Masonite International Corp. (DOOR) - 05-May-2021
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05-May-2021
Masonite International Corp. (DOOR)
Q1 2021 Earnings Call
Total Pages: 21
1-877-FACTSET www.callstreet.com Copyright © 2001-2021 FactSet CallStreet, LLCMasonite International Corp. (DOOR) Corrected Transcript
Q1 2021 Earnings Call 05-May-2021
CORPORATE PARTICIPANTS
Joanne M. Freiberger Russell T. Tiejema
Vice President & Treasurer, Masonite International Corp. Executive Vice President & Chief Financial Officer, Masonite
International Corp.
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International James A. Hair
Corp. President-Global Residential, Masonite International Corp.
.....................................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Joshua K. Chan Jay McCanless
Analyst, Robert W. Baird & Co., Inc. Analyst, Wedbush Securities, Inc.
Elad Hillman Steven Ramsey
Analyst, JPMorgan Securities LLC Analyst, Thompson Research Group LLC
Michael Dahl Reuben Garner
Analyst, RBC Capital Markets LLC Analyst, The Benchmark Co. LLC
Noah Merkousko Kevin Hocevar
Analyst, Stephens, Inc. Analyst, Northcoast Research Partners LLC
.....................................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Welcome to Masonite's First 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 call is being recorded. I would now
like to turn the call over to Joanne Freiberger, Vice President and Treasurer.
.....................................................................................................................................................................................................................................................................
Joanne M. Freiberger
Vice President & Treasurer, Masonite International Corp.
Thank you, Maria; 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, is also joining us for our Q&A session. We
issued a press release and Webex presentation after market closed yesterday, sharing our first quarter 2021
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 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-Q which are available at sec.gov and at masonite.com. The forward-looking
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Q1 2021 Earnings Call 05-May-2021
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 include certain non-GAAP financial measures. Please refer to the
reconciliations which are in the press release and the appendix of the Webex presentation. Our agenda for
today's call includes a business overview from Howard, a review of the first quarter from Russ, along with our
updated 2021 financial outlook. Howard will provide closing remarks and we will host a question-and-answer
session.
And with that, let me turn the call over to Howard.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp.
Thanks, Joanne. Good morning and welcome, everyone. I'm happy to be speaking with you all today and look
forward to discussing Masonite's great first quarter results. But before I get to that, I'd like to thank those of you
who are able to join us for our 2021 Virtual Investor Day. We received a lot of positive feedback. So, for those of
you that couldn't join us, I'd like to revisit a few of the key highlights from the event. These are important as we
believe this is how we will create value for shareholders going forward.
One area I'm particularly proud of is our strong leadership team. A key goal of our Investor Day was to provide
you with access to a broader set of the management team. Since I joined Masonite, we've established two new
roles to help our company focus on growth, and we gave investors an opportunity to meet our Chief Marketing
Officer, Jennifer Renaud; and our Chief Innovation Officer, Cory Sorice and hear a little more about their
backgrounds and how their teams are helping drive our Doors That Do More strategy. We also caught up with our
business leaders to hear how they're aligned with this strategy and discuss operational plans to support growth.
Moving to the center of the slide, we spoke about the three pillars of our Doors That Do More strategy, deliver
consistent and reliable product, drive specified demand and win at the last point of sale. We've spoken at some
length this past year about how our North American investment plan has been focused on quality assurance,
including improved raw materials and packaging and investments in strategic inventory to improve our lead times
and service metrics. This is the first pillar and foundational for all that we do.
Second, we plan to increase specified demand for our products through Doors That Do More. Through our
research, many consumers have told us that they want more from their doors. Yet today, most demand is
unspecified, indicating that they do not perceive any particular manufacturers focused on meeting their needs.
Our goal is to drive demand to Masonite by developing and offering more innovative products. Examples include
our new exterior smart door system and our interior SWITCHiT product, both of which Cory showcased on our
Investor Day. We believe we can create a strong and sustainable preference for Masonite by offering products
that deliver distinct benefits to consumers when and where they need it.
