MasterBrand Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 7 speakers on the call.

Operator

Welcome to Master Brands Second Quarter 2023 Earnings Conference Call. During the company's prepared remarks, all participants will be in a listen only mode. Following management's closing remarks, callers 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 Faron Pollock, Vice President of Investor Relations and Corporate Communications.

Speaker 1

Thank you, and 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 Andy Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon Disclosing our Q2 2023 financial results. If you do not have this document, it is available on our Investors section of our website at masterbrand.com.

Speaker 1

I'd 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 risk can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2022 Form 10 ks and our Q1 2023 Form 10Q, which are available at sec.govand@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.

Speaker 1

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 andmasterbrand.com.

Speaker 2

Our prepared remarks today will include

Speaker 1

a business update from Dave, followed by a discussion of our Q2 2020 financial results from Andy along with our current 2023 financial outlook. 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.

Speaker 2

Thanks, Barron. Good afternoon, everyone, and thank you for joining us here today on our Q2 2023 earnings conference call. Master Brand delivered a quarter of strong financial performance. Net sales in the 2nd quarter were in line with our expectations As lower volumes from softer end market demand were partially offset by higher average selling price. Despite this sales decline, We delivered flat adjusted EBITDA year over year.

Speaker 2

Adjusted EBITDA in the Q2 of 2023 was $106,300,000 Compared to $106,800,000 in the Q2 of 2022. Our ability to preserve adjusted EBITDA dollars on lower sales We have adjusted EBITDA margin considerably higher than last year with 281 basis points of year over year margin expansion. This was also higher than our internal estimates going into the quarter as our teams continue to execute at a high level. We also made great improvements in working capital and delivered strong free cash flow within the quarter. Our supply chain efforts are in full swing And we are ahead of plan on our inventory reductions from last year's investments.

Speaker 2

This along with improvements in accounts receivable Helped us generate free cash flow of $123,400,000 in the Q2 of 2023, an 82% increase over the same period last year. Our strong free cash flow is allowing us to continue to invest in the business, paying down debt and return value to shareholders at the same time. One method of returning value to shareholders is through our previously announced share repurchase program, which we began executing on this quarter. These financial results are only possible because of the team's consistent execution. Our focus on utilizing the established tools of the master brand way It's allowing us to repeatedly achieve or exceed our operational targets and make meaningful progress on our strategic initiatives, Aligned to grow, lead through lean and tech enabled.

Speaker 2

Today, I'd like to share some more details on how those initiatives help deliver such an outstanding quarter And some of the investments we've made in the quarter that we believe will drive growth in future periods. Before I do that, I'd like to provide you with a brief update on what we saw in our end markets during the Q2. If you remember, at the time of our last earnings call, Our customers that serve the new construction market were performing better than anticipated. This strength continued through the quarter as builders benefited from a pause in interest rate hikes Historically low inventory levels of existing homes for sale. Our flexible manufacturing network enabled us to service this sequential increase in demand from builders, Particularly production builders, helping drive our Q2 financial performance.

Speaker 2

While year on year demand for new construction is still down overall, We're encouraged by the trajectory of this end market and recent builder commentary. The repair and remodel market, Which we serve through our dealer and retail customers has become more dynamic. While the U. S. Retail channel was largely in line with our expectations in the Q1, We saw a slightly greater sequential POS decline in the Q2 than anticipated.

Speaker 2

We expect this demand to remain soft for the balance of 2023. As we have previously discussed, we work very closely with our retail partners to manage inventory reductions and appropriately level set our production to accommodate their needs, allowing us to preserve margin as demand slows. Our business with U. S. Dealer customers improved sequentially as expected, In line with normal seasonality.

Speaker 2

However, we are hearing from our dealer network that the end consumer is getting multiple quotes before doing a remodeling project And being more thoughtful with their budget. This focus on cost is driving some trade downs as people look to give up features to achieve a desired price point. As we've discussed before, our breadth of product offering from premium to stock allows us to work with all our customers. We can shift between product lines to find the right solution for them at their various price points. This presents a headwind to net sales and adjusted EBITDA dollars, But our adjusted EBITDA margins are relatively unaffected by shifts in product categories.

