Masonite International Corp. (DOOR) - 25-Feb-2021
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25-Feb-2021
Masonite International Corp. (DOOR)
Q4 2020 Earnings Call
Total Pages: 20
1-877-FACTSET www.callstreet.com Copyright © 2001-2021 FactSet CallStreet, LLCMasonite International Corp. (DOOR) Corrected Transcript
Q4 2020 Earnings Call 25-Feb-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
Elad Hillman Jay McCanless
Analyst, JPMorgan Securities LLC Analyst, Wedbush Securities, Inc.
Joshua K. Chan Reuben Garner
Analyst, Robert W. Baird & Co., Inc. Analyst, The Benchmark Co. LLC
Michael Dahl Noah Merkousko
Analyst, RBC Capital Markets LLC Analyst, Stephens, Inc.
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Welcome to the Masonite's Fourth Quarter 2020 Earnings Conference Call. During the presentation,
all participants will be in 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. Please go ahead,
ma'am.
......................................................................................................................................................................................................................................................
Joanne M. Freiberger
Vice President & Treasurer, Masonite International Corp.
Thank you, Jerry, 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 fourth quarter and
full year 2020 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
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Q4 2020 Earnings Call 25-Feb-2021
Masonite's annual report on Form 10-K to be filed with the SEC shortly after this call and in our other SEC filings
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 Webex
presentation. Our agenda for today's call includes a business overview from Howard, a review of the fourth
quarter and full year results from Russ along with our 2021 financial outlook. Howard will provide closing remarks
and 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 pleased to be joining you again and to update you on
Masonite's fourth quarter results and the current state of our business. If you look at the strength of the quarter,
it's easy to forget how much the world changed in 2020 and what our organization and others have navigated.
Accordingly, I thought it appropriate to revisit some of our strategic, operational and financial accomplishments
from what can only be described as an extraordinary year.
During the first quarter of the year, we successfully implemented our previously announced North American
Residential pricing strategy and with it our plan to reinvest roughly $100 million in the business over five years
with a focus on service and quality, product innovation and down channel marketing. The pricing strategy was a
success and we realized more price than originally anticipated due to strong market demand throughout the first
quarter.
At the same time, we began to invest more heavily in service and quality as planned although we ultimately
curtailed spending near the end of the first quarter to preserve liquidity in the face of uncertainty from COVID-19.
The health and safety of our employees was our highest priority and in early March we had already formed a
COVID response team designed to proactively identify potential business impacts and implement mitigation
strategies. These actions served us well as we were able to navigate operational challenges and maintain strong
margins in the second quarter. Despite our UK and Ireland operations being shut down for approximately half that
quarter, we reported our highest quarterly consolidated adjusted EBITDA since becoming a NYSE listed company
in 2013.
We also took steps designed to ensure we positioned ourselves to emerge stronger following the pandemic. In
April, we created a growth and momentum team that was tasked to prioritize investments and resources with the
goal of building upon the momentum we enjoyed in the first quarter of the year. Following a steep decline in April,
demand strengthened sequentially through the second quarter and we resumed investment spending in key areas
of the business in order to position ourselves to support growth.
Conditions improved in our largest end markets during the third quarter and we experienced growth in average
unit price or AUP across all three of our segments. The strength of the recovery in our North American Residential
and Europe segments exceeded our expectations, resulting in better than anticipated performance and continued
year-on-year adjusted EBITDA margin expansion.
Our employees did an exceptional job stabilizing our operations as we navigated pockets of higher absenteeism
and capacity constraints from COVID. We held an increasing number of Kaizen events in the third quarter to
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Q4 2020 Earnings Call 25-Feb-2021
improve operational efficiencies and sharpen our focus on safety. We saw volume growth accelerate across our
residential businesses in the fourth quarter. We believe we exited the year well-positioned to capitalize on the
current market strength and have more momentum than at any other point in my time at Masonite.
This year was challenging in many ways and we performed exceptionally well. The result was a year-on-year
increase in adjusted EBITDA of $80 million which resulted in adjusted EBITDA margin of 16.1% for the full year,
up 310 basis points from 2019.
Now let's move to slide 5 for a more detailed review of our fourth quarter performance. The accelerating volume
growth I mentioned in our residential businesses coupled with strong AUP across all three business segments
drove a 16% year-on-year increase in net sales. We are pleased with the recovery of our Europe segment as they
return to year-on-year base volume growth in the fourth quarter. The favorable volume and continued growth in
AUP primarily driven by our previously implemented North American pricing strategy drove year-on-year adjusted
EBITDA margin expansion in the quarter of 140 basis points, despite some anticipated cost headwinds and
planned investments for future growth. Russ will provide more detail on this later.