Third, our goal is to win at the point of sale. Our research shows that substitution is very common and 94% of
homeowners will purchase what is convenient and available at the time they are in market. We believe that the
work Jennifer and her team are doing in conjunction with our channel partners to focus on down-channel
marketing and demand creation can change this behavior. With consistent and reliable supply, driving specified
demand, and winning at the point-of-sale we believe we can drive incremental growth by capturing meaningfully
higher prices for innovative new products, allowing Masonite to grow in excess of what the market would naturally
provide.
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Q1 2021 Earnings Call 05-May-2021
These strategies underline the ambitious 2025 centennial plan we introduced at the event. This plan aspires to
nearly double the top line of our company, achieving approximately $4 billion in consolidated net sales by the end
of 2025.
Given the improvements in our base business AUP, along with incremental product that should be margin
accretive, we believe this will allow us to deliver adjusted EBITDA margins in excess of 20% by 2025. And this
higher margin rate coupled with our disciplined capital deployment should allow us to attain sector leading return
on invested capital. We realize this is an ambitious plan, but we believe we have the right people and strategy in
place to make it a reality. For those of you that haven't watched our Investor Day, I encourage you to take some
time to visit the event link on our Investor Relations webpage where you can view the event in its entirety.
Now let's move to slide 5 for an overview of our first quarter. Net sales increased 17% year-on-year on higher
average unit price or AUP and continued 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 pricing.
We saw our ninth consecutive quarter of year-on-year margin expansion with adjusted EBITDA margins up 100
basis points. This was due to continued growth in AUP primarily driven by our previously implemented North
American pricing strategy, despite some cost headwinds largely in the form of inflation. Russ will provide an
update on inflation trends when he discusses our improved outlook.
We continue to invest in the quarter with the North American investment plan on schedule and in line with our
expectations.
Following the quarter end in April, Moody's upgraded our corporate credit rating from BA2 to BA1, reflecting their
view that Masonite will benefit from residential and market tailwinds and achieve strong credit metrics. This
upgrade places us just one notch below investment grade, aligned with our existing rating from S&P. It's nice to
see our commitment to maintain a strong balance sheet being reflected in our credit ratings.
Shifting to the right of the slide, I'll touch on business and operational highlights for the quarter. Against the
challenging backdrop, our operations team continued to deliver exceptionally well. At the core of our
manufacturing operations as MVantage, our lean operating system, which is helping to drive continued safety
improvements. While one accident is one accident too many, we are pleased to report that our TIR did improve
15% compared to the first quarter of 2020. Additionally, MVantage has continued to help drive sequential
improvements in capacity.
We are making progress on our ESG initiatives. I'm pleased to say that we recently completed our first global
carbon footprint assessment. This assessment has been third party verified and will act as the baseline for our
roadmap as we work towards science-based targets. In addition to completing this assessment, we've also hired
a dedicated ESG manager to focus on our sustainability journey.
Lastly, we continue to develop our Architectural optimization plan, which has been organized around three distinct
phases. Phase 1 is focused on components. If you recall, we mentioned on our last earnings call we had
announced the closure of one of our veneer plants and would absorb its production into an existing facility.
Phase 2 is focused on specialty doors. As part of this, we've announced – recently announced the closure of our
Springfield, Missouri stile and rail wood door plants. Similar to our components action, we will absorb most of the
production from this plant into other existing facilities. Phase 3 is focused on optimizing costs in our flush door
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Q1 2021 Earnings Call 05-May-2021
assembly plants and we have already begun to take some actions there. Russ will quantify some of the costs
related to these actions later along with the anticipated savings.
Overall, we remain encouraged by the long-term prospects of the Architectural business. We believe the actions
we are taking will improve the segments cost structure and service levels, so we can support growth as
commercial and market demand recovers.
With that, I'll turn the call over to Russ to provide more details on our financials. Russ?
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp.
Thanks, Howards. And good morning, everyone. Turning to slide 7, I'll start with a summary of our first quarter
financial results. We reported net sales of $646 million, up 17% as compared to the first quarter of 2020. The
growth was primarily due to a 14% increase in AUP which was up year-on-year across all three segments due to
price increases. We also benefit – benefited 2% from foreign exchange and 1% from higher component sales.