Speaker 2

We don't often talk about the Canadian market given its relatively small size compared to We have seen both the new construction and repair and remodel markets in this region underperform our expectations. We are taking actions to address the softening demand, but we expect this portion of our business to continue to be weaker in the second half of twenty twenty three. On balance, new construction seems to be trending a little better and repair and remodel is trending a little worse than our prior expectations. Regardless of these end market shifts, we remain confident in our ability to continue to drive our strategic transformation forward. As I mentioned earlier, Our Q2 is largely a result of our continued operational excellence.

Speaker 2

This includes both continuous improvement efforts and our strategic initiatives. Our Align to Grow initiative, specifically our supply chain work had a meaningful impact on our Q2 financial performance. Our tech enabled initiative is already benefiting the organization and our rapid execution is enabling us to increase the number of projects launched And accelerate other projects already in progress. There's a lot of exciting work underway, so I'll spend a little time discussing both of these areas further. For those of you who remember our Investor Day, you'll recall that we discussed our supply chain as a near term opportunity for our Line to Grow initiative.

Speaker 2

Our ability to consolidate and improve the efficiency of our supply chain was limited by the complexity in our product offering and manufacturing processes. As we implemented our common box initiative and deployed standard processes across the plants, organizing our extended supply chain and realizing the full benefits of our scale a possibility. Given the supply chain challenges faced during COVID, our ability to make changes was limited. Now in 2023, we've been able to focus on our supply chain optimization. We are realizing the benefits of these efforts earlier than expected, Which helps support our strong margin performance in the Q2.

Speaker 2

While it's still in its early stages, our tech enabled initiative is already improving operations Contributing to our financial performance. As a reminder, the goal of this initiative is to simplify and modernize our technology foundation To drive better insights and outcomes for the business. This can be on the plant floor, in the back office or customer facing. I mentioned in a prior call, we've been implementing RFID technology across our facilities. RFID tags help improve inventory tracking and accuracy.

Speaker 2

This automated tracking has allowed us to save on labor as individuals that previously spent time tracking parts have now been reallocated to other more value added areas. Additionally, the improved inventory accuracy has allowed us to control working capital more tightly. Our improved technology foundation goes beyond the plant floor into the back office as we look to get near real time analytics across the company. We continue to enhance our data lake to support this effort. We recently consolidated another facility onto a common ERP platform.

Speaker 2

The process was seamless as our digital and technology did a great job partnering with operations to get this done. Adding manufacturing, customer, consumer and pricing analytics to our data lake Strengthens our technology architecture and increases our ability to act with speed and agility. Those are some examples of how our tech enabled initiative Supporting the business today. We are also investing in additional technology to improve the overall buying experience for our customers. We've accelerated investment in new tech platforms that improve our connection with our channel and expect to roll these improvements out late this year or early 2024.

Speaker 2

The tools of the Master Brand Way are deeply embedded in this initiative. We utilize cross functional agile teams through every phase of development and implementation, Making sure that we have all the inputs needed to get the right technology in place. Agile also helps us reduce waste in the process, Identifying barriers early and keeping the team focused on eliminating those barriers, so that when a new technology is launched, it works and adds value. It's early days for us in our tech enabled initiative, but our accelerating investment in these technologies will make them more robust and bring value to our customers sooner. Based on our strong financial performance and the project pipeline supporting our strategic initiatives, we've decided to increase our investment spending for 2023.

Speaker 2

Again, a lot of exciting work taking place across the company and a softer demand environment presents an ideal time to prepare for future growth. With these investments, as demand strengthens, we believe we can grow in excess of the market as outlined in our long term targets. Now before I hand the call over to Andy, I want to address another area of success in the quarter. I'm pleased to say that in June, Master Brand published Inaugural Environmental, Social and Governance Report. I've said this on several occasions.

Speaker 2

Being a leader in the industry comes with an even greater responsibility To do what's right for all stakeholders. We take this commitment seriously and I'm extremely pleased with our ESG efforts to date. Along with the report, we launched an ESG page on our corporate website under the About Us section of our homepage, where you can find the ESG report Along with future updates on our ESG journey. And this journey is continuing. After publishing the report, Master Brand received notification It was being recognized as one of America's Safest Companies by EHS Today Magazine.

