Masonite International Corporation (NYSE:DOOR) Q3 2023 Earnings Call Transcript

Masonite International Corporation (NYSE:DOOR) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Greetings, and welcome to Masonite’s Third Quarter 2023 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management’s prepared remarks, investors are invited to participate in a question and answer session. Please note that this conference is being recorded. I would now like to turn the call over to Rich Leland, Vice President, Finance and Treasurer. Thank you. Please go ahead.

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. Also joining us today for Q&A is Chris Ball, our President of Global Residential. We issued a press release and earnings presentation yesterday reporting our third quarter 2023 financial results. These documents are available on our website at masonite.com. Before we begin, let me remind you that this call will include forward-looking statements. Each forward-looking statement 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 titled 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-Q, which are available at sec.gov and at masonite.com. The forward-looking statements in this call speaks only as of today and we undertake no obligation to update or revise any of these statements. Our earnings release and today’s discussion include certain non-GAAP financial measures. Please refer to reconciliations which are in the press release and in 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 financial results from Russ and then Howard will provide some closing remarks and we’ll begin the question-and-answer session.

With that, let me turn the call over to Howard.

Howard Heckes: Thanks, Rich. Good morning and welcome everyone. Starting on Slide 4. I’m very proud of Masonite team for delivering solid third quarter results in the phase of a challenging macro environment, while also making meaningful progress on strategic initiatives that lay the foundation for our future growth. Net sales in the quarter were $702 million, down 4% year-over-year with rising mortgage rates putting continued pressure on our end-markets. Despite these headwinds, our disciplined focus on price cost management enabled us to hold margins nearly flat year-over-year and deliver $107 million of adjusted EBITDA. We continued to generate exceptional levels of cash flow in the quarter, driven by the success of our enterprise-wide working capital optimization initiatives.

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Q&A Session

Year-to-date through September, operating, cash flow was a record $310 million and notably, our free cash flow has already surpassed the low end of our full year guidance. Also during the third quarter, we held our 2023 Virtual Investor Day where we reviewed our long-term strategy and financial goals. The theme for the day was Invisible to Invaluable, which summarizes the key objectives of our integrated Doors That Do More strategy; to drive product leadership with innovation and differentiations that make our doors invaluable to homeowners; to win the sale with new marketing and customer engagement initiatives that make the Masonite brand invaluable; to deliver reliable supply by leveraging, our scale, vertical integration and the Mvantage operating systems to make Masonite the business partner invaluable; And to achieve our 2027 financial goals of reaching $4 million in net sales for more organic growth and strategic M&A while also delivering between 19% and 20% adjusted EBITDA margins and generating over $1 billion in cumulative free cash flow, ultimately making an investment in Masonite invaluable to our shareholders.

As I said in my closing remarks at Investor Day Masonite is an industry leader in residential doors. We have identified opportunities for both timeline and margin growth and I believe we are well positioned with the right team, the right assets, and the right strategy to convert these opportunities into strong long-term financial results and shareholder returns. In case you missed the event, you can find a complete replay, as well as downloadable copies of all presentations at investor.masonite.com. Returning to our third quarter business highlights, we saw considerably softer demand year-over-year as both new construction and RRR continued to be impacted by ongoing mortgage rate increases. Our teams responded to this sustained market weakness with consistent execution of our 2023 playbook that includes a balanced mix of actions designed to maintain margins, while executing our strategic growth initiatives.

Throughout the third quarter, we stayed focused on servicing our customers and adjusting to order volatility, all while maintaining overall price cost favorability. We continued to flex variable cost and aggressively pursue savings opportunities to help maintain margins in the near term and effectively coil the spring to realize accelerated margin growth when end-market demand strengthens. Simultaneously, we continue to invest in strategic initiatives to support future growth, such as the new masonite.com website, marketing support for mixed improvements and the commercialization of new products recently released in our retail channel. The acquisition of Endura earlier this year has been another bright spot for us. Our success in achieving the projected synergies and smooth integration of this business has resulted in strong performance, highlighted by a second consecutive quarter of mid-teens margins and an adjusted EBITDA contribution of $10 million to the consolidated business.