Base volume growth in the North American Residential and Europe segments was offset by volume declines in
the Architectural segment. Gross profit increased 18% to $159 million, driven by AUP which was partially offset by
higher inflation and tariffs on raw materials, rising logistics costs, higher manufacturing wages and benefits, and
investments in the business. Since outlining our 2021 outlook earlier this year, the inflationary environment has
worsened. We saw higher inflation on our wood purchases than contemplated in our original outlook and
experienced rapidly increasing inflation in resin due to the impact of February's severe winter weather, which
extended all the way to the Gulf Coast. Wood and resin represent our two largest baskets of material spend. So,
this was a meaningful headwind in the quarter.
We also saw significantly higher inbound freight cost particularly in the area of ocean freight. As a result, material
costs increased in excess of 5% for the first quarter. Higher freight cost also impacted our distribution expense.
Despite these headwinds, we expanded gross margin by 10 basis points year-on-year to 24.5%.
Selling, general, and administration expenses were $84 million, up 4% compared to the same period last year
primarily driven by higher personnel costs, which includes resources to support growth and incentive
compensation. However, SG&A as a percentage of sales was down 170 basis points to 12.9%.
Net income was $47 million in the quarter, an increase of $17 million from the prior year, driven primarily by
higher operating profit. Diluted earnings per share were $1.89 up 59% from $1.19 in the first quarter of last year.
Adjusted earnings per share increased to $1.93, which excludes charges related to our previously announced
restructuring plans incurred in the first quarter. This compares to $1.24 in the comparable period last year which
also excluded charges related to restructuring actions.
Adjusted EBITDA increased 25% to $102 million, while adjusted EBITDA margin expanded 100 basis points to
15.8%. This represents the highest first quarter adjusted EBITDA since becoming an NYSE listed company in
2013.
On the right-hand side of the slide, our adjusted EBITDA loss illustrates the significant year-on-year contribution
from volume mix and price. This was primarily driven by price in the first quarter as the volume growth from our
residential businesses was offset by continued weakness in our Architectural segment. We saw additional year-
on-year favorability of $3 million due to foreign exchange as both the Canadian dollar and British pound
strengthen against the US dollar.
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Q1 2021 Earnings Call 05-May-2021
Next, we see the negative impact of the rising inflationary pressures I just discussed in both materials and
distribution costs. We also experienced $17 million of higher factory-related costs in the quarter due to higher
wages and benefits, negative volume leverage in our Architectural business and weather-related impacts,
primarily in several of our North American Residential plants.
Turning to slide 8 then, in our North American Residential segment results. Net sales increased 24% for the prior
year to $477 million with the largest driver being a 17% increase in AUP, the result of an overlapping benefit of
price. If you recall, our price increases last year were for orders placed in February, effectively yielding us only
one month of benefit while this year's increases went into effect at the beginning of the year. This provided an
outsized benefit to AUP in the first quarter.
Base volume contributed an additional 5% to growth in the quarter. While our wholesale business was negatively
affected by winter weather, which impacted both demand and our capacity mid-quarter.
Our retail business continues to perform exceptionally well, supported by our previously announced new business
win with Lowe's, strong POS, and our ability to slightly rebuild channel inventory. Adjusted EBITDA in the North
American Residential segment was $95 million in the first quarter, a 32% increase over the same period last year.
Adjusted EBITDA margin expanded 110 basis points to 19.8% despite inflation and continued business
investments.
As I mentioned earlier, we saw increasing inflation in a number of our material baskets. The rapid increases in
resin prices due to weather impacts on the Gulf Coast coupled with already rebounding oil prices pushed material
cost higher than our original expectations for the North American Residential segment. Freight was also
negatively impacted in both material and distribution cost in the quarter as we saw both inbound and outbound
rates increase. I would remind you that our goal is to always maintain a favorable price cost relationship and steps
we are taking that are intended to mitigate increased inflation are contemplated in our updated outlook.
Finally, our North American investment plan spending was on track for the quarter. Overall, another excellent
quarter for our North American Residential team.