The largest investments in our future growth were those related to our North American investment plan. Spending
in the quarter was in line with our expectations as we invested in service, quality and innovation. We had another
year of strong free cash flow from operations. 2020 marks our fourth consecutive year of free cash flow
conversion in excess of 100%.
Shifting to the right of the slide, I'll touch on business and operational highlights for the quarter. Operations
performed well with capacity improving sequentially albeit at constrained levels. Both our North American and
European operations continue to experience operational headwinds related to COVID. I'm very proud of the
team's ability to prevent any major plant disruptions in the fourth quarter.
MVantage operating system deployment remains strong, Kaizen events increased 50% year-on-year in both the
fourth quarter and the full year with increases in every business segment. Our commitment and discipline in this
area are having a meaningful benefit to factory productivity.
During the quarter, we completed the integration of the Lowe's door fabrication facility we acquired in Janesville,
Wisconsin. This transaction includes a multi-year supply agreement. We are pleased to say that we have been
able to retain the existing workforce and we welcome these individuals to the Masonite family.
Lastly, in February, we hosted builders, remodelers and channel partners at the Virtual International Builders'
Show, IBSx 2021. While we prefer the in-person interaction of IBS, our marketing team did an exceptional job of
creating a virtual environment to once again showcase our products and our commitment of delivering Doors That
Do More.
Moving over to slide 6, while our Investor Relations team has spoken about ESG with many of you at past
conferences and in meetings, I want to give this broader audience an update on this important topic. ESG is at the
core of our company's culture and has been since inception. The company was founded in 1925 based on a
concept of converting waste into [ph] worth (00:09:06). William Mason established the company to use the waste
wood that was being created from sawmill operations throughout the Southeastern United States, much of which
was being either burned or buried in landfills. Mr. Mason discovered a process to convert wood fibers using heat,
resin and pressure into hardboard products. This significantly changed the dynamics of the building products
industry for the next century.
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Q4 2020 Earnings Call 25-Feb-2021
While our history is steeped in ESG, we are relatively early in our journey of public disclosure. We remain focused
on continuing our legacy of environmental sustainability as we create a safe and engaging environment for our
employees while driving accountability through good governance practices, all of which are managed in a
balanced approach to ensure we are focused on what is relevant to our business.
Now I'll share a few of the key items we initiated in 2020 as well as some of our results. On environmental, we
hired a third-party to help us perform our first carbon footprint assessment. This is currently in process and we're
planning to create a baseline measurement and identify opportunities to set a relevant science-based targets for
the future. In 2020, we prevented over 1 million tons of wood 42,000 tons of wheat straw and 2,000 tons of
mineral core dust from going to landfills by using them as raw materials and fuel in our processes or selling them
to local farmers as a soil conditioner. These actions are both good for the environment and benefit our cost
structure.
On social as we have consistently stated, safety is our highest priority. We conducted 615 safety Kaizen events,
which created great employee engagement and resulted in increased awareness as we achieved a 1.89 total
incident rate in 2020, a 10% improvement versus the comparable basis in 2019. We created a new position for
Vice President of Diversity and Inclusion to further shape our diversity, equity and inclusion strategy. Our people
are our greatest asset and I am proud to share that just last week Masonite was included on the Forbes 2021 list
of America's Best Large Employers.
On the governance front, our leadership team completed a materiality assessment using the [ph] SASB
(00:11:23) framework and identified ESG topics that are a priority for our specific business. At Masonite, we
believe what is measured matters and ESG metrics are incorporated in our compensation plans. For the last two
years we've incorporated both safety and employee engagement metrics tied directly to our annual bonus. We
have engagement on ESG from the board to the plant floor. We developed an ESG executive steering committee
and we have cross-functional teams with subject matter experts throughout the company involved in various
initiatives. In 2019, we published our inaugural Corporate Responsibility Highlights Report, which is located on the
Investor Relations section of our website and we are targeting a more robust ESG report to be published in 2021.
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, Howard. Good morning, everyone. Let's turn to slide 8 for a summary of our fourth quarter financial
results. We reported net sales of $619 million, up 16% as compared to the fourth quarter of 2019. The growth was
primarily due to a 9% increase in AUP, which was up year-on-year across all three segments and a 6% increase
in base volumes compared to the prior year due to growth in our North American Residential and Europe
segments. A 1% increase in higher component sales and a 1% favorable impact from foreign exchange were
partially offset by a 1% decrease in volume from the impact of a divestiture.