Speaker 2

For over 20 years, America's Safest Company's competition has sought to identify those characteristics that differentiate great safety programs from good ones. We're pleased to be recognized for our And we will now begin the call over to Andy for a closer review of our Q2 financials

Speaker 3

Thanks, Dave, and good afternoon, everyone. It's great to be joining you here today. I'll begin with an overview of our Q2 financial results, and then I'll discuss our updated 2023 outlook. 2nd quarter net sales were $695,100,000 an 18.8 percent decline compared to $855,600,000 in the Same period last year and in line with our expectations. The anticipated volume declines in the market were partially offset by higher net average selling price, primarily attributable to previously implemented pricing actions.

Speaker 3

As I discussed on our last call, the 2nd and third quarters of last year We're particularly strong as we benefited from a higher than usual backlog. So we are in a period of more challenging year over year comparisons. Gross profit was $236,200,000 in the quarter, down 5.3% compared to $249,600,000 in the Q2 of last year. However, gross profit margin expanded 480 basis points year over year From 29.2 percent to 34%. This significant margin expansion was primarily due to our strong operational performance.

Speaker 3

In particular, the supply chain portion of our Align to Growth strategic initiative is paying off and delivering ahead of schedule. In addition, we are being extremely thoughtful and diligent as we take steps to manage our capacity in a dynamic environment. We are still benefiting from the restructuring actions we took last year and in the first half of twenty twenty three. Our restructuring related savings are tracking ahead year to date with an expected savings of over $5,000,000 per quarter in 2023. Also important to mention, our 2nd quarter performance includes insurance proceeds of $2,200,000 related to the tornado damage Sustained at our Jackson, Georgia facility earlier in the year.

Speaker 3

Selling, general and administrative expenses were $141,700,000 14.6% lower compared to the same period last year. As I've previously discussed, we were allocated a portion of But if you compare the impact of the 2, it is a net savings year over year in 2023. You should expect increased SG and A in the second half of the year versus the first half as we continue to ramp up the pace of investment in our strategic initiatives. I'll provide more color on this when I discuss outlook shortly. We delivered net income of $51,200,000 in the 2nd quarter compared to $40,900,000 in the same period last year.

Speaker 3

The 25.2% year over year increase was driven by a $26,000,000 Asset impairment charge related to a trademark in the Q2 of 2022 that did not reoccur this year. This was partially offset by Q2 2023 interest expense of $17,200,000 related to debt necessary to fund the dividend to Fortune Brands at the time of the spin. As a reminder, in 2022, we did not have any external debt assigned to our balance sheet, And therefore, there was no external interest expense in our earnings during the prior year. Diluted earnings per share were $0.39 In the Q2, an increase from a pro form a diluted earnings per share of $0.32 in the Q2 last year. Please note that prior year pro form a diluted earnings per share is calculated using 128,000,000 shares outstanding.

Speaker 3

As under U. S. GAAP, it is assumed that there were no dilutive equity instruments prior to separation as there were no equity awards of MVC outstanding. We held adjusted EBITDA flat at $106,300,000 compared to $106,800,000 in the same period last year despite significantly lower volumes. Adjusted EBITDA margin expanded 281 basis points to 15.3 Compared to 12.5 percent in the comparable period of the prior year due to very strong gross margin performance along with savings from our continuous improvement, strategic initiatives and restructuring actions.

Speaker 3

We delivered very strong margin performance this quarter, And we will continue to methodically execute on pricing strategies, supply chain improvements, cost controls and continuous improvement initiatives throughout the back half of the year, while also accelerating the pace of our business investments. We calculate adjusted EBITDA by removing the impact of non operational results And special items from EBITDA. Our definition of adjusted EBITDA includes estimated net cost savings as a standalone company And excludes separation costs, restructuring charges and restructuring related items, asset impairment charges and defined benefit actuarial gains and losses. Turning to the balance sheet. We ended the 2nd quarter with $110,200,000 of cash on hand And $410,900,000 of liquidity available on our revolver.