Turning to slide 9 in our Europe segment. Net sales increased by 25% year-on-year to $89 million. Excluding FX,
net sales grew 16% compared to the first quarter of last year. This growth was driven by base volume increases
of roughly 7% as we saw continued strength in our exterior door business, up double digits year-on-year. AUP
contributed another 7% to growth as we successfully realized price increases across all products and channels in
the UK, our primary European market. Adjusted EBITDA in the Europe segment was $17 million in the first
quarter, a 73% increase over the same period last year. Adjusted EBITDA margin expanded 520 basis points to
18.9% despite inflationary pressures. Margins continue to expand on the strength in our exterior business while
we experienced some capacity constraints on the interior side of the business.
Moving to slide 10 and the Architectural segment, net sales decreased by 18% year-on-year to $75 million due to
a 22% decline in base volume as commercial end markets remained weak in the first quarter. These base volume
declines were partially offset by growth of 5% from AUP as we continue to benefit from favorable price. Adjusted
EBITDA margin contracted 890 basis points to 2.7% with lower volume being the primary driver of this
performance. Roughly three quarters of our year-on-year adjusted EBITDA decline is due to lost volume and the
impact of negative volume leverage with the remainder of the decline largely due to inflation.
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Q1 2021 Earnings Call 05-May-2021
The three-phase plan our team is working on is designed to reset our footprint to improve our cost structure and
better reflect the current demand environment while also improving the flexibility of our network. As Howard
mentioned, we have executed on Phase 1 and Phase 2 and have already taken some early actions for Phase 3 in
the form of overhead reductions. The announced actions to-date are expected to deliver annualized savings of
approximately $5 million. We incurred some negligible restructuring charges in the first quarter, but you will see
the majority of the restructuring charges roughly $10 million occurring in the second quarter. We believe this
business has the ability to earn attractive margins and support our Doors That Do More strategy in nonresidential
end markets. Given the softness in those markets, it is time to aggressively reset the business. We are just
beginning to see improvements in the Architecture Billing Index suggesting that the market may have bottomed
and could see eventual recovery as we enter 2022.
Slight 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 $574 million, net debt was $468 million and we ended the first quarter with a net debt to
adjusted EBITDA leverage ratio of 1.2 times.
As Howard mentioned earlier, we're pleased to see that our focus on maintaining a strong balance sheet has
been acknowledged most recently with the credit rating upgraded by Moody's. We purchased approximately
85,000 shares in the quarter for approximately $10 million at an average price of $112.98. Cash flow used by
operations was $14 million at the end of the first quarter, down from $6 million provided by operations in the first
quarter of 2020.
The first quarter is typically a minimal cash flow quarter given the working capital seasonality of our business and
this use of cash was not unexpected given our historically low net working capital at the end of 2020 and the
higher cash taxes anticipated this year. Capital expenditures were approximately $40 million.
Now, let's turn to slide 12. On slide 12, we provide our updated outlook for the consolidated full year 2021. Given
the continued strength in residential demand, coupled with the anticipated benefit of foreign exchange tailwinds
throughout the year, we now expect year-on-year consolidated net sales growth of 12% to 15% compared to our
original outlook of 7% to 10%. With inflation running higher for the year than our original expectations, we would
like to reiterate that our strategy is to maintain a favorable price-cost relationship. And this updated outlook
reflects actions designed to achieve that. This updated outlook also includes a 2% benefit from foreign exchange
on the assumption that the tailwind we realized in the first quarter due primarily to strengthening of the Canadian
dollar and British pound will continue throughout the year.
With regards to our Architectural segment, our net sales expectations remained largely unchanged. On this
updated net sales outlook, we now expect adjusted EBITDA to be in the range of $435 million to $455 million.
While we expect to realize higher net sales, the incremental impact to adjusted EBITDA is likely to be offset
largely by material inflation which we now believe could be as much as 7% for the full year. The timing of inflation
in relation to our mitigation actions, as well as the return of expenses absent last year could limit our ability to
grow adjusted EBITDA margin year-on-year in the second quarter. We believe this will be temporary and
anticipate meaningful full year margin expansion again in 2021.
