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

Thanks to our continued focus on cost management. Selling, general and administration expenses were $99 million, up 19% year-over-year due primarily to the addition of SG&A from Endura and an increase in M&A-related costs. Third quarter net income was $41 million, compared to $57 million in the third quarter of 2022. The decrease was driven by higher non-EBITDA costs including increased depreciation and amortization, higher interest expense and cost associated with our previously announced restructuring plans, all partially offset by lower tax expense. Diluted earnings per share in the quarter were $1.86, compared to $2.54 last year. Adjusted earnings per share, which exclude restructuring costs, as well as acquisition and due diligence-related cost were $2.04.

Adjusted EBITDA for the quarter was $107 million, down slightly from $112 million last year. Adjusted EBITDA margin of 15.3% was within 10 basis points of prior year despite lower volume. On the right hand side of the slide is more detail on factors that influenced adjusted EBITDA in the quarter. The combined impact of volume and AUP turned negative in the quarter as the majority of carryover pricing from 2022 expired. Material cost impacts turned positive in the quarter however, as material inflation has broadly stabilized and inbound logistics cost have declined. Although, this is a welcome development it reflects a level of aggregate deflation on material and logistics costs that is still tracking slightly behind what we had originally expected to see by this point in the year.

As we noted on our second quarter earnings call, our original outlook for low to mid-single-digit deflation for the full year has been tracking towards the low end of that range. Keep in mind that one point of material cost deflation is worth roughly $10 million to adjusted EBITDA at a consolidated level. Factory and distribution costs were negative as expected due primarily to the combined impact of volume deleveraging and inflation, partially offset by continuous improvement and cost control initiatives. On an adjusted EBITDA basis, SG&A was up just slightly due to incremental investments in strategic growth initiatives. Outside of those expenses, we were able to offset inflation on wages, benefits, and other SG&A with restructuring actions and careful cost management.

And lastly, as Howard noted earlier, the Endura acquisition contributed $10 million of adjusted EBITDA in the quarter Turning to $slide 10. Let’s look at highlights from the North American residential segment. Third quarter, net sales were $553 million, down 5% year-over-year, driven by a 14% decline in volume and a 1% decrease in AUP, partially offset by a 10% benefit from the Endura acquisition. Soft end-market demand accounted for most of the volume impact in the quarter. The wholesale channel was down mid-teens including the impact of decisions to prioritize margin over unit volumes and the retail channel was down low-double-digits on weaker POS due to lower RRR spend and modest inventory adjustments. Freight cost remained positive in the quarter.

However AUP was down slightly, now that we have lapped all 2022 price actions. Product mix continued to be a modest AUP tailwind in the quarter. Adjusted EBITDA in the quarter was $109 million, down 5% from last year. Adjusted EBITDA margin decreased 20 basis points year-over-year to 19.7%. Excluding Endura however, segment margins were actually up 20 basis points. Although Endura margins are modestly dilutive to the overall segment, the business is performing very well delivering strong mid-teens EBITDA margins and running ahead of our original synergy estimates due to strong collaboration across all areas of integration. Endura has embraced the Doors That Do More strategy and these results reflect the positive impact of work done on reliable supply and customer engagement.

In terms of product leadership, the Endura engineering team has partnered with the sales force, to support the nationwide rollout of the Masonite performance door system, while continuing to focus on joint product development efforts on higher value exterior door systems. As we said in our recent Investor Day, the Doors That Do More strategy is our north star which helps differentiate us in the door industry. And there’s always nice to get affirmation from our customers. In the third quarter, we were honored to have two of our largest customers, the Home Depot and Lowe’s recognized us with No Work Partner of The Year awards for the hard work our teams have done to deliver consistent and reliable supply, for our leadership in bringing new and innovative products to the market; and for our collaboration on sales and marketing initiatives.