Speaker 3

Net debt at the quarter end was $705,000,000 resulting in a net debt to adjusted EBITDA leverage ratio of 1.7x, down from 2x at the end of the Q1 of 2023, Our second successive quarterly reduction. Our balance sheet remains strong with the financial flexibility to invest in the business for growth. Operating cash flow was $194,000,000 for the 6 months ended June 25, 2023, compared to $76,100,000 in the comparable period last year. This significant year on year improvement And operating cash flow reflects the execution of our working capital improvement plans as well as terrific operational performance. We expect our working capital to continue to decrease as the year progresses.

Speaker 3

Capital expenditures for the 6 months ended June 25, 2023 were $11,400,000 We now expect to spend $50,000,000 to $55,000,000 in 2023 with the majority of cash outflows scheduled for the second half of the year. Our projects are on track. However, we believe our capital Spending will be lower than prior guidance due in general to project costs being favorable to original estimates. Free cash flow was $182,600,000 for the 6 months ended June 25, 2023, compared to $54,000,000 in the comparable period last year. This is a $128,600,000 improvement year over year.

Speaker 3

We continue to expect free cash flow in excess of net income for 2023. Finally, as you know, on May 9, We announced the authorization of a stock repurchase program under which we may repurchase up to $50,000,000 of MasterBread common stock. During the quarter, we repurchased 404,858 shares of our common stock under this program at a cost of approximately $4,400,000 or an average of $10.89 per share. Turning to our outlook. We remain optimistic about the increased demand we've seen from our customers servicing the new construction market and expect this trend to continue through the balance of the year.

Speaker 3

For those customers servicing the repair and remodel market, we anticipate weaker conditions will Additionally, we believe the entirety of the Canadian market will be weaker in 2023. Given this backdrop, we expect net sales in the second half of twenty twenty three to be down mid teens year over year. We expect normal seasonality in the remainder of the year as we previously stated, but it's important to note that we have an extra week in the 4th quarter based on our normal 4.4.5 fiscal calendar. From an adjusted EBITDA standpoint, we plan to build on the strong momentum we developed in the first half of twenty twenty three. The team's better than anticipated progress on continuous improvement and strategic initiatives Gives us the confidence to accelerate our investment spending and position the company for future growth.

Speaker 3

Our original 2023 outlook called for strategic investments of $10,000,000 to $15,000,000 for the full year. With roughly $6,000,000 spent in the first half of twenty twenty three, We now plan to spend $10,000,000 to $15,000,000 in the second half of the year, bringing our estimated full year 2023 investment spend to $16,000,000 to $21,000,000 Based on our strong operational performance and this revised investment spending, We are raising our adjusted EBITDA outlook range to $345,000,000 to $365,000,000 a $25,000,000 increase at the midpoint compared to our prior outlook. On this updated range, we now expect adjusted EBITDA margins of roughly 12.5% to 13% for 20 This revised 2023 outlook reflects our ability to maintain or expand adjusted EBITDA margins year on year even in a softer environment. This outlook does not contemplate any additional insurance proceeds related to the tornado damage sustained at our Jackson, Georgia facility earlier in the year. We have reduced our expected 2023 interest expense to be $65,000,000 to $70,000,000 and maintained our anticipated 2023 tax rate of approximately 26%.

Speaker 3

The established tools and principles from our business system, the Master Brand Way, have helped the team deliver strong performance in the first half of twenty twenty three. We are confident that we can extend this performance through the remainder of the year and position the company to achieve its long term financial targets discussed at our Investor Day last year. And with that, I'd like to turn the call back to Dave.

Speaker 2

Thanks, Andy. Overall, we're very pleased with our 2nd quarter performance. The team's ability to maintain adjusted EBITDA dollars on declining sales and deliver outstanding adjusted EBITDA margin expansion is a testament to the strength of the This culture is driving our continuous improvement and strategic initiatives forward at an exceptional pace. The momentum we developed in the first half of twenty twenty three gives us confidence to raise our adjusted EBITDA outlook for the full year and accelerate our investment spending. Lastly, I would just like to thank our more than 13,000 associates at Master Brand for their hard work and dedication.

Speaker 2

And with that, I'll open up the call to Q and A.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from Adam Baumgarten with Zelman and Associates. Please proceed with your question.

