MasterBrand, Inc. (NYSE:MBC) Q1 2024 Earnings Call Transcript

MasterBrand, Inc. (NYSE:MBC) Q1 2024 Earnings Call Transcript May 11, 2024

MasterBrand, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to MasterBrand's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded. I would now like to turn the call over to Farand Pawlak, Vice President of Investor Relations and Corporate Communications.

Farand Pawlak: Thank you. Good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, President and Chief Executive Officer; and Andi Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our first quarter 2024 financial results. If you do not have this document, it is available on the Investors section of our website at masterbrand.com. I would like to remind you that this call will include forward-looking statements in either our prepared remarks or the associated question-and-answer session. Each forward-looking statement contained in this call is based on current expectations and market outlook and is subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated.

Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today. More information about risks can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors and our full year 2023 Form 10-K and updated as necessary in our subsequent 2024 Form 10-Qs, which will be available once filed at sec.gov and at masterbrand.com. The forward-looking statements in this call speak only as of today and the company does not undertake any obligation to update or revise any of these statements, except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables, which are in the press release issued earlier this afternoon and are also available at sec.gov and at masterbrand.com.

Our prepared remarks today will include a business update from Dave, followed by a discussion of our first quarter 2024 financial results, along with our 2024 financial outlook from Andi. Finally, Dave will make some closing remarks before we host a question-and-answer session. With that, let me turn the call over to Dave.

Dave Banyard: Thanks, Farand. It's good to be speaking with you all on our first quarter 2024 earnings conference call. I'm pleased to say that MasterBrand delivered a solid quarter to start the year. Net sales in the first quarter of 2024 were $638 million, a 6% decline over the same period last year. This mid-single-digit decline was in line with our expectations as we experienced the continued impact of anticipated trade downs and our return to normal promotional activity through the first quarter. Volume was roughly flat on a year-over-year basis as we saw growth with our customers servicing the new construction market, offset by declines with our customers servicing the repair and remodel market. Again, this was in line with our 2024 end market demand assumptions laid out on the last call, which I'll revisit shortly.

Operationally, the company continued to perform exceptionally well. We delivered adjusted EBITDA of $79 million in the first quarter and a related margin of 12.4%, 40 basis points higher than the same period last year. Our margin expansion was again driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of lower average selling price. Our first quarter performance followed our trend of delivering year-over-year margin expansion despite market softness. This is a testament to two things. One, our associates' dedication to the MasterBrand Way, our business system. And two, the success of our strategic initiatives Align to Grow, Lead Through Lean and tech-enabled. When we first introduced the MasterBrand Way, our focus was on deploying foundational Lean tools and improving operations.

During this early period, our executive team, myself included, spent a great deal of time training and coaching all levels of associates on how to use these tools. More importantly, our time spent on the plant floor was about fostering a culture of continuous improvement and driving the mindset of problem-solving at all levels of the organization. As this culture took hold, we saw our operational efficiency improve as well as our financial performance. Fast forward to today, Lean as a way of working is just part of what we do. Our associates, along with a core team of CI professionals, are driving daily operational improvements utilizing our toolkit and we continue to see the benefit of their work in our adjusted EBITDA margin performance this quarter.

This quarter, we also continue to benefit from our strategic initiatives, specifically significant cost savings from our quality process initiatives and carryover savings from our prior year supply chain work. I'll provide a deeper update on our strategic initiatives shortly. Our continued discipline around working capital management allowed us to deliver free cash flow of $12 million in the quarter. Prior to last year, MasterBrand has historically been a consumer of cash in the first quarter, so this relatively strong performance is an encouraging trend to see. Now, let me provide more detail on the end market demand we saw during the first quarter. Similar to our financial and operational performance, end market demand was in line with our expectations.

For our customers servicing the U.S. single-family new construction market, we saw demand increase year-over-year high single digits in the first quarter. Demand trends improved across multiple regions, with large production builders continuing to outperform other segments of the market. Large production builders, both public and private, remain the best suited to address pent-up demand for housing, and we are benefiting from our close relationships with them. We serve these builders through a combination of direct sales and sales through our distribution partners. Given the positive tone from builders and the new product and channel-specific offerings we continue to introduce for them, we remain optimistic about this portion of the market.