Gross profit increased 28% to $142 million driven by higher AUP and our previous restructuring actions, which
were partially offset by higher inflation and tariffs on raw materials, increased investment in the business,
including those related to our North American investment plan, and the impact of lower volume in our Architectural
business segment.
We continue to benefit from strategic sourcing projects but the related savings were outpaced by the increase we
saw in raw material cost. Gross profit margin expanded 200 basis points versus the fourth quarter of 2019 to
22.9%.
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Q4 2020 Earnings Call 25-Feb-2021
Selling, general and administration expenses were $95 million up 23% compared to the same period last year
primarily driven by higher personnel costs, including incentive compensation and charges related to the
settlement of US class action litigation. SG&A was 15.3% of net sales.
Net income was $27 million in the quarter, an increase of $25 million in the prior year due to the net impact of
higher gross profit and higher SG&A and the absence of $12 million in restructuring charges that were incurred in
the prior year.
Diluted earnings per share were $1.08 as compared to $0.06 in the fourth quarter of last year. Adjusted earnings
per share increased to $1.26, which excludes charges related to our previously announced restructuring plans
and the settlement of US class action litigation. This compares to $0.69 per share in the fourth quarter of 2019,
which excluded charges related to restructuring actions and a pension settlement. Adjusted EBITDA increased
30% to $81 million while adjusted EBITDA margin expanded 140 basis points to 13.1%. This marks the eighth
consecutive quarter of year-on-year adjusted EBITDA margin expansion.
On the right-hand side of the slide, we have more detail on our adjusted EBITDA performance, which benefited
from accelerated volume growth in our Residential businesses along with strong year-on-year gains in AUP. In
addition to the anticipated impact of anti-dumping duties we commented on during our third quarter call, we also
saw meaningful increases in inbound freight costs. In total, we incurred an $11 million year-on-year increase to
material costs for the quarter. We've previously discussed our two-pronged strategy to mitigate anti-dumping
duties where possible. Our global sourcing team continues to work diligently to qualify alternative suppliers and at
the same time we have sought relief through temporary surcharges where appropriate. Given the implementation
timing of these surcharges, we realized minimal benefit from them in the fourth quarter.
Factory costs increased $14 million in the fourth quarter due to increased investment spending primarily in our
North American (sic) [North American Residential] (00:16:06) segment and negative volume leverage in the
Architectural segment. Savings from our previously implemented restructuring initiatives largely offset wage and
benefit inflation in the quarter. Distribution costs were $6 million higher compared to the prior year due to the
impact of COVID and our use of suboptimal plant locations to support customers as our capacity buried across
their manufacturing network. Lastly, on an adjusted EBITDA basis, SG&A was $11 million higher due to increased
personnel costs largely due to incentive compensation.
Turning to slide 9 and our North American Residential segment, net sales increased 26% from the prior year to
$453 million primarily due to a 13% increase in base volumes aided by a 53rd operating week and a 12%
increase in AUP. Driven by our previously announced pricing actions, AUP for the full year 2020 was up 10%,
slightly above our original expectations.
End market demand strengthened in both our wholesale and retail channels in the fourth quarter. This
accelerating demand, coupled with our constrained capacity levels has limited our ability to rebuild channel
inventory.
Adjusted EBITDA in the North American Residential segment was $88 million in the fourth quarter, a 62%
increase over the same period last year. Adjusted EBITDA margin expanded 430 basis points to 19.3% despite
anticipated cost headwinds. The significant anti-dumping duties and tariffs, I mentioned earlier, resided within our
North American Residential segment. We also experienced higher logistics costs in the form of both inbound
freight and distribution. Our North American investment plan spending was on track for the quarter as were
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Q4 2020 Earnings Call 25-Feb-2021
previously discussed investments to improve the workplace environment for our employees. Overall, an
exceptional quarter and year from our North American Residential team.
Turning to slide 10 and our Europe segment. Net sales increased by 4% year-on-year to $83 million. We were
pleased to see base volumes turn positive in the quarter up 4% on the back of expected improvements in our
interior business and continued strength in our exterior business. A favorable impact from foreign exchange
contributed an additional 3% to growth and gains in AUP contributed another 2% due to pricing actions taken in
the exterior door business late in the third quarter. These additional gains were offset by a 5% decrease in sales
volume from the impact of a divestiture in the fourth quarter of last year.
Adjusted EBITDA in the Europe segment was $17 million in the fourth quarter, a 37% increase over the same
period last year. Adjusted EBITDA margin expanded 500 basis points to 20.1%. We anticipated margin
headwinds from the impact of mix due to the relative growth of interior doors, but pricing actions better than
anticipated factory productivity more than offset the impact.