Speaker 4

Hey, good afternoon. Nice quarter, guys. I guess, maybe starting on pricing, how should we think about the impact of Price in the back half of the year, do you still expect it to be positive? And are you seeing any pricing pressure at this point across any of the channels?

Speaker 2

Yes. Thanks, Adam. The way I described the pricing environment today is it's we're kind of back to normal pricing environment. We have not raised price this year nor do we feel that we need to. And so there's a couple of different Aspects that I'll talk to about the current, what normal looks like.

Speaker 2

So first off, we do have some contracts with some large Customers that are index based and so those are going to move with the indexes as they go. And so we're seeing that as material costs do come down. We're seeing some of those come down a bit. But I think I'll also go back, we've moved there is a lot of talk in the market of people wanting a lower Cost for their project and so we spent a lot of time working with customers across all different parts of the market to get them into the right configuration. So to think of it as value engineering, if you will, from the designer standpoint.

Speaker 2

So using the breadth of our portfolio to move Folks into the right price point that suits their needs at the time. And then beyond that, I'd say a normal pricing environment for cabinets, as you know, has some promotions in it. I we use that sparingly, but we use it in cases where we think we need to for larger projects and things like that. But so generally, I'd say in summary, it's a normal Price environment sort of akin to the way it was before COVID and the inflation.

Speaker 4

Got it. That's helpful. And then Just thinking about that value engineering and the spectrum products that you guys offer and able to kind of hit all the price points. Do you have a sense for in the quarter at least How much the trade down you mentioned impacted just top line declines?

Speaker 2

Yes, I don't think we really have a number to give you. It's definitely a factor. It Plays into the year over year revenue numbers. But again, it was at least in the second quarter was in line. Obviously, I think we hit the revenue number that we thought we would.

Speaker 2

And I think for the full year, it's not material of a change for us, but it does affect material in the sense that It's not going to be much different than what we anticipated at the beginning of the year. So I think year over year it will have an impact, but I think From our expectations and how we're planning the year, it's immaterial.

Speaker 4

Okay, got it. And then just lastly for me, just on the you mentioned consolidating A facility onto your ERP system, how many more facilities do you still have that you can get those benefits from?

Speaker 2

Yes. I mean, I kind of look at the ERP, to To some extent, I hazard to bring it up because it seems like such a pedestrian thing to talk about when you're talking about technology today. But we do have a number of facilities. It's rough order of magnitude about, I'd say, 5 to 6 more that need to have modernization put in. But really the key to that is that that allows us to bring the data into a more Unified picture for the company and this is not a lock, stock and barrel redo the ERP system.

Speaker 2

This is upgrading To the latest version or a different system, but none of these are very large projects where we're Taking massive amounts of resources to do them. So I think that generally speaking, we still have a roadmap of things to go do. That's part of Some of the things that we're accelerating, but I think to me ERP is kind of get it done and move on. It just helps us with the data, Seeing certain parts of the business with a little more clarity than we've seen in the past and being able to react to it. So we have workarounds for that today, obviously, but it just makes things more efficient, the more you do that.

Speaker 4

Okay, got it. Thanks. Best of luck.

Speaker 2

Yes. Thanks, Adam.

Operator

Our next question comes from Garik Shmois with Loop Capital Markets. Please proceed with your question.

Speaker 5

Hi, thank you. Congrats on the quarter. I wanted to ask first just with respect to the margin walk for the second half of the year. Certainly, you had a very strong first half and the second half outlook implies some sequential deceleration. Just wondering if you can go into some detail So what you're seeing is some of the drivers sequentially.

Speaker 5

I think you did call out an increase in investments relative to Before, are you seeing any other changes, whether it's with respect to mix or costs Sir, anything else would speak to the first half, second half moving margin?

Speaker 2

Yes, sure. I'll give you some maybe highlights and if Andy wants to fill in If I missed anything, but generally speaking, let's start with the top line. The revenue will It will be smaller as we go. So Q3 will be slightly less than Q2, Q4 typically is the lowest or 1st and Q4 are typically lower. So there's a revenue volume impact on overall profitability.