Moving to EPS, we now expect adjusted earnings per share in 2021 will be in the range of $8 to $8.60 compared
to $7.40 to $8.30 in our original outlook. There is no change on our assumption for cash taxes or capital
expenditures from our initial 2021 outlook. Given the increased adjusted EBITDA outlook, we would expect free
cash flow of approximately $160 million to $180 million for the full year.
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Q1 2021 Earnings Call 05-May-2021
Now, I'll turn the call back to Howard for closing comments.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp.
Thanks, Russ. In summary, we were very pleased to have delivered a net sales increase of 17% in the first
quarter as we continued to benefit from higher AUP across all segments and volume growth in our residential end
markets. Strong price and mix drove adjusted EBITDA in the quarter more than offsetting increasing inflation and
resulting in our ninth consecutive quarter of year-on-year adjusted EBITDA margin expansion.
We leverage the MVantage operating system to drive safety improvements and sequential increases in capacity.
While capacity has improved, we remain focused on ensuring that we are a consistent and reliable supplier for
our channel partners. We continue to invest in the business to drive future growth as all our segments focus on
strategies that support our goal of delivering differentiated products and Doors That Do More. We've increased
our 2021 outlook based on favorable results in the first quarter and our expectations for the remainder of the year.
Lastly, before we start Q&A, I have an announcement to make regarding our Investor Relations Department. After
13 years with Masonite, Joanne Freiberger has made the decision to leave the company for another opportunity. I
want to thank her for her hard work and leadership in the organization. I've personally enjoyed my time working
with her and we all wish her well in her future endeavors. So be with us through the annual shareholder meeting,
but you can always reach out to Farand Pawlak, Director of Investor Relations, for any assistance.
And with that, I'd like to open the call to questions. Operator?
.....................................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Operator: Thank you, Mr. Heckes. [Operator Instructions] One moment please while we poll for questions. Our
first question is Josh Chan with Baird. Please proceed with your question.
.....................................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
Hi. Good morning. Thanks for taking my questions and best wishes for Joanne on future endeavors.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Good morning, Josh.
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Thanks, Josh.
.....................................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
Good morning. Just given your comments about February, at least in the North American Residential channel, I
was wondering if you could give sort of an update on sort of the cadence in March and into April, particularly in
wholesale. How that trended exiting the storm impacted February if you could talk about that, that'd be great?
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Q1 2021 Earnings Call 05-May-2021
James A. Hair
President-Global Residential, Masonite International Corp. A
Yeah, Josh. It's Tony. Couple of highlights we did with the weather impact. We did see some slowness in both
demand and our capacity with the limitations we saw. We have a pretty strong business in the south and south
central part of the US, particularly in wholesale. So, we did see a bit of a dip there. We also saw some impact as
we looked at completions in the multifamily sector. So, customers who are focused on multifamily felt a little dip in
February as well. I would say that we got sequentially better in that demand and in our ability to supply in March
as we started to recover from the weather impacts, and we continue to see very strong growth. Through it all, we
saw very strong demand and point-of-sale positivity in the retail business. And so that stayed relatively consistent
and has done so. And I don't know, Russ, if you want to add some color across the rest – rest of the business.
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Well, I think Tony encapsulated it really well is that most of those impacts that we did feel from the February
weather impacts were in the North American Residential business and particularly in the wholesale business
given that a number of the plant servicing the interior door business were impacted by that. But the door
fabrication plants they have a natural amount of buffer inventory that they can continue operating to support the
retail channel. And you did see a little bit of that mix shift as we continue to run our retail operations and keep up
with point-of-sale that we're seeing in that channel.
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Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
All right. That makes sense. So, thanks for the color on that. And then my follow-up is on inflation. If you look at
the bridge, Russ, that you gave in terms of materials, factory, and distribution. Is it fair to think of those headwinds
in Q1 basically continuing into Q2 in roughly the same magnitude? Just because it sounds like most of those
factors haven't gone away maybe with the exception of some of the weather impact. So, is that the right way to
think about inflation looking into the second quarter?