Moving to slide 11 and the Architectural segment. Net sales decreased by 10% year-on-year to $77 million due to
a 16% decline in base volume as commercial end markets remained weak. As mentioned on our third quarter call,
we saw softening sales in October and as expected that trend continued through the fourth quarter.
The base volume declines were partially offset by growth of 4% from AUP and 2% from the sale of components
and other products. AUP growth benefited from both favorable price due to previously implemented increases and
improved mix. Adjusted EBITDA margin contracted 590 basis points to 1.3% due to negative volume leverage.
This includes the unfavorable impact of our 53rd operating week on this business when minimal shipping volumes
did not cover fixed costs.
Before I leave the slide just a quick update on our progress to optimize this business. Alex Legall, the recently
hired leader of the Architectural segment and his team continued to work on reconfiguring the business with a
goal of improving service levels as a platform for growth when end markets recover. Accordingly, they have
rapidly taken some surgical actions including the closure of a components plant and a sales office. These
optimization efforts are ongoing and we look forward to providing you with future updates.
On slide 12, we summarize our full year financial results for 2020. Net sales were up 4% compared to 2019 due to
AUP growth of over 7% for the full year, primarily driven by price in North America. This increase was partially
offset by a 3% decline in base volumes primarily due to COVID-19.
Gross profit of $573 million represents an increase of 20% over the prior year, while gross profit margin expanded
350 basis points to 25.4% for the full year. The expansion was primarily due to higher AUP and prior year
restructuring actions which were partially offset by the impact of lower volume, higher inflation and tariffs on raw
materials, increased investment in the business and higher manufacturing wages and benefits.
While sourcing projects had offset increases in raw material costs through the third quarter, escalating tariffs and
inbound freight costs prevented us from delivering net savings for the full year. Excluding the impact of anti-
dumping duties, inflation was in line with our original expectations played out at the beginning of last year.
Adjusted EBITDA increased 28% to $364 million for the full year, while adjusted EBITDA margin expanded 310
basis points from the prior year to 16.1%, in line with the expectations we shared on the third quarter call. On the
right of the slide, we provided full year adjusted EBITDA bridge, a relatively straightforward causal for 2020,
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Q4 2020 Earnings Call 25-Feb-2021
favorable volume, mix and price along with solid operational performance offset the impact of inflation and
expenses related to our growth investments.
Slide 13 summarizes our liquidity and cash flow performance for the quarter. Our balance sheet and cash flow
both ended 2020 strongly, with total available liquidity of $582 million inclusive of unrestricted cash and accounts
receivable purchase agreement and our ABL facility, which remains undrawn. Net debt was $428 million and we
ended the fourth quarter with a net debt to adjusted EBITDA leverage ratio of 1.2 times. We repurchased
approximately 106,000 shares in the quarter, bringing the 2020 total to approximately 673,000 shares
repurchased for $44 million at an average price of $64.98.
Full year cash flow from operations was $321 million, up from $222 million in 2019. Capital expenditures were
approximately $73 million. While we curtailed second quarter spending in response to COVID, we resumed and in
certain instances accelerated investments, ultimately resulting in our capital expenditures being in line with our
original 2020 outlook. We ended 2020 with a full year free cash flow conversion of 162% driven by lower year-on-
your capital expenditures and strong working capital performance as we accelerated material purchases at year
end and deferred payroll tax payments.
Now let's turn to slide 14. Here we outlined factors that we believe will have the most significant impact on our
operational and financial performance in 2021. Based on robust US new housing data, modest but continued
growth in the RRR market and improving trends in the UK, we expect to benefit from favorable residential end
market conditions. [ph] Hyped (00:24:30) North American wholesale and retail channel inventories exiting 2020
are expected to provide added support for residential demand.
Outside of market conditions, our North American Residential segment will benefit from new business wins,
specifically the previously mentioned Lowe's business in the Midwestern part of the US. This multi-year
agreement with Lowe's will equate to roughly $60 million annually. Slab shipments began early in the fourth
quarter of last year, so we would expect to realize the full amount in 2021.
We anticipate favorable price to continue again this year with consolidated year-on-year growth of mid-to-high-
single digits primarily due to our North American Residential business and our recently enacted increases. As
Howard mentioned, we have a strong team that came together and navigated an exceptionally challenging year
with the addition of Jennifer Renaud as Chief Marketing Officer and the hiring of Alex Legall, we believe we have
the right leadership team in place.
While we feel confident about 2021, we will face some headwinds. Our capacity remains constrained due to the
impacts of higher absenteeism and the inability to staff additional shifts. After absenteeism hit its highest levels in
April and May of this past year, we saw numbers come down and remain relatively stable albeit at elevated levels
into the fourth quarter. More recently in December and into January, we have seen absenteeism increase again.
