Masonite International Corp (DOOR) 2013 Q3 法說會逐字稿

Welcome to Masonite's Third Quarter 2013 Earnings 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.

This conference call is being recorded. The replay may be accessed until November 17. To access the replay, please dial 877-660-6853 in the US or 201-612-7415 outside the US. Enter conference ID 421303.

I will now introduce Joanne Freiberger, Masonite's Vice President and Treasurer. Please go ahead.

Thank you, Latonya, and good morning, everyone. I'm joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer, and Mark Erceg, our Executive Vice President and Chief Financial Officer.

The information for the webcast presentation that will accompany today's call is available on our website at www.masonite.com under the heading Investors.

The earnings release and presentations made by our executives include forward-looking statements that are based on the beliefs of the management team regarding the operations and results of operations of the Company, as well as general economic conditions. These beliefs and the related forward-looking statements are subject to risks and uncertainties, which are described in greater detail in Item 1-A of our Registration Statement on Form 10 that was filed with the Securities and Exchange Commission on August 19, 2013. This document is available on the Investors tab of our website. Actual results may vary materially from those described in these forward-looking statements.

We do supplement our GAAP reporting with the non-GAAP financial measure of adjusted EBITDA and the related measure of adjusted EBITDA flow-through. A reconciliation of adjusted EBITDA to the GAAP measure of net income, as well as the calculation of adjusted EBITDA flow-through, are provided in the appendix of the presentation.

On today's call, Fred will provide a company and industry update. Next, Mark will review 2013's third-quarter results, after which Fred will summarize today's call. A question-and-answer session will follow our prepared remarks.

With that, I'll turn the call over to Fred.

Thanks, Joanne. Good morning and welcome, everyone.

Over the past several quarters, we've discussed the need to reverse the negative pricing trend we experienced during the global housing recession in order to recover lost profitability. To that end, we were encouraged that the average unit price for our product across the North American segment strengthened again in the third quarter. Importantly, this marks two consecutive quarters of positive change in average unit price after a string of seven consecutive negative quarters.

Late in the first quarter, we instituted a mid-single-digit price increase across our US wholesale customer base on certain doors, door lights and components, and that first-quarter price increase -- which affected about one-quarter of our total revenue base -- as well as positive mix from our focused effort on selling higher-margin products in higher-margin channels, largely drove the average unit price increase. And having recently implemented a second US-only wholesale price increase on molded and flush interior doors that went into effect at the beginning of the fourth quarter, we are hopeful that this positive trend in average unit pricing will continue.

With these price increases only impacting a portion of our global revenue base, it is paramount that we direct efforts towards improving profitability in all regions and channels, including what has been a highly competitive retail environment in North America. We've previously spoken about 2012's line review, which resulted in the loss of about $70 million of interior door sales, principally in the Northeast and Texas region, based on lower competitive pricing, and the related restructuring charges booked during the fourth quarter of 2012 to realign our manufacturing footprint.

Based on the timing associated with what appears to have been a difficult transition in those markets, we did not begin feeling the full impact of reduced volumes at Lowe's until the third quarter of 2013.

Following a line review at the Home Depot earlier this year, we extended the markets we service to include the interior and exterior business in Arizona and Nevada, beginning in Q4 2013, while maintaining all of our existing markets, albeit at reduced price points. This suggests that the poor competitive dynamics we've experienced in this channel during this historic downturn have worsened again in the second half of 2013, and we have yet to realize an appropriate recovery of profitability in the North American retail customer base.

Turning to Slide 7, our current North American business profile is skewed towards the wholesale channel, which is more highly-leveraged to new housing construction. As such, volume growth across our wholesale business, as you can see in this graph, remains strong, having increased by double digits during the quarter. However, total volume was down slightly in North America, largely because of the whole -- the Lowe's business loss.

So I spoke a lot about the impact of pricing on our business in 2013 -- both positive and negative. Looking forward, we remain focused on recovering the excess of margin loss we experienced during the downturn, in spite of significant cost reductions. In addition to the recent price increase in the North American wholesale channel, we have announced a residential door price increase in France -- which will be effective in January -- and we are in the process of evaluating additional pricing actions across all of our North American distribution channels.

As we've stated in the past, we believe that pricing needs to move up at retail, wholesale and with independent and pro dealers in order to adequately compensate us for the value our products provide and the investments we are making to service our channel partners and customers. And we're committed to taking the necessary steps to make sure that happens.