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Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah. Generally, that's true, Josh. If you step back and look at our updated outlook, we're comprehending
material inflation now in the 7% range as opposed to the 4% range that we talked about earlier in the year. So, 3
points alone up from material inflation. Now you know, there are a couple of other factors that impact material
spending. We did see impacts from both of those in the first quarter and a lot of that could very well continue.
One factor is the fact that we do have just naturally higher inbound freight within our vertically integrated network.
We're moving, for example, components, door facings, et cetera from our facings plants to our door assembly
plants. And we're moving door slabs from our assembly plants in some cases to our door fabrication plants to
support the retail channel. So, we're seeing some higher cost of freight logistics that accrue to our material costs
just from that movement within our vertically integrated supply chain. You also have some sourcing mix in there.
Demand has been extremely robust fortunately but that is impacting our ability to supply components from our
lowest cost plants. In some cases, they're maxed out. And so, you're seeing us draw on a higher degree of
components from some of our higher cost plants within the network including actually bringing in some additional
facings from our Ireland plant now to support certain operations in North American Residential.
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Q1 2021 Earnings Call 05-May-2021
So those are some headwinds on the material side that we have comprehended in the outlook and to some
degree with the exception of endings that will abate because of weather impacts that we're trying to manage
around in the middle of the quarter. Some of those headwinds will continue, however.
.....................................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
Great. Thanks for the color and good luck on the rest of the year.
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Appreciate it. Thank you.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Thanks, Josh.
.....................................................................................................................................................................................................................................................................
Operator: Our next question is with Michael Rehaut with JPMorgan. Please proceed with your question.
.....................................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Hi. Good morning. This is Elad Hillman on for Mike and thanks for taking my questions.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Good morning, Elad.
.....................................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
So first, on the – good morning. So first on the resells guide which was raised by 5%. I was curious if you could
just provide a little more detail on how that breaks out by segment. I think you pointed to some stronger North
American Residential demand, Architectural not change, but maybe where you're really seeing some upside and
also regarding Europe?
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah. It's Russ. I'll take that. If you look at it on a segment-by-segment basis, I guess I'd characterize it as
Architectural kind of in line with our original plans. No real change there. We continue to expect pretty weak end-
markets throughout the year in the commercial end markets that the Architectural segment serves. Now, I believe
as Howard noted, we are seeing some encouraging trends with the Architecture Billing Index. I noted that as well
during the prepared remarks. That likely puts us in a position to see demand recovery in that business as we get
to the end of this year and into 2022 but our outlook for Architectural currently is as it was previously.
The areas of strength that we're seeing are across the residential business. Obviously, the bulk of that is in North
American Residential but the UK business is continuing to recover a little bit quicker pace than we would have
expected and we're also seeing FX tailwinds that earlier in the year we are a little uncertain as to whether or not
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Q1 2021 Earnings Call 05-May-2021
they would stick. If you look at the forward curves now, it would appear that they're likely to remain in place
throughout the year.
So, if you step back and you look at that five-point improvement in our net sales guide midpoint to midpoint, I'd
characterize two points of that is FX and the other three points as being a combination of market strength and
AUP as we get deeper into the year.
.....................................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Great. Thanks. That's helpful. And then my second question is looking at North American Residential in 1Q, I was
curious how much of the new Lowe's business win represented in terms of sales. And then also you talked about
kind of strong North America retail POS continuing and you also talked about some rebuilding of inventory there.
So, I'm just curious if that rebuild of inventory was indicative of some kind of slowing of market demand there or
increased production on your side and if there's still further opportunity for the rebuild?
.....................................................................................................................................................................................................................................................................
James A. Hair
President-Global Residential, Masonite International Corp. A
Yeah. I'll answer your last question first and just talk about the inventory situation. I would say sequentially, our
output improved through the application of all the MVantage efforts in trying to improve our capacity. So, that was
one key part of our ability to drive sequential improvements in inventory position. I would say that we just talked
about a little bit of a lull in demand particularly of multi-family and across wholesale primarily due to weather. We
saw that come back and so we did deliver some sequential improvement in wholesale as a result of that because
we were able to drive some output.
We still see and we still have certainly some inventory makeup to do across all the channels but primarily in retail.
So, we're going to continue to see that play out as we see improved capacity and as we drive more output, we'll
try to – we'll be making up that inventory position on the retail side.