This optimism is tempered with our view that land and labor constraints, along with potential for some supply chain disruptions in certain categories, could limit growth. We continue to believe this market will grow year-over-year mid-single digits with relatively normal sequential seasonality and moderating year-over-year growth rates later in the year due to more challenging comparables. As for our dealer and retail customers who primarily service the repair and remodel market, demand continued at a similar pace to the fourth quarter of 2023. On a year-over-year basis, we saw demand decline high-single digits in both our retail and dealer channels as customers continue to note lighter-than-usual foot traffic and extended decision lead times.

This was in line with our expectations for this portion of the market as consumers remain hesitant to make large ticket purchases given general macroeconomic uncertainty. Those who are willing to commit to larger purchases are being more thoughtful about total project costs and choosing fewer features in their order. Accordingly, our outlook for the U.S. repair and remodel market for cabinets remains unchanged. We still expect to see mid-single-digit declines for 2024, with year-over-year declines easing as we progress through the year and annualize these impacts, which we've already seen occur from the fourth quarter of 2023 to the first quarter of 2024. In Canada, both the new construction and repair and remodel markets remain slow year-over-year as expected, but we've seen signs of stabilization.

We were pleased to even see areas of sequential improvement in order intake in new construction and repair and remodel markets, which appear to be signaling a bottoming out. This and the steps that the Canadian government is taking to improve housing affordability for existing and new homebuyers are favorable signs for the Canadian housing market. While these are encouraging developments, we still expect to see soft end market demand continue, with year-over-year high single-digit declines in 2024. This outlook is based on new housing starts being meaningfully lower and repair and remodel activity being down mid-single digits year-over-year. End market demand was in line with our expectations for new construction and repair and remodel markets across North America, and we see relatively no change to our underlying assumptions.

Therefore, we're reiterating our overall market demand expectation of down low single digits year-over-year in 2024. Our assumptions originally factored in a moderate reduction in interest rates later in the year. While there's been a lot of press around the timing of potential rate cuts, this remains a dynamic situation. We feel that we have a balanced approach related to Fed actions and our outlook does not depend on rate reductions occurring on any timetable. Our outlook was more predicated on rate stability rather than on future rate reductions. With this backdrop in mind, we still expect a gradual improvement in existing housing turnover along with a solidifying of demand levels for new construction as the year progresses. Our assumptions also anticipated little improvement in larger ticket R&R spending within 2024, as consumer R&R spending would mostly be on smaller ticket items to start.

So, as you can see, we believe our end markets are largely progressing as anticipated and will continue to do so. Given 2024 looks to remain a transitory year from an end-market demand standpoint, we remain focused on operating efficiency, serving our customers and continuing to execute on our strategic initiatives. Now, I'd like to share some recent successes and updates from across these three initiatives. I briefly mentioned the new product and channel-specific packages launched for our large builder partners servicing the new construction market. This is a good example of how our Align to Grow initiative is driving growth for MasterBrand. Through our close relationships with these large builders, we work to match our offering to their needs.

We've seen excellent results from this approach with many of these top builders awarding us new business through the fourth quarter of 2023 and into the first quarter of 2024. It does take a while for these projects to go into production, but you are already seeing the benefit from the work we've done over the past year. We believe this is how 80/20 and the Align to Grow initiative will produce the growth we need to achieve our long-term financial targets. Moving to our Lead Through Lean initiative. This initiative is the furthest along in its journey and we continue to make great strides here too. As I mentioned earlier, this is really about our culture of problem-solving in every level of the organization. While this culture has taken hold as MasterBrand looks to grow, we need to further equip our associates to lead and address problems closest to the work.

