Welcome to MasterBrand's Fourth Quarter and Full Year 2022 Earnings Conference Call. Please note that this conference call is being recorded. I would like to turn the call over to Farand Pawlak, Vice President of Investor Relations and Corporate Communication. Thank you. You may begin.

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 Andi Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our fourth quarter and full year 2022 financial results. If you do not have this document, it is available on the Investors section of our website at masterbrand.com. I'd like to remind you that this call will include forward-looking statements either in 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 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 under the heading Risk Factors on our Form 10 and other filings with the SEC, which are available at sec.gov and 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 these statements, except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables, recurring in the press release issued earlier this afternoon and are also available at sec.gov and masterbrand.com. Our prepared remarks today will include a business update from Dave followed by a discussion of our fourth quarter and full year financial results from Andi, along with our 2023 financial outlook. Finally, Dave will make some closing remarks before we host a question-and-answer session. And with that, let me turn the call over to Dave.

Thank you, Farand, and good afternoon, everyone. I appreciate you joining us today for our first earnings conference call as a stand-alone public company. It has been a few months since our management team and I introduced MasterBrand at our Investor Day in New York. Since then, we have successfully completed our spin-off from Fortune Brands and have continued to make progress on our short-term and long-term objectives. This afternoon, I will update you on our transformation efforts and how we are addressing current market conditions. Before that, I will provide a brief overview of our fourth quarter and full year financial performance. Andi will give more details later in the call, and we will share our outlook for 2023. I am pleased with our strong finish to 2022, achieving net sales of $784.4 million in the fourth quarter, which is over a 5% increase compared to the fourth quarter of 2021. This growth was driven by previously announced price increases and strong performance from select brands. For instance, our mantra line, which features affordably priced full plywood construction products, grew in double digits year-over-year in the fourth quarter, outpacing other segments of our business. However, net sales growth was partially offset by volume declines due to higher interest rates and general economic uncertainty affecting our customers. Adjusted EBITDA for the quarter was $97.8 million, up from $66.7 million in the same period last year, driven by a favorable net average selling price and continuous improvement benefits that offset material, logistics, and personnel inflation. The adjusted EBITDA margin expanded to 12.5%, compared to 9% the previous year, reflecting an increase of 350 basis points. The fourth quarter concludes an excellent full year for us, with net sales totaling approximately $3.3 billion, representing year-on-year growth of about 15%, slightly exceeding our anticipated range of 13% to 14%. For the full year, adjusted EBITDA was $411.4 million, reflecting a year-on-year increase of around 29% compared to 2021. Moreover, adjusted EBITDA margins increased by 150 basis points to 12.6%, aligning with our expected margin performance. We achieved these results despite a softening in our end markets. I would like to provide some insights into what we are observing in both new construction and repair and remodel sectors. In early December, we noticed a slowdown in builder channel orders as we approached the end of the year, which varied by region. The new construction market in the Southeastern U.S. has remained relatively stable compared to other areas. Traditionally faster-growing markets in the West are stable but slower than last year. Overall, while we saw the new construction market stabilize at the start of 2023, we anticipate challenges in this area. In repair and remodel, both through dealer and retail channels, activity has been steady since the end of the third quarter, although at lower levels compared to last year. While our high-priced custom products have remained resilient, there is a noticeable shift toward lower-priced products. Our diverse range of offerings allows us to adapt to this demand shift. Our mantra brand is an excellent example of a quality, lower-priced option for customers aiming to cut costs. As discussed during our Investor Day, our multi-brand strategy is intended to engage with the market and meet consumers' needs, whether regarding style or price. We expect these market conditions to persist throughout much of 2023, with larger declines in new construction and more moderate declines in our dealer and retail channels serving repair and remodel. Andi will provide further details on our outlook later in the call. Although 2023 appears to be a softer environment, we believe that the long-term trends for the housing market and the building products industry are favorable. The significant aging of housing stock, with the median house age now at 39 years, and the U.S. being underbuilt by approximately three million homes provide a positive long-term backdrop. Over the past few years, we have established a strong track record of continuous improvement. Since commencing our transformation in 2019, we have increased net sales by nearly $1 billion, achieving a compounded annual growth rate of 11%. During the same three-year period, adjusted EBITDA has also risen by over $150 million, corresponding to a compound annual growth rate of approximately 17%. The impressive results we've attained over these years stem from consistent execution. While having a clear strategy is crucial, it must translate into results, which is why execution is key to our success. The unique culture at MasterBrand is dedicated to leveraging the established tools of the MasterBrand Way to meet our strategic goals. At our Investor Day, we highlighted why MasterBrand leads the North American residential cabinet industry: our top-tier dealer network, unmatched product and brand portfolio, and operational excellence at scale. The ongoing transformation of the company is how we will succeed in the future, and it fuels my excitement about our growth potential. In the fourth quarter, we made significant progress in the three key initiatives driving our future growth: align to grow, lead through lean, and tech-enabled. The align to grow approach utilizes the 80/20 tools to identify ideal customers, understand their needs, and efficiently deliver tailored solutions. I discussed some notable successes related to our common box initiative at our Investor Day, and I am pleased to report that we continue our progress in this area. During the fourth quarter, we transitioned two more facilities to one of our four common construction platforms. With our operations in Winnipeg now converted, approximately 75% of our facilities utilize the common construction method. This has substantially reduced the number of component SKUs and eliminated unnecessary complexity that our customers do not notice or value. Additionally, the common box enables us to shift volume across our platform, which has been highly beneficial as we manage capacity in a softer market. We have now adjusted our operations to ship volume across our manufacturing network, allowing us to close three facilities in 2022 without impacting customer service and delivery. Recognizing that our business can be cyclical, our strategic transformation is designed to create an organization that can flexibly adjust production levels based on market conditions. This flexibility is one reason we believe we can maintain superior margin performance in any market. The lead through lean initiative employs a set of tools to foster future growth within the organization. Many of you may be familiar with these tools, which are foundational rather than distinctive. It is the disciplined application of these tools, coupled with our culture, that truly sets us apart. We consider lead through lean to be the ultimate engagement tool. Weekly, we host numerous events that empower our associates with the resources they need to solve problems and enhance efficiency. In the fourth quarter alone, we conducted 59 Kaizen events and over 350 events throughout the year, identifying around $80 million in addressable waste. With this information, we can prioritize these areas for future cost-saving initiatives. Our previous initiatives in 2022 provided over $40 million in accumulated savings. When we involve employees in addressing issues with the right tools and training, they respond positively, which fosters leadership and encourages internal promotions. Given the ongoing labor constraints, our talent development efforts are key to retention. That is why we emphasize trusting the tools, empowering the team, and moving forward. Our final initiative, which still has much room for growth, is tech-enabled. We are working to simplify and modernize our technology foundation to deliver better insights and outcomes for the business. We aim to utilize data and analytics more effectively in the back office, on the manufacturing floor, and with our customers to create additional value. In the fourth quarter, we made significant advancements in this regard. In the back office, we improved data consistency and expanded our data lake and the use of new digital dashboards that standardize key metrics across sales, orders, receivables, purchases, operations, and incentives, providing our team with near real-time information for decision-making. On the manufacturing floor, we outlined additional automation solutions, including further RFID utilization and pallet serialization implementation, which will enhance inventory accuracy and visibility of materials. We believe these actions can yield cost savings as early as the first half of 2023. In engagement with customers, we successfully piloted a third-party delivery management software that enhances the home delivery experience by providing improved order tracking information. As you can see, there have been numerous operational enhancements made by our team since our last public address in December. Now, I'll turn it over to Andi for a detailed review of our financial performance. Andi?