On the heels of the successful Endura transaction, we completed our second acquisition of the year by purchasing Fleetwood subsequent to quarter end on October 19th. Let’s continue to Slide 5. I’m thrilled to share more details about our addition of the Fleetwood brand of premium glass doors to the Masonite product portfolio. As you can see in this beautiful picture from a customer location in Los Angeles, Fleetwood doors unmistakably define a home, enabling a seamless flow between indoor and outdoor living spaces, when open while give the home security, abundant natural light, and spectacular views when closed. You can find many more examples like this on the portfolio pages of their website at fleetwoodusa.com Turning to Slide 6. In the luxury residential glass door markets, Fleetwood is a leader that is well known among architects and builders.

Its product line-up includes a range of folding, sliding, pockets, hinge and pivot doors, as well as accompanying glass walls and window systems. These products are highly customizable, but all take advantage of the unique technology and manufacturing processes that’s been developed by Fleetwood to meet or exceed the strictest quality standards. Fleetwood door panels can range in size up to 20 feet tall and 12 feet wide that are made with custom design, precision hardware components to operate effortlessly, while being able to withstand the extreme weather that often comes with some of the most exquisite views in the world. In fact, we would hold several patents and trademarks for products with energy savings and weather resistant features.

When evaluating the business, we saw several compelling attributes. First, Fleetwood’s business strategy of bringing innovative door systems to the residential markets that solve life and living problems with a special focus on customer service and building close relationships with channel partners is highly aligned with our own doors that do more strategies. Second, the acquisition allows us to more effectively address the large patio door market and indoor outdoor living trend, but with a focus on premium aluminum framed glass segment, which we view as more differentiated than the mainstream sliding vinyl patio door segment. And third, as we said in our recent Investor Day, we are intent on adding high value, better and best products to our comprehensive range of doors that do more.

The acquisition of Fleetwood provides an immediate lift to our portfolio of best products and helps us move closer to our 2027 goals. Moving the Slide 7, let me give you more detail about Fleetwood, which has been family owned since its founding in 1961. The business is located in Corona, California and operates a modern 200,000 square foot manufacturing facility. This is also the site for the administrative headquarters, as well as R&D laboratories, which include on-site frost, wind, water and severe weather testing capabilities. The company has approximately 350 total employees. About 70% of Fleetwood’s revenues come from door systems and 30% from matching glass walls and window systems. Through targeted advertising and relationships established over many years with some of the country’s top architects, Fleetwood has built a well-known and trusted brand.

Channel partners include more than 200 specialty dealers across the United States and Canada, although the majority of its sales today about 70% are concentrated on the West Coast. They have had unusually strong results in 2023 due to a large backlog of orders that resulted from supply chain constraints in the prior year. In 2024, we expect Fleetwood to contribute more normalized results to Masonite with an estimated $150 million in net sales and $35 million in adjusted EBITDA. We also expect the business to be accretive to EPS in 2024. Now that the tax benefits we expect from this transaction, our purchase price would equate to approximately $255 million or seven times pro forma EBITDA, an attractive purchase price multiple for a tightly adjacent business with great growth potential and margins in excess of 20%.

As a result, Fleetwood clearly met both the strategic and financial streams we’ve established for assessing M&A opportunities. The current management team at Fleetwood will continue to operate the business independently reporting results to our North American residential segment. We are very excited about the future potential for this business, and I’d like to welcome all the Fleetwood employees, customers and partners to the Masonite family and thank you for your efforts to help Fleetwood continue to grow and thrive as a leader in the market. Now I’d like to turn the call over to Russ to provide more details on our third quarter financial performance. Russ?

Russ Tiejema : Thanks, Howard. Good morning, everyone. Let’s turn to Slide 9 for an overview of our consolidated financial results. Third quarter net sales were $702 million, down 3.5% from last year, driven primarily by a 13% decline in volume. This decline was slightly greater than what we were anticipating at the time of our Q2 earnings call, when there was more optimism about macroeconomic conditions in the North American residential market and builder sentiment was trending upward. Partially offsetting the volume impact this quarter was an 8% benefit from the Endura acquisition and a 1% increase in average unit price or AUP. Year-over-year gross profit decreased 1% to $166 million, due to the lower net sales. However, gross margin improved 60 basis points to 23.6%.