Now while we're very optimistic about mid-term and long-term prospects, there are several near-term operational items which we expect to impact fourth-quarter results beyond the challenging resale dynamics just discussed. For example, with the recent -- and we believe temporary -- flattening of the US housing starts from earlier growth trends this year, we have taken the decision to slow certain production and reduce inventory levels in Q4 which will negatively impact overhead absorption rates. We will also be incurring some additional one-time costs as we continue to optimize our new process technology at the Denmark automated facility while we ramp up production, which is currently operating on a single shift, and we're just beginning to service the recently-added Home Depot Arizona and Nevada markets, which will also give rise to some additional one-time costs in the fourth quarter.

After evaluating the combined impact of all of these items, it suggests that our fourth-quarter adjusted EBITDA will, on an operational basis, be below year-ago levels, which you may recall included a one-time benefit associated with a business interruption insurance claim of approximately $3.3 million.

So while we're experiencing some choppiness in the US housing market near term, our mid to long-term view remains bullish. US housing starts are forecasted to grow at double-digit rates over the next several years. The repair, renovation and remodeling market continues to pick up steam. The commercial market is projected to experience high rates of growth in future years. And the prices received for our products and services have significant room for improvement based on previous norms.

With 34% of our North American business tied directly to new housing, 45% to repair, renovation and remodel, and 21% to commercial construction, Masonite is well-positioned to capitalize on what we expect to be a multi-leg, multi-stage recovery in our largest markets.

So with that, let me turn the call over to Mark to review our financial results for the third quarter. Mark?

Thanks, Fred, and good morning, everyone.

In the third quarter, total door volume was unchanged and net sales were up 1.9% over the comparable 2012 period, as double-digit gains from US wholesale customers were largely offset by the Lowe's business reduction and retail pricing pressures Fred referenced earlier.

Adjusted EBITDA -- excluding $2 million of one-time costs associated with registering and listing Masonite's share on the New York Stock Exchange -- increased 13.6% from $25 million to $28.4 million.

Turning to Slide 12, gross margins increased 60 basis points to 13.6% of net sales, and SG&A -- as a percent of net sales -- decreased 50 basis points to 11.9%.

Adjusted EBITDA, as reported, increased $1.4 million to $26.4 million during the quarter, or 6.1% of net sales -- a 20-basis-point improvement compared to last year. Excluding approximately $2 million of one-time registration and listing costs, adjusted EBITDA increased by 70 basis points.

While volume and net sales growth were restrained in the quarter by the Lowe's business loss and our decision to proactively discontinue certain unprofitable product lines and businesses, Slide 13 shows that our adjusted EBITDA flow-through rate -- defined as adjusted EBIDTA growth divided by net sales growth -- has improved over the past several quarters and was particularly strong during the third quarter where, excluding one-time registration and listing costs, the adjusted EBITDA flow-through rate actually exceeded 40%. We have taken specific and deliberate actions focused on profitable growth initiatives, which have contributed to this positive trend, and while we don't believe a 40% flow-through rate is currently sustainable, we are pleased that our pricing actions in the US wholesale channel, cost-control efforts, emphasis on higher-margin product lines, channels and geographies, and synergies from recent tuck-in acquisitions all contributed to a robust adjusted EBITDA flow-through rate for the third quarter of 2013.

On Slide 14, we examine the change in net sales for each of our three reportable business segments and the primary drivers of the year-over-year changes. Net sales in our North America segment increased by 4.4%, or $14.1 million. This was primarily driven by higher average unit prices as a result of the US wholesale price increase implemented in the first quarter of 2013, as well as improvements in product and customer mix. Net sales in our Europe, Asia and Latin America segment decreased 4.7%, or $4 million, compared to the third quarter last year. This was primarily due to a $3.8-million decline in volume as a result of the broader downturn in the European markets we serve, a strategic shift in our customer and product base in France and Asia, and our decision to exit the unprofitable Romania and Hungary markets. This volume decline, along with a decline in component sales, was partially offset by a $1.6-million increase in average unit price, driven by targeted price increases and favorable mix, as well as a $1.7-million benefit from foreign exchange.