We've been fortunate that [indiscernible] (00:26:04) to peak levels we experienced during the onset of COVID, but
these increases act as a natural governor on our ability to service residential market growth.
Similarly, we have experienced elevated impacts from COVID in our UK operations, particularly after the year end
due to this most recent wave of the virus. Leading non-residential indicators, such as the Architecture Billing
Index, continues to suggest a weak end market demand for Architectural segment through 2021. ABI has been
below 50 since March of last year with numbers softening as we exited 2020. We believe in the strength of this
business in the long-term, but the near-term remains challenging. Until commercial construction activity increases
in North America, we believe we will see pressure on this business.
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Q4 2020 Earnings Call 25-Feb-2021
Inflationary pressures are expected to increase in 2021 both on logistics and material costs. I will expand on these
along with the impact of tariffs and anti-dumping duties on the next slide. Lastly, we expect spending on the North
American investment plan will accelerate as we position the company for future growth. Net, we believe these
factors provide a positive backdrop for Masonite in the year ahead.
Turning then to slide 15, we provide our current outlook for consolidated full year results in 2021. Given the
strength of our residential housing markets and the tailwinds created by tight channel inventories along with new
business wins and favorable price, we currently expect consolidated net sales growth of 7% to 10% versus 2020.
This range contemplates the recovery from the impact of COVID we primarily felt in the second quarter last year
as well as one less week of sales due to our 53rd operating week in 2020.
Within this consolidated range our growth assumptions vary greatly by segment. The North American Residential
segment is expected to benefit from all of the previously mentioned drivers of net sales growth. Accordingly, we
expect to see net sales increases in the low teens for this segment. Given the severity of last year's sales declines
in our Europe segment, we expect net sales growth in the mid-teens for 2021 as business recovers and we
benefit from recently implemented price.
In the Architectural segment, we are planning for a net sales decrease in the high teens due to continued
weakness in commercial end markets. On this net sales growth outlook, we expect adjusted EBITDA to be in the
range of $415 million to $445 million. We believe the key variable impacting adjusted EBITDA growth in 2021 will
be rising material costs which we anticipate will increase in excess of 4% year-on-year. These increases are due
to inflation that has rapidly materialized in the wood category as well as strong demand that may require us to buy
more steel outside of our long-term contracts. Incremental anti-dumping duties expected on wood shipments out
of Asia and meaningful increases in recent ocean shipping rates will further drive total material cost increases.
Our sourcing team continues to work aggressively to identify initiatives to diversify our supply chain and offset
these costs where possible.
Between these efforts and our pricing actions along with temporary surcharges, we remain confident in our ability
to maintain a favorable price/cost relationship again in 2021. Even at the low end of our stated outlook, we
anticipate another year of meaningful adjusted EBITDA margin expansion.
We expect that adjusted earnings per share in 2021 will be in the range of $7.40 to $8.30. This range incorporates
an assumed tax rate of 23% to 25% and an average diluted share count of roughly $25.4 million. We expect cash
taxes to increase from $24 million in 2020 to a range of $45 million to $55 million in 2021, primarily due to our
largely exhausting net operating loss carry-forwards.
With respect to capital expenditures in 2021, we currently expect a range of $80 million to $90 million. This
increase from reduced spending in 2020 reflects our focus on strategic investments for growth, including
initiatives to improve capacity in our plants and the ability to service our customers. These investments in the
business and higher cash tax rates are expected to negatively impact free cash flow. Along with natural increases
in working capital that accompany rising sales volumes and the cash payment related to the settlement of US
class action litigation, we anticipate free cash flow of $145 million to $165 million in 2021.
And with that, I'll turn the call back to Howard for some closing comments.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp.
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Q4 2020 Earnings Call 25-Feb-2021
Thanks, Russ. To summarize, we are very pleased with what turned out to be an exceptional year for Masonite in
2020. We finished strong with net sales increasing 16% year-on-year in the fourth quarter as growth accelerated
in our residential end markets and we saw higher AUP across all segments. This volume growth and strong price
drove adjusted EBITDA in the quarter, which resulted in our eighth consecutive quarter of year-on-year adjusted
EBITDA margin expansion and full-year adjusted EBITDA margins of 16.1%, a 310-basis-point increase over the
prior year. This would not have been possible without the extraordinary efforts of the entire Masonite team.