Speaker 2

We are increasing our investment as we said, I think Significantly from what we had anticipated before because I think we can afford to do that and I like the list of projects that we have and this is accelerating certain ones of those. And then we do the Q4 is always 4th and Q1 always have a lot of holidays in them and they're really inefficient times to be running the plants. And so you do see an impact on that. And it's one of those where if I were you to ask the question, well, don't you guys have a very flexible network? Do, but you don't flex For 1 week Christmas holidays, you kind of just absorb that.

Speaker 2

So you'll see that if you look back through history, you'll see that we have this kind of Pattern to our profitability through the year. Last year Q3 was the strongest. This year, I think Q2 will be the strongest. We're going to have a little bit of that dynamic Just from some inefficiencies around how you run the plants based on the time of the year And so forth. Andy, is there anything

Speaker 3

I missed on that? No, that's exactly it. It's the totality and then the

Speaker 4

strategic initiative investment.

Speaker 5

Understood. No, that's helpful. I wanted to follow-up just on the R and R side of the equation. You said that consumers are being more selective and are being more budget conscious. Outside of the trade down that you're seeing right now, are you seeing any change in whether it's project size or an increase in Cancellations by chance?

Speaker 2

Yes, I wouldn't say cancellations, no. I think the dynamic is it's an odd one at this time of year. I think You're seeing this in the press too. I mean people are spending more on their vacations this year and that's probably dollars we're competing with. So What's interesting about it is you see more activity of people interested in redoing their kitchens.

Speaker 2

They're just not pulling the trigger on it right now. So I think That gives us pause. I don't think it's a long term problem. I think it's people are either building up their budgets to go do it Or they're dreaming a little bit now and eventually we anticipate that they're going to want to do the kitchen at some point or the bathroom. So I think there's just a bit of distraction for the consumer.

Speaker 2

And I think the consumer is also a bit in a wait and see mode. I mean, you see People setting up accounts for home equity loans, but they're not taking the money out, things like that. And so those are kind of the kinds of things we're And I think if you talk to our dealer network, they'd say that traffic is down and that people are shopping around a bit more. So it may just be that the lag of people thinking about their kitchens, they're waiting a little longer to do it. And so we got a little bit of an air pocket in the actual order book Because of that, again, as we look at the market, we think we're going to kind of be right in line with where we thought for the year in terms of revenue.

Speaker 2

It's just going to come from different parts of the market. The builder market is stronger than when we talked in the last quarterly Yes. Builder, we were questioning what's going to happen towards the tail end of the year. We're more confident today that builders are going to continue to build and they brought starts up and so forth. So I think We're trading one for the other.

Speaker 2

But yes, R and R in general is a little tepid at the moment. But again, I think the long term fundamentals are good for us. And so I'm not too worried about it.

Speaker 5

Understood. Last question is just on the new construction side. Can you remind us what the lag is at this point between Housing starts and when you intend to see the sale?

Speaker 2

Yes, it continues to come down. Builders still are carrying an excess backlog Of homes under construction, so that's it's still got a bit of noise in it. But generally speaking, I think that by the end of this year, they'll be on PACE to be kind of normalized in terms of starts with completions. For us, it's typically towards The tail end of whatever their cycle time happens to be, floors have to go in, windows and doors have to be on and so forth in a house before they put cabinets in. So it's The later third of a build is where we tend to see the cabinets go in.

Speaker 2

And our Lead times have come down are any inventory that is in the system is out. So I think we're now kind of what I'd say is a normal book and turn pace for that. So we get the order Several months into a start.

Speaker 5

Understood. Thanks again. Best of luck.

Speaker 4

Thanks, Derek.

Operator

Our next question comes from Tom Mahoney with Cleveland Research. Please proceed with your question.

Speaker 6

Hello, good afternoon. I wanted to ask, you talked about material cost savings and indexes that are moving lower. Can you Quantify what the input cost bucket looks like inside of the second quarter and What would you anticipate to flow through inventory as input costs ease for you?

Speaker 2

Yes, I'd say we're not going to we don't Quantify specifically, our material cost in general is about half of 50% of sales. That's about the best I can give you.

Speaker 3

50 percent of cost.

Speaker 2

Sorry, 50 percent of cost of sales. Thanks, Andy. The In terms of inventory, I'll take the moment here to say that the supply chain organization within Master Brands did an amazing job in the first half of this year. And as you know, we invested in inventory last year in the first half and it did an amazing job Working through that much quicker than we expected. That's why you see strong cash flow that we had in the quarter.