Net sales in our South Africa segment decreased 10%, as a $4.7-million decline in unit volumes and a $3.8-million unfavorable impact of foreign exchange were only partially offset by a $6.5-million increase in average unit price. While we have successfully executed significant price increases in our South African segment, the highly inflationary environment for both labor and energy, and a weakening rand, have negated virtually all of these gains. As a result, the impact of these pricing actions on the bottom line has been de minimus.

Turning quickly to liquidity, cash flow and balance sheet metrics, available liquidity at September 29 -- which included unrestricted cash and undrawn ABL and an accounts receivable purchase agreement -- totaled $236.7 million, or approximately 13.7% of Masonite's trailing 12-month net sales. Total debt and net debt to trailing 12-month adjusted EBITDA stood at 3.4 and 2.4 times, respectively, as of September 29, 2013. Our trailing 12-month adjusted EBITDA interest coverage ratio was 3.4 times, and our trailing 12-month fixed charge coverage ratio was 2.2 times. Cash flow from continuing operations during the first 9 months of 2013 was $29.8 million, compared to $28.7 million in the comparable 2012 period.

Capital spending was $24.9 million, which -- as a percent of sales -- was 1.9% during the first 9 months of 2013. For the full year, we expect capital spending to be less than 3% of total net sales.

That concludes the financial review, and I'll now turn the call back to Fred to summarize today's discussion.

Great. Thank you, Mark.

During the quarter, we continued to focus on improving the overall profitability of our business. Adjusted EBITDA, including one-time registration and listing costs, increased 13.6%, and our adjusted EBITDA flow-through rate exceeded 40%. The integration of our Masisa acquisition is proceeding smoothly, and the Home Depot Nevada and Arizona retail expansion will begin this quarter. Average unit prices increased for the second consecutive quarter across the North American segment, and we recently implemented a fourth-quarter price increase for a portion of the US wholesale business. 2014 pricing plans are actively being worked, which we will anticipate will impact all of our North American distribution channels, as well as select international geographies.

Overall, market indicators remain positive, with low mortgage rates and high levels of housing affordability; home prices continuing to climb -- although at a slower pace, fueling improvements and repair, remodeling and renovation spending; and favorable long-term demographic-driven demand trends.

Nevertheless, we expect the housing market to remain choppy and are prepared to be flexible and nimble as we steer Masonite through what is expected to be a multi-year, multi-stage recovery across our primary end markets.

Lastly, I'd like to take a moment to recognize the hard work that our team put into the registration and listing of our common equity on the New York Stock Exchange. This is a significant moment in the history of our company which will provide greater liquidity and increased opportunity for new investors to participate in Masonite's future.

So at this point, I'll turn the call back to the operator to open the lines for any questions.

Thank you, Mr. Lynch. (OPERATOR INSTRUCTIONS.) Our first question comes from Robert Wetenhall with RBC Capital Markets. Please proceed with your question.

Hi, guys. This is actually Desi filling in for Bob. Thank you for taking my questions. Given the pick-up in repair and remodel spending that we've seen over the past quarter or so, have you seen any change in product mix towards higher-margin products so far?

At this point, I would say that we continue to see a similar offering. There's been no substantial change in the product offering that we're selling through the retail channel.

Okay. And then on the EBITDA margin on the Lowe's sales that come off in the quarter, how does that compare to the consolidated for the company overall?

What I would tell you is that the sales loss that we're experiencing now -- which, as we talked about was, on an annualized basis, about $70 million -- that equated to about $17 million of lost sales in Q3, which is about -- probably twice the rate we experienced during the first and second quarters of the year. I would tell you that the margin associated with that is something that we wouldn't typically openly comment on. We tend to think about our wholesale business and our retail business as providing two different types of products to the marketplace. On the wholesale side, we provide slabs typically, and on the retail side, we provide other value-added services like pre-hung -- pre-hanging and pre-finishing. So it's not really comparable on that front. But for a lot of competitive reasons, we don't typically talk about margins specifically on the retail versus wholesale split.

Got it. Thanks.

Our next question comes from Phillip Volpicelli with Deutsche Bank. Please proceed with your question.

Great. Thank you. With regard to the price increases, can you give us some magnitude of the increase in North America and then in France?

Yes. I would say that for the price increases that we've put in place so far this year, they've tended to be in the mid-single-digit range. As far as our price increases looking forward, we're not prepared at this point in time to discuss specifically what those will be, but we -- as been past practice, we will in follow-up quarters talk to what those numbers are.