To help with this, we've introduced TrueLeader, our program designed to ensure that frontline supervisors are skilled in leading others and coaching them for success. We've also taken steps to help associates know what success looks like through our newly introduced success model. This model focuses on the behaviors that truly differentiate great performance at MasterBrand and those that will be rewarded. We believe that enhanced training, clear expectations, and related financial incentives will help our associates continue to deliver operational excellence and sustained growth. Now, let me touch on our tech-enabled initiative and specifically our work on quality processes. On our last call, I mentioned that our digital infrastructure team continued to make progress on cloud migration efforts and delivering near real-time data.

Our quality team is already benefiting from this improved information with better data and insights as to where and when quality issues are occurring. As a result, we've been able to address these issues with more precision and are already seeing the financial and operational benefits. These insights, coupled with the technology we're implementing to inspect product, should continue to drive our cost of quality lower. Lastly, we continue to make progress on rolling out the MasterBrand Connect portal to our dealers and distributors. The rollout of this portal is well underway and we're continuing to build more functionality into the application. Reducing friction for our customers is a top priority and we'll have more exciting features to share later this year.

With the end market demand progressing as anticipated and our associates executing on our continuous improvement plans and strategic initiatives as expected, we're pleased to reiterate our full-year 2024 outlook. Now, I'll turn the call over to Andi for a more in-depth discussion of our financial results and additional details on our 2024 outlook.

Andi Simon: Thanks, Dave. I'll begin with an overview of our first quarter financial results, then I'll provide our thoughts around the remainder of 2024 and our full-year outlook. First quarter net sales were $638.1 million, a 5.7% decline compared to $676.7 million in the same period last year. Our top line performance was primarily the result of year-over-year growth from our customers serving the new construction market, offset by anticipated volume declines in the repair and remodel market, as well as a softening in our net ASP, largely due to continued trade down activity and our reintroduction of customary targeted promotions. Gross profit was $204.7 million in the first quarter, roughly flat with $204.6 million in the same period last year.

Gross profit margin expanded 190 basis points year-over-year from 30.2% to 32.1%. This year-over-year margin expansion was driven by cost savings from consistent execution on MasterBrand strategic initiatives, specifically our quality processes and carryover from last year's supply chain work and our continuous improvement efforts, which more than offset the negative impact of lower ASP and personnel inflation. Selling, general and administrative expenses were $137.8 million, a 1.8% increase compared to the same period last year, primarily driven by personnel and personnel-related inflation and higher investments in our tech-enabled initiative. Net income was $37.5 million in the first quarter, a 7.1% year-over-year increase compared to $35 million in the same period last year.

This increase was primarily driven by lower interest expense of $14.1 million in the first quarter compared to $17.4 million in the same period last year, and a lower income tax expense of $11.5 million, or a 23.5% effective tax rate in the quarter compared to $12.9 million or a 26.9% rate in the first quarter of 2023. Diluted earnings per share were $0.29 in the first quarter of 2024 based on 130.5 million diluted shares outstanding, an increase from diluted earnings per share of $0.27 in the first quarter of last year based on 129.5 million diluted shares outstanding. Adjusted EBITDA was $79.4 million compared to $81.5 million in the same period last year. Adjusted EBITDA margin expanded 40 basis points to 12.4% compared to 12.0% in the comparable period of the prior year despite lower sales.

This margin expansion was driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of trade downs. Turning to the balance sheet, we ended the quarter with $153.7 million of cash on hand and we remain undrawn on our $500 million revolver. Net debt at the quarter end was $554.3 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.5 times, consistent with the fourth quarter of 2023 and down from 2 times in the first quarter of 2023. Our balance sheet remains strong with the financial flexibility to invest in the business for growth. Operating cash flow with $18.7 million for the three months ended March 31, 2024, compared to $62.1 million in the comparable period last year and better than our expectations.

As you recall, the first quarter of 2023 benefited from the planned inventory reduction from our 2022 strategic build. The first quarter of 2024 also reflects a larger annual incentive compensation payout year-over-year due to a higher attainment percentage. Capital expenditures for the three months ended March 31, 2024 were $7 million compared to $2.9 million in the prior year period. As Dave mentioned on our last call, we made the decision to accelerate investment in the business, specifically in our tech-enabled initiative, and we saw this higher investment spending continue in the first quarter. We plan to further ramp our investment spending and we still expect 2024 capital expenditures to be in the range of $55 million to $65 million.