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah, Elad, I think your other question was just with respect to the amount of pickup that we were having from the
new business wins with Lowe's and the retail channel I think you estimated roughly 3%. I think that's in the right
range. If you take a look at our annual guide for how much new business that represented and that is fully now in
place and so that's about what we would have yielded an increase in the first quarter.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
It's important to note too...
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Elad Hillman
Analyst, JPMorgan Securities LLC Q
Okay.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
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Q1 2021 Earnings Call 05-May-2021
...this is Howard, that the POS will remain strong, so it was a combination of business wins and about POS about
equally split. Yeah.
.....................................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Got it. Thank you.
.....................................................................................................................................................................................................................................................................
Operator: Our next question is with Mike Dahl with RBC Capital Markets. Please proceed with your question.
.....................................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Good morning. Thanks for taking my questions.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Good morning, Mike.
.....................................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
My first question. Thanks. My first question is kind of a two-part around inflation and margins. I was wondering if
you could put a finer point on maybe regionally what do you think about the 7% full year? I mean obviously we're
seeing worldwide issues but presumably the North American side is running a little hotter than some other regions
given the multitude of issues there. So maybe a finer point on those inflation percentages by segment if possible.
But then the second part is your continuing comment about favorability on price cost. Your adjusted EBITDA
margin guide is up 125 basis points year-on-year at the midpoint. Any sense of kind of order of magnitude we
should be thinking about as far as how much of that coming from gross margin versus SG&A leverage?
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah. Mike, it's Russ. Let me take a shot at that and then maybe Howard wants to add some color. Specific to
your question around inflation, a significant majority of what you saw as EBITDA impact in material cost in the
quarter was indeed in the North American Residential business. And that's driven by the fact that we're seeing
pretty significant wood inflation in North America. Wood inflation is a global phenomenon, but it is primarily hitting
North America because we are still incurring higher tariffs on wood imports. And so that's driven. In fact, if you
look at just our commodity inflation by basket in the first quarter, we saw wood up low double digits. With the other
categories up low to mid-single digits, call it, but in all cases effectively ahead of what our original outlook had
been very early in the year. So, that impact is clearly going to hit North American Residential as well as some of
the other dynamics. I think I mentioned on one of the earlier questions about just the higher logistics cost in
moving our own components around our network to facilitate our vertical integration.
With respect to your question on the guide and margin progression, we're putting actions in place to mitigate the
inflationary effects that we are seeing. But it's fair to assume that there's going to be a little bit of lag with some of
those actions. And so, that's why I commented during the call that in Q2, it's unlikely before we face some
difficulty certainly in meaningfully growing margins on a year-on-year basis, but some of those actions that we're
taking and planning, would certainly give us a tailwind as we enter the third quarter. And so, that is all
comprehended in the outlook that I gave, and those actions should benefit us as well in the gross margin.
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Q1 2021 Earnings Call 05-May-2021
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah. If I could just add, Mike. Yeah. I'm glad you recognized our margin increase year-over-year with our guide. I
mean, we're really proud of the progress we're making on margins. We raised our margins 310 basis points last
year and the midpoint of our guide this year is in the 110-120 basis range on top of, as I said, a really strong year
last year. So, despite significantly more inflation than we had contemplated in the outlook, we're still planning a
very healthy margin growth to the low 17s which proud of the team for.
.....................................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Yeah. Thanks. Thanks. Really comprehensive answer there. Appreciate it. My follow-up question is on
Architectural. And so, the – it's helpful weighing up details on the, let's say, the three phases. When I take a step
back at $5 million of annualized savings and that's diminishing, but it's a little under 2% of sales where even if you
realize that, it doesn't really get you back to the levels of profitability that you're at a couple of years ago and
where I think it's certainly some of the long-term goals would be. So, I'm wondering is these three phases of what
could still end up being a four, five, six phase plan or are there kind of contingency plans in place? And any color
around where that could potentially flex up in terms of the actions there?