We are planning for another outstanding year in 2021. Our MVantage operating system continues to drive
productivity and it's helping create a safer workplace for our employees. We are making thoughtful and strategic
investments in our business to improve service to our customers, drive innovation in our products and position us
for future growth. Strong demand and pricing should enable solid net sales growth and continued margin
expansion for the year.
Lastly, I would like to remind all of you that we have our 2021 Virtual Investor Day scheduled for Wednesday,
March 24. We invite you all to attend as we will provide more detail on our strategy along with an updated long-
term growth framework. Registration opens early next week on our Investor Relations website. So we encourage
you to visit our site as well as our new digital learning center to view a Doors That Do More video ahead of
Investor Day.
And with that, I'd like to open the call to questions. Operator?
......................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Operator: Thank you, Mr. Heckes. [Operator Instructions] We ask that you limit yourself to one question and one
follow-up. [Operator Instructions] The first question is from Michael Rehaut, JPMorgan. Please go ahead, sir.
......................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Hi. Good morning. This is Elad Hillman on for Mike. 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
First, on North America – Hey. Good morning. First on North America Residential volumes, they inflected much
higher this quarter, which is very positive. And I was just wondering if you could talk more about your progress
kind of on the production front and how you're positioned to meet the growing market demand? And how much
was the impact from the 53rd week? And I guess, additionally just on Tijuana and getting that plant up and
running and what type of volume growth you could support in 2021?
......................................................................................................................................................................................................................................................
James A. Hair
President-Global Residential, Masonite International Corp. A
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Q4 2020 Earnings Call 25-Feb-2021
Sure, Elad. This is Tony. Good question. Yeah. We were very pleased with the ability to increase our output [ph]
as our in demand (00:34:10) stayed very strong in the fourth quarter. Relative to the 53rd week, we believe that
was roughly a 5% lift in overall net sales for our segment. And we have been very focused to try and increase our
capacity. Tijuana was a little bit behind as we mentioned in our previous calls on its ramp up. Due to COVID, we
had materials and equipment sitting across the border and couldn't get it in place. As those restrictions relaxed we
were able to get it in and we still struggled to get people into Mexico to do the setup. But we did some – our teams
did some very interesting virtual setup activities and we started seeing better output there.
As we look forward, we are increasing shifts on our interior door plants, our big plant at Haleyville, Alabama has
already started in that process as well [ph] within (00:35:01) our retail door perhaps. And we're continuing to
invest in capital equipment in Monterrey to improve the output there. So we can increase capacity. We're going to
add another [ph] cell (00:35:12) in Tijuana in that operation. So we feel pretty good about the increases in
capacity that we're working on right now to continue to support what we still see is a very strong end market.
......................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Great. Thank you. And then just turning to price in North America, if you could just – maybe just talk a little bit
about the overall pricing environment and how are you thinking about taking additional pricing actions in 2021, or
what price could contribute?
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah. Thanks Elad. This is Howard. We're not going to speak prospectively about future price increases. We
confirmed on the Q3 call that we announced a price increase for 2021, which is effective – was effective from
orders placed early in Q1. Additionally, we've implemented some surcharges, for example, to mitigate the impact
of anti-dumping duties because it's always our strategy to pursue favorable price/costs. So if inflation becomes
really burdensome, we'll consider what we need to do. But for now we're not going to talk prospectively about
where we are and we're happy with the position we're in.
......................................................................................................................................................................................................................................................
Elad Hillman
Analyst, JPMorgan Securities LLC Q
Okay. Thank you.
......................................................................................................................................................................................................................................................
Operator: The next question is from Josh Chan, Baird. Please go ahead, sir.
......................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
Hey. Good morning, guys. Congrats on a strong quarter and year.
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Thanks, Josh.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Thanks. Good morning, Josh.
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Q4 2020 Earnings Call 25-Feb-2021
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
I guess my first question is on the 2021 revenue guidance. Just trying to think about how you're contemplating the
cadence through the year. Clearly you have very strong demand momentum entering into Q1 presumably and Q2
you have a very easy comparison. So just kind of – could you talk a little bit about what that means and how –
what you're projecting kind for the second half?
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah, Josh. It's Russ. A fair question, I'll take that. We do expect it to be a little bit of a story of two halves here.
To your point, in the first half of last year, the second quarter in particular, we saw a real downdraft in the revenue
and that was driven globally but largely by our UK operations being shut down for almost half of that second
quarter. So between that and just natural blunting of demand that we even saw in the North American Residential
business, while people kind of digested what COVID would actually mean for construction markets, that's when
we saw the biggest impact in 2020. If you just step back and look at first half versus second half pacing, we would
anticipate net sales probably up in the mid-teens for the first half overall, falling to probably a low single-digit
growth rate for the second half.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah. The second part of...