Free cash flow was $11.7 million for the first quarter of 2024 compared to $59.2 million in the comparable period last year. While lower year-on-year, this is relatively strong compared to historical first quarter performance, especially in light of some of the larger cash uses. Finally, during the first quarter, we repurchased approximately $1.9 million of our common stock under our existing stock repurchase program. We have roughly $26 million left under our existing authorization. Now, let's turn to our outlook. We are pleased with our performance so far and the year is unfolding as we anticipated. While there is certainly increased macroeconomic uncertainty, as Dave mentioned earlier, end-market demand is progressing as anticipated. We believe our growth initiatives will allow us to achieve our previously stated 2024 financial outlook while continuing to invest in the business for growth.

We are therefore reiterating our full-year 2024 guidance. We continue to anticipate our 2024 net sales will be in the range of down low single digits to flat year-on-year. Let me provide some additional color on the drivers of our net sales in relation to the market. Our 2024 outlook contemplates the continued effect of trade downs and a more normalized pricing environment, including customary promotions. We saw this pattern develop in the second half of 2023, so there is some annualization impact from the normal pricing and promotion environment in the first half of 2024, but we would expect to see less impact in the second half of the year as we get to normalize comparisons. We anticipate a more normal inflationary environment and we'll continue to evaluate price quarterly in response to that.

As Dave mentioned, our 2024 outlook assumes big ticket repair and remodel will lag smaller ticket items, resulting in a timing difference between our net sales and our broader R&R market recovery. To offset this net sales headwind, we have a variety of new products and channel-specific packages that launched late last year and in the early part of this year across both the new construction and repair and remodel markets. As part of our Align to Grow initiative, we have tailored these products to satisfy the specific end markets and regions best positioned for growth. As these products gain traction, these incremental sales will more than help offset the previously discussed impacts of trade downs and customary promotions. We remain confident that our existing manufacturing capabilities and our common box initiative provides the flexibility needed to adjust capacity up or down with demand.

As we did in 2023, this flexibility, along with cost actions, should allow us to deliver strong margin performance. This flexibility also provides us ample capacity to service our customers as demand strengthens. We will continue to be nimble and adjust our manufacturing network as needed to address any future market conditions. This ability to flex manufacturing, coupled with our strategic initiatives and continuous improvement efforts will allow further investment in the business. As we highlighted on our previous earnings call, given the success of our early tech-enabled initiatives, we plan to invest an incremental $20 million into this initiative in 2024. With 2024 shaping up to be a relatively stable year, particularly from a demand perspective, we are taking this opportunity to further invest and position ourselves for future growth on a more robust demand environment returns.

With this in mind, we continue to expect adjusted EBITDA in the range of $370 million to $400 million, with adjusted EBITDA margins of roughly 14% to 14.5% for 2024. Interest expense is still expected to be approximately $55 million to $60 million, and our anticipated tax rate between 25% and 26% is unchanged. As a result, our expectation that our adjusted diluted earnings per share will be in the range of $1.40 to $1.60 also remains the same. As I mentioned earlier, we are still planning 2024 capital expenditures to be in the range of $55 million to $65 million. This investment is approximately 1.3 times depreciation, which is within our stated long-term goals. Given the steps we have already taken to reduce working capital and these other factors, we continue to expect free cash flow to be in excess of net income for 2024, but the magnitude of working capital improvements in 2023 will not repeat.

With that, I would like to turn the call back to Dave.

Dave Banyard: Thanks, Andi. We're pleased with our solid start to the year with continued year-over-year adjusted EBITDA margin expansion and better than anticipated first quarter free cash flow, we are reiterating our full-year 2024 outlook and are on a trajectory to achieve our long-term financial targets. Beyond the financial performance, I'm proud of the culture and associate engagement we're cultivating. We recently had our semi-annual employee satisfaction survey and we continue to exceed manufacturing industry benchmarks and see sequential improvement across the organization. I want to thank our associates once again for their continued support as we work on building great experiences together. Now with that, I'll open the call up to Q&A.

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