We have partnered with both the Home Depot and Lowe’s for many years on joint business planning initiatives and it’s great to see our efforts bearing fruit. So, a big shout-out, this quarter to the Masonite teams that are working to activate the Doors That Do More strategy with our customers. Now, turning to Slide 11 and our Europe segment. Third quarter net sales were $65 million, down 2% year-over-year. 7% lower volume was offset by a 7% favorable impact from foreign exchange but AUP was lower by 2% due entirely to the mix impact of relatively weaker results in exterior versus interior doors. Adjusted EBITDA was $4 million in the quarter with an adjusted EBITDA margin held roughly flat year-over-year at 6% despite these incremental volume and mixed headwinds.

In the UK, which accounts for over 90% of our Europe segment sales, new home completions were down year-over-year by 14%, and indications are that the RRR market is down over 20%. Our interior door business, which primarily serves new construction, meaningfully outperformed the market, thanks to service levels, which allowed us to win a larger share of wallet with our customers. We expect this tailwind to diminish through year end as new construction slows seasonally, while remains focused on maintaining these service levels as a competitive advantage. On the exterior door side of the business, we are seeing sales declines that are more in line with the RRR market. Homeowners in the UK are still facing exceptionally high cost of living challenges and have cut back discretionary repair and remodel projects.

Historically, we see elevated exterior doors sales in Q4 in the runoffs to holiday season, but we are not expecting that to occur this year. While the macroeconomic situation in the UK is not ideal, our Europe team is aggressively managing price cost to offset inflation while maintaining service levels and executing targeted marketing initiatives to win new business. Moving to Slide 12, and the Architectural segment. Third quarter net sales increased 4% year-over-year to $81 million, driven by an 18% increase in AUP, partially offset by 10% lower volumes and a 4% decline in component sales. Adjusted EBITDA was $5 million in the quarter, up from breakeven in the prior year. We are pleased with the year-over-year improvement in the quarter, but our expectations are somewhat muted for Q4, as the pace of orders through the quarter has slowed in line with a softening end-market.

With respect to the strategic review that has been underway for the Architectural segment, we continue to expect that a complete or partial divestiture of the business is the most likely outcome. Until recently, we were negotiating exclusively with one party to achieve a sale of the entire segment. As you can imagine, a carve out of an entire business is complex. Those negotiations ultimately reached a point where we did not feel value could be maximized on the half of our shareholders. As a result, we are now in discussions with other interested parties with respect to either a full or partial divestiture. We will update you further when we have concluded the likely outcome of this next stage of the process. Let’s turn now to Slide 13 for a summary of our liquidity and cash flow performance.

At quarter end, our total available liquidity was $663 million, including $360 million in unrestricted cash. Net debt was $736 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.7 times on a trailing 12 month basis, down from 1.8 times at the end of the second quarter. Subsequent to quarter end to fund the Fleetwood acquisition, we used $200 million in cash and borrowed $85 million against our ABL. $15 million of which has already been repaid. Cash provided by operations, was $310 million to the end of the third quarter, compared to $83 million in the same period of 2022, a reduction in core working capital has been a key driver of our improved cash flow. Thanks to actions implemented so far this year. We have reduced total core working capital as a percent of trailing 12 months net sales by over 400 basis points from 24% a year ago to 20% at the end of the third quarter this year.

Year-to-date capital expenditures are approximately $86 million remaining on track with our full year outlook. Year-to-date free cash flow was $224 million, positioning us well to reach or exceed the upper end of our full-year outlook of between $220 million and $250 million. During the third quarter, Masonite repurchased approximately 106,000 shares of stock for $10 million at an average price of $94.05. We also repaid $10 million of long-term debt in the quarter, in line with the principal amortization required under our term loan A Turning to Slide 14, I’d like to review some of the factors likely to influence our results in the fourth quarter, and going into 2024. Over the summer, there were signs of green shoots emerging in the housing markets, which builder sentiment improving and a broad expectation that we could see a more stable interest rate environment.