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah, Mike. Obviously, the Architectural business has a disappointing quarter. That said, the volumes were
actually a little better than we had expected. Volumes are down 22% in that segment, well-documented that that
commercial business is struggling right now. Now, there are some encouraging signs. The ABI was north of 50.
And of course, when it's greater than 50, it indicates an increase from the prior month. For the first time since
February 20, it was north of 50 in February of 2021. So, it took a year so we're in what we would consider
expansionary territory.
Now, in February, there were still some weak spots regionally and whatnot. In March, it increased to 55.6 and
every measure trended positive. So, we do believe there's obviously a lag because with Doors, it may be 9 to 12
months later that they're putting Doors on projects, but the markets are recovering. So, when you look at this
quarter, we had a volume and an inflation problem. We didn't have the flexibility in the network to be able to adjust
to the dramatic reductions in volume and that's what we're trying to address with our three-phase plan. We also
had some inefficiencies in the factory due to that volume leverage and then we had quite a bit more inflation than
we had planned.
So, between those three things, we had obviously troubled margins. But as we can take actions to moderate
inflation, as Russ described, as we can lower the cost structure of our network through this plan, closed the
veneer plant last quarter, we announced the closure of [indiscernible] (41:03) plant recently and we have to
address our flush door capacity next and we're doing some things with overhead there. Our cost structure is going
to change. And then we do expect that volume is going to begin to recover.
So, we still like this business. We believe this business can be near, at, or slightly more than our margins. That's
our goal with this business. We want it to be consistent with our other businesses. And we've got some work to do
to get there. We're committed to doing it.
.....................................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
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Q1 2021 Earnings Call 05-May-2021
Yeah. And you know, I might just add, Mike, you talked about is there a Phase 4, 5, 6. I wouldn't want you to think
from our commentary that this means that Phase 3 is largely done. Phase 3 has just started, right? So, while
Phase 1 around components to Howard's point, and Phase 2 around specialty door, we've announced actions
there. We're just very early in the phases of starting what we think can be additional cost optimization within our
flush door footprint. So more to come on that, but I wouldn't want you to think that the numbers that we have cited
represent a fully completed plan. There's still plenty of work that the team is executing right now.
.....................................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Okay. All right. Thanks, Russ. Thanks, Howard.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Thanks, Mike.
.....................................................................................................................................................................................................................................................................
Operator: Our next question is with Noah Merkousko with Stephens. Please proceed with your question.
.....................................................................................................................................................................................................................................................................
Noah Merkousko
Analyst, Stephens, Inc. Q
Good morning and thanks for taking my question. So, I wanted to go into a little bit more detail on some of the
actions you're taking to impact – to mitigate the impact of higher cost inflation, you know, outside of price and
maybe if you could talk specifically to the North American Residential business.
.....................................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah. Noah, this is Howard. You know, our sourcing team has been working hard on sourcing strategies to
mitigate inflation. Whether that's finding alternative suppliers regionally, part of the inflation is due to tariffs and
anti-dumping duties and things like that. So that's something that's been going on for quite some time. And the
team's done a terrific job actually of trying to mitigate some of the significant increases in tariffs and duties. And
it's the same with inflation. So that's certainly a strategy that we use often.
You talk about pricing as another arrow in the quiver. Surcharges, we've talked about surcharges to offset freight,
for example, and they may be temporary in nature, but there's a lot of ways that we're working to try to mitigate
the impacts of inflation. Russ also talked a little bit about moving components around the network in order – when
we had some of these capacity challenges and we've been able to successfully increase our capacity
sequentially, when you have capacity challenges, you're moving freight around the network more than you might
normally. And so, as freight – as there's inflation in freight, it hits us at a higher rate if we're moving product more
frequently. So, minimizing that by increasing capacity is another strategy to minimize the impacts of inflation.
.....................................................................................................................................................................................................................................................................
Noah Merkousko
Analyst, Stephens, Inc. Q
Got you. Thanks. That's helpful. And then for a follow-up, you're talking about, in 2Q, just given the timing of
where you're seeing inflation, adjusted EBITDA margin expansion might be challenged on a year-over-year basis,
is that to say there's the possibility to see some compression that margin goes lower or that it just won't be as
high as we saw in the 1Q?
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