......................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
Very good. Helpful.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
...that question – I'm sorry, I think, Josh you asked about first quarter and how things were starting. January was
terrific. We grew in excess of 20% overall on a consolidated level and demand in February was also strong. Of
course, we had this weather issue which wreaked havoc on our operations. Over 40% of our plants were at least
partially shut down during the week of that terrible weather. And in fact, we lost about 89 shifts of production. So
as a result, we expect February to be closer to flat. Our focus is now shifted to the supply chain because we're
aware of at least one upstream raw material supplier that is yet to resume operations from the weather. So, yeah
that's going to have an impact certainly in February. And we would expect demand – demand is still there, right?
We'd expect that demand to be resilient in March. And so we're planning for growth in the first quarter despite
very challenging weather situation.
......................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
All right. Yeah. That makes sense and thanks for the color there. And then I guess my second question is a little
bit bigger picture. Could you talk a little bit about how you're managing sort of the plant network given these
disruptions both in terms of demand and then also the absenteeism? Because I guess if you look back several
years ago, I would have thought that these types of fluctuations would have caused a lot more operational
disruptions, but clearly you've been able to manage through all of that very well. So could you talk about what kind
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Q4 2020 Earnings Call 25-Feb-2021
of improvements you've made operationally versus several years ago and how you are able to kind of handle
these types of movements?
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah. Hey Josh. It's Russ. Maybe I'll open up a little bit and just kind of remind folks what some of the impacts
were in the quarter and how that impacted our results and then how it can widen the lens out a little bit and talk
about strategically how we think about that. We're fortunate in that, we've got a network of plants across North
America that we can leverage. The key often comes down to how efficiently can you do that. As you have
disruptions across the network whether it's by spikes in absenteeism due to localized COVID outbreaks or as
Howard just mentioned disruptions due to severe weather. We can flex production of many of our products,
particularly in the Residential business around that plant network to support our customers. The key is it becomes
inefficient from a logistic standpoint. And we even commented that during the fourth quarter we had a lot higher
logistics cost because we were having to flex that production around and that often means shipping products on a
lot longer freight lane than you would typically to service a customer in a particular geography.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah. And I'd just add that 2020 taught us a lot about flexibility in our network, right? We were thrown into this
global pandemic and we quickly had to pivot to ensure we could do whatever we could to service our customers.
And we talk a lot about our MVantage operating system and Kaizen events and lean transformations of all those
things I think have really benefited us as we learn to be more flexible in our network. And as Russ said,
sometimes creates a bit of inefficiency. But generally speaking we've been able to increase capacity sequentially.
Tony mentioned some of the more strategic initiatives we're doing to continue to build capacity throughout 2021.
......................................................................................................................................................................................................................................................
Joshua K. Chan
Analyst, Robert W. Baird & Co., Inc. Q
That's great. Thank you for the color, guys.
......................................................................................................................................................................................................................................................
Operator: We have a question from Mike Dahl, RBC Capital Markets. Please go ahead, sir.
......................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Yeah. Thanks for taking my questions and for the detail so far.
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Good morning Mike.
......................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Morning. I had another question on just framing up kind of the top line guide for this year because – I appreciate
the details you've provided. If I look at a really high level with mid-single-digit to high single-digit price plus the $60
million from the Lowe's win, I mean that alone gets you to something like 7% to 10% and it would seem like your
Europe and Architectural may kind of offset one another which again then kind of implies just no base volume
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Q4 2020 Earnings Call 25-Feb-2021
growth outside of the Lowe's win. So I'm just curious kind of how you're thinking through that? Is it really just the
impact of the one less week this year or if there are other moving pieces we should be cognizant of?
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
Yeah. Hey Mike, it's Russ. Let me try and unpack it even a little bit further for you to help kind of walk from where
we ended 2020 to call it the midpoint of our guide for 2021. First of all, if you look at the overall market, we're
assuming a mid-single digit market growth for NA Res and that would be comprised of high singles on the new
construction side and probably a low single-digit growth on the RRR side. Remember, our business is roughly
split 50-50 between those markets.
Europe, we're assuming market low double digits, but Architectural, we think could be down as much as 20%.
You do all the math against that and that suggests that the overall market would be low-single digits, call it 2-ish-
percent and that's really driven down by that significant weakness that we're seeing in the non-residential
markets.
Then, you add to that that mid-to-high single-digit AUP, which we referenced and you cited, about 2.5 points from
the new business leaves a gap of about 2 percentage points and that would really be comprised of that 53rd
operating week that won't repeat this year and then the potential we have baked in there for some spot capacity
constraints here and there. That's really how you walk from 2020 to our guide for 2021, is that helped?