Okay. And then on the one-time issues you guys mentioned with regard to the fourth quarter being down year over year, the overhead of underabsorption, the production costs and then the start-up costs for the Home Depot contract -- can you either give us each of those components or, in aggregate, how much that will be?

Yes. Taken altogether -- so the inventory absorption rates, the Denmark facility just continuing to ramp up and the upfront costs associated with servicing those two new market wins -- we would tell you that's several millions of dollars (inaudible) between the three.

Several million?

Yes.

Okay. Great. And then in terms of -- as you look forward, are there any other line reviews that are coming up here in the fourth quarter that you feel confident about or you feel vulnerable on?

Yes. We have not been informed by either -- any of our major retail customers of any line reviews coming up in the near future.

Great. Thank you very much. Good luck.

(OPERATOR INSTRUCTIONS.) Our next question comes from Matt Kaplan with Imperial Capital. Please proceed with your question.

Good morning.

Good morning.

I guess my question is on the COGS side. Have you guys seen any raw materials inflation at all this quarter?

We have continued to see some price pressures, principally in the wood area. Some other areas such as steel continue to trend a little bit more favorably for us. Our global (inaudible) group and our Lean Sigma program has done a pretty good job managing against that, and I think you saw that reflected in the quarter where we saw our gross margin expand by 60 basis points as a result of all the cost-control efforts we do have in place.

But I would say that we remain cognizant of the fact that, while our teams have done a superb job of trying to hold off those costs increases, the underlying economics and the underlying trends for many of the commodities that we purchase have been inflationary. And so we continue to look at that as a critical requirement for us to -- needing to increase prices across all of our channels going forward.

Alright. And then in the Q it says there was an increase in direct labor. What was the driver of this?

Yes. The direct labor increase was actually driven more by a little bit of a change in what we're seeing as far as order quantity. So we have seen order quantities kind of get smaller as a lot of the buildout is starting to occur. People are being very mindful of managing working capital. And so the average order size has been going down a little bit in the industry, and as a result of that, we've seen a little bit of pressure against direct labor.

And we've also had some mix shift between -- as we've brought on more commercial business, etc., that impacts our overall direct labor costs.

Alright. And then what -- can you remind me what percent of COGS direct labor represents?

In the quarter just ending, I would tell you that direct labor is roughly in the 12%, 13% range.

Alright. Thanks. And then going back to the 4Q impacts, where will we see those flow through? Will it be mostly for -- just to start on the Arizona and Nevada Home Depot market expansion -- is that going to be realized in the SG&A? COGS? CapEx? Any specific line items we should see?

It'll be across a multitude of those areas. It won't be broken out specifically in SG&A versus COGS. There'll be some attributable to both, as well as in some of our freight and logistics costs as we initially provide product into those stores.

And then when you say you guys are going to slow certain lines and reduce inventory that'll impact your contribution margins, will that also lead to you guys generating a little bit of cash from working capital as you work through that inventory that you've built up?

Yes. As we reduce inventory, clearly that'll convert to cash.

Okay.

And that's an area we've been focused on. If you think about trade working capital as a percent of sales for the quarter just ending, it was 14.8%, which was down about 20, 30 basis points versus the same time a year ago. So we've been trying to manage that working capital pretty tightly this year.

Alright. Great. And then any more update on rolling out more automated assembly plants like Denmark, South Carolina?

Yes. One of the things that we've talked about in the past is we've had a long-term plan. We believe that it will make sense for us ultimately to roll out three plants total over time. We're going to try to time that very closely with how the market improves and the market increases. So it's -- it will be dependent on what happens with regards to housing starts in 2014 and 2015. What we've seen so far more recently is many of the future-looking indicators have pushed out the housing recovery some. Therefore, you would anticipate that we would push out the next start-up some in response.

Alright. Great. Thanks, guys.

There are no further questions in the queue at this time. I would like to turn the call back over to Mr. Lynch for closing comments.

Great. Well, thank you very much. We appreciate your continued involvement and participation in Masonite. And if there's no further calls, I want to thank you for joining the call today and we look forward to speaking to all of you soon. Thank you.

Thank you for joining the Masonite International's Third Quarter Earnings Call. This conference call has been recorded. The replay may be accessed until November 17. To access the replay, please dial 877-660-6853 in the US or 201-612-7415 outside the US. Enter conference ID 421303. Thank you. You may now disconnect at this time.