Speaker 2

And so I think we're in a position now where our inventory It's getting closer to normal. It's not all the way there yet, but our inventory costs are on balance with where what we're paying for new Incoming inventory. So I think we're past the bubble, if you will, of what was more expensive inventory. In terms of the total cost Difference, we're certainly not back to prior to inflation type costs for material, but Material sequentially has continued to come down.

Speaker 6

Okay. And then the other question I wanted to ask was, How do you view growth relative to the market in the updated 2023 view? I know there was an issue of working down backlog that muddied the waters there. And then can you talk about how the buckets of incremental investment that you're pulling Forward are linked to accelerating growth going forward relative to the market?

Speaker 2

Yes, absolutely. So I think we're still having that backlog period Still the work through, it was not it wasn't done by the end of the Q2 last year. So Q3 in particular is going to be A big chunk of that backlog is not there. So comparing Q3 to Q3 of last year is that's going to be the biggest decline of the year. In terms of the market, I'd say this year we're probably on par with the market, if you take that backlog portion out.

Speaker 2

And really the work that we're doing on these growth initiatives is probably more centered on 2024. Some of these are customer and consumer facing type initiatives and we're not we don't have that completed yet. And so until they're completed, they're really not going to generate any kind of outsized growth, but we're excited about them. And beyond that, there's the norm what I'd call the normal Going and winning share by selling the value proposition, which we think is a strong one and we're continuing to do that every day. I think with our large builder customers, with our large retailers, we're out there every day trying to win share and I think we've been Successful with that.

Speaker 2

Those types of wins tend to take a little longer to come into the P and L, when you change a big program over. But Our goal with the growth initiatives is to grow across all parts of the business. And so some of them take time because when you win, it takes time to change over and some of them Because the initiatives that you're building to get that growth take time to develop. But that's why we think it's prudent for us to spend more money this year to go after that. So we're really Ready to go in 2024.

Speaker 6

Great. And then I think in the Q1, you had highlighted some restocking Of the wholesale channel facing builder customers that benefited revenue in the quarter, was there any moving pieces around that in the second quarter, Maybe did recur, didn't recur, continued, didn't continue.

Speaker 2

Yes. I think maybe if I remember correctly, it might be the flip of that. We serve a number of our building builder customers through a distribution network and I think they were destocking through that period. So there was a That was Q4 and big into Q1. So I think that's sort of the opposite of perhaps how you're We're trying it here.

Speaker 2

So, I'd say no, we're kind of out of that mode now. We're in what I'd say as houses get started, we get the order Within a couple of months and then we deliver it within a couple of weeks. So we're in what I'd say is a normal pace for the new construction market in terms of Our order is in delivery.

Speaker 6

Okay, great. Thank you.

Speaker 2

Thank you.

Operator

That's all the questions we have today. I'll hand the call over to Farron Pollock again.

Speaker 1

Thank you, operator, and thank you, everyone, for joining us. Appreciate your interest and look

Speaker 2

forward to speaking to you in the future.

Speaker 4

This concludes our call.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your

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Key Takeaways

  • Despite an 18.8% decline in net sales due to softer end-market demand, MasterBrand delivered flat adjusted EBITDA at $106.3 million and achieved 281 basis points of year-over-year margin expansion.
  • Supply chain optimization under the Align to Grow initiative and RFID deployment from the Tech-Enabled program drove faster inventory reduction and contributed to an 82% increase in free cash flow to $123.4 million in Q2.
  • MasterBrand generated $182.6 million of free cash flow in H1 2023, reduced net debt to $705 million (1.7x adjusted EBITDA), and repurchased $4.4 million of shares under its $50 million buyback program.
  • The company raised its 2023 adjusted EBITDA outlook by $25 million at the midpoint to $345–$365 million and increased strategic investments to $16–$21 million to position for future growth amid a weaker repair and remodel market.
  • In June, MasterBrand published its inaugural ESG report and was named one of America’s Safest Companies, underscoring its commitment to environmental, social, and governance initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
MasterBrand Q2 2023
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