......................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Okay. Yeah, that's very helpful. And then a quick follow-up on the revenue side before I shift to another question.
You're assuming negligible FX. If we just look at spot rates, obviously they've been moving around dramatically
but would seem to imply that there's actually fairly significant FX tailwinds if these current rates persist. So how
did you reach the kind of the point of not really assuming any FX impacts for the year? Is that just kind of a
standard modeling assumption or is there something else we should be thinking about on that as well?
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
No, it's a great question and in a word yes, because I love your word volatility around FX. It has been pretty
significant particularly in the last three months. As we zoned in on our outlook for 2021 back in the fourth quarter,
subsequent to that is when we saw our key currency pairs specifically USD to Canadian dollar and US dollar to
pound sterling. They started moving around a lot. We've seen just in the last 90 days 5% to 7% movement
strengthening of both of those currencies. And so trying to put a pin in the map right now on FX is pretty difficult. If
we were to see the current spot rates carry all the way through the year, it would represent, call it, a point to two
of upside against what you've seen here, but we're just not trying to call that right now. So think about our sales
growth as basically exclusive of any FX impacts when the dust settles end of the year.
......................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Okay. Fair enough. That makes sense. And then my follow-up question is really then more around the inflation
environment and clearly that's been dynamic as well and recently accelerating really across effectively everything
you can track. So as you're looking at the 4% or greater than 4% for the year how much of that is just relying on
kind of what you see today versus also incorporating an expectation for further acceleration in costs from today's
levels?
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Q4 2020 Earnings Call 25-Feb-2021
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
I would say both. Our sourcing team does a pretty good job we believe at monitoring supply conditions,
monitoring pricing outlook, taking into account what they're hearing from the supply base on any potential
inflationary pressures, and we think that we've captured that within the outlook that we've provided.
If you step back and you unpack that in excess of 4%, the area that we've seen the most rapid escalation in
commodity inflation recently has been wood. And so we could easily see that up mid-to-high single digits in 2021.
The other areas where we're seeing more inflationary pressure are in glass and packaging. They're also probably
in the mid-to-high single-digit range. Those are obviously smaller parts of our buy. So it's the wood inflation that is
the primary driver against the escalating inflationary outlook we've got for 2021.
......................................................................................................................................................................................................................................................
Michael Dahl
Analyst, RBC Capital Markets LLC Q
Okay. Great. Thanks, Russ. That's helpful.
......................................................................................................................................................................................................................................................
Operator: We have a question from Jay McCanless, Wedbush. Please go ahead, sir.
......................................................................................................................................................................................................................................................
Jay McCanless
Analyst, Wedbush Securities, Inc. Q
Hey. Good morning, everyone. Thanks for taking my questions. Could we spend a minute on Europe and talk
about how UK housing starts and UK repair and remodel seems to be going? Fourth quarter numbers looked
pretty positive. So we'd love to get your thoughts on where that goes in 2021?
......................................................................................................................................................................................................................................................
Howard C. Heckes
President, Chief Executive Officer & Director, Masonite International Corp. A
Yeah, Jay, this is Howard. I'll start. We expected to see our interior business strengthen in the quarter and we did.
That was more strength due to growth in the merchant channel than it was with homebuilders specifically. But we
would expect that that would carry on a bit here and our exterior business has been strong all year. We had a bit
of a challenge in the fourth quarter with some congestion at the ports and difficulty getting materials and even so
our exterior business was up sort of low single digits. So we're pleased with the recovery of the UK business and
as Russ said, we expect that momentum to continue certainly on the heels of a miserable second quarter 2020. I
don't know, Russ, do you want to add anything to that or...?
......................................................................................................................................................................................................................................................
Russell T. Tiejema
Executive Vice President & Chief Financial Officer, Masonite International Corp. A
I would just add that we continue to see a market in the UK a new housing market Jason (sic) [Jay] (00:48:05). So
I think that was the area you were specifically asking about that has been underserved or under built. And the
new builders have been trying to get back to work. They really spent a lot of the – certainly the second half of
2020 trying to get back onto the plots and restarting new construction activity, but that has been the slowest part
of our business [ph] area (00:48:27) recover. And we are fortunately starting to see some green shoots.
And even through this latest lockdown in Europe and in the UK, in particular, which I think some folks had some
concerns early on could stall the housing recovery once again in the UK. They seem to have tried to protect the
construction trades wherever possible in recognition of the fact that that we've got a housing start picture in the
UK that frankly is just running well short of what organic demand should be. So overall, as Howard said, we feel
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