suggests EBITDA margins and maybe the mid-15 or something in the fourth quarter, which is down sequentially from the third quarter kind of where you were. But it sounds like pricing is – the third quarter sounds like pricing offset the dollar value of inflation. It sounds like in the fourth quarter it will offset the dollar value and seemingly – the margin impact as well, so still improving there. So I guess I'm curious, can you help me understand kind of the margin degradation there sequentially? It does seem like there is some seasonality that the fourth quarter tends to be lower than the third, so is it just kind of normal seasonal patterns? Or is it anything beyond that is other from distribution or factory or any of that inflation getting worse? Just trying to understand the moving pieces there in terms of the progression of the margin there. Russell Tiejema: Yes. Kevin, it's Russ. I chalked that up primarily to the fact that you traditionally see a margin step down from Q3 to Q4. There is some seasonality in that. You have fewer operating days within the quarter just because of the holiday schedule between Thanksgiving and Christmas. So fewer operating days, but a certain amount of fixed overhead that's got be covered by that. So it's not unusual to see margins strip down meaningfully from Q3 to Q4. What's driving the year-on-year improvement this year that we are predicting is the strong realization of price. Again, as I mentioned earlier, three increases that will be fully in place in the market, but inflation will continue. Now, fortunately commodity inflation is largely behaving as we expected when we updated our viewpoint on that on the second quarter call. At that time, we said we expected inflation to approach 20% in the third quarter, moderate percentage wise a little bit in the fourth quarter and come in about low-teens for the year. I would just call it just modestly better than that in the third quarter, call it, kind of high-teens percentage. And probably still in that mid-teens range in the fourth quarter, but such that we get to a low-teens commodity inflation for the full-year. But it's certainly not tailing off. So those are the factors that we take into account when we lay out our guide for the full-year and obviously what then applies for Q4. Kevin Hocevar: Okay. Great. And then when you say kind of inflation leveling off a bit here is, is the whole basket kind of leveling off or some stuff still going up while some going down and that's kind of offsetting. Just kind of curious if you can give some color in terms of between the wood, the resin, the steel. And then speaking of steel too, I believe you guys do like collars around the steel. So obviously there was a lot of inflation this year. So I'm curious the impact – was that a big headwind for you guys this year or does that kind of get deferred to next year because of how these collars are structured? Curious, if you can give some color on that. Yes, just kind of the piece there, and then steel specifically as we think about this year, next year. Russell Tiejema: Yes. The short answer is we're seeing inflation across every one of the baskets that we buy. So wood, chemicals, steel, glass and packaging for that matter also, which impacts our distribution cost. But the greatest inflation that we're seeing are in our first and second largest baskets, that being wood and chemicals. In the area of wood, we're seeing stubbornly high inflation in industrial grade lumber. We buy the industrial grades as opposed to dimensional grade and that has remained relatively high and there have been supply chain constraints globally, it’s forced us to shift some of our buy around. And in fact, we managed our global buy of cut stock on a regular basis to shift supply amongst regions where we can get best quality and best price. We've had a couple of those regions impacted by COVID protocols, right. Some of the suppliers in Brazil were shut down for an extended period. Some of the suppliers in Malaysia were shut down for an extended period. That forced us to move actually more of our buyback into China and incur higher tariffs. So those are all factors that have driven wood inflation at an outsized rate. Chemicals, you're right. It's all the stuff that's impacted by the upstream petchem shortages. So adhesives and resins, some of the blowing agents that we use to fill the cavities of our exterior doors, we've seen outsized inflation in those two areas. As we look forward to 2022, I'm glad you asked the question about steel. We've seen inflation in steel this year, but not dramatically so because of the long-term contracts that we buy under is insulated just a little bit this year. Those contracts are under negotiation for a reset. So it's possible that we'll see higher inflation in metals actually in 2022 than we did in 2021. So again, we're still finalizing our viewpoint there. I don't want to be too specific on 2022, but we'll have that laid out in a little bit more detail when we give our guide on the Q4 call. Kevin Hocevar: Okay. Great. All right. Thank you very much. Russell Tiejema: Thanks, Kevin. Operator: Our next question comes from Jay McCanless with Wedbush. Please proceed with your question. Jay McCanless: Hey. Thanks for taking my questions. Russ, you actually just answered the question I was going to ask around wood. It doesn't sound like things are getting any better there. I mean, could you maybe talk about what you're looking at going into 2022 as alternative means of sourcing? Russell Tiejema: Well, I think the strategies that our sourcing team has laid out have probably benefited us at the margin a little bit. It does not feel good to pay the rates of inflation that we are on lumber. But when I think about the job that that team did three years ago, when they were trying to diversify the global wood basket to help us reduce the impact of Section 301 tariff, so we're implemented in China, that's probably given us greater flexibility to move the buy amongst other Asian nations, like Malaysia, which I mentioned are Vietnam and South American markets such as Brazil. So that's going to continue to be a playbook. There's probably additional work that the sourcing team can do to qualify other sources on a global basis. In all candor, they haven't had a lot of time this year to do that because they have been dealing with an incredible amount of supply chain disruptions globally. So a lot of their time and attention has been focused on just maintaining continuity of supply as opposed to the extensive work on qualification of alternative suppliers. We would like to hope that as the supply chain stabilizes into next year, they can devote more time and attention to that aspect. So that's going to continue to be a strategy that they will pursue. Jay McCanless: Got it. And then good to hear about steady demand at retail, but as we think ahead to next year, what are the big customers telling you? Are they thinking little higher inventory levels a little lower what's – how are your customers feeling about the spring of next year? Howard Heckes: Yes. Jay, we’ve had an opportunity to spend some time with our big wholesale customers and big retail customers recently. And I think, generally speaking, everybody feels pretty good about the demand environment. So throughout this year, our customers take a different approach to inventory. And some admittedly said, look, we’re going to try to accumulate some inventory well, we think we can as things are on allocation and whatnot. So at least we have a buffer. We have others that don't choose to do that. But generally speaking from a demand perspective, everybody feels pretty good. As Russ talked out, there's potential elongation in the cycle now. In fact, I was with an executive from a large national home builder recently. And he said too, it's a bit of a moving target. We might be short on garage doors this week and paint next week that just elongate that build cycle a little bit. So we see potential little lag there, but we don't think that it’s demand-related generally. And I don't believe our customers do either. So we're feeling good about 2022 and the demand environment and the things we're doing from a capacity perspective to be able to service that demand. Jay McCanless: Okay. Great. Thanks for taking my questions. Howard Heckes: Thanks, Jay. Operator: Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Mr. Heckes for closing remarks. Howard Heckes: Thank you, Maria, and thank you all for joining us today. We appreciate your interest and continued support. This concludes our call. Operator: Thank you for joining Masonite’s third quarter 2021 earnings conference call. This conference call has been recorded. The replay maybe accessed until November 23. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside of the United States, enter conference ID number 13720924.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.