Thanks, Dave, and good afternoon, everyone. Like Dave said, it's great to be joining you all here today on our first earnings call. I'll begin with an overview of our fourth quarter and full year financial results, and then I'll discuss our 2023 outlook. Fourth quarter net sales were $784.4 million, an increase of 5.3% over the same period last year. This growth was primarily driven by previously implemented price, partially offset by volume declines in certain areas of our business as higher interest rates and general economic uncertainty negatively impacted the end consumer. Gross profit was $215 million in the quarter, up over 14.4% compared to $187.9 million in the fourth quarter of last year. Gross profit margin expanded 220 basis points year-over-year from 25.2% to 27.4%. Year-over-year growth and margin expansion were driven by higher net ASP and continuous improvement initiatives, which more than offset inbound logistics, material and labor inflation in our factories. Selling, general and administrative expenses were $161.3 million, up 18% compared to the same period last year, primarily due to separation costs, personnel-related inflation, outbound logistics costs and investments in our strategic initiatives, primarily in our tech-enabled efforts. This was partially offset by savings from our continuous improvement initiatives. SG&A as a percentage of net sales was 20.6%, an increase of 220 basis points compared to the same period last year. As a reminder, we classify outbound freight in SG&A, so any inflation in that area increases our SG&A spend. We delivered net income of $15.4 million in the fourth quarter compared to $35.2 million in the comparable period last year, primarily due to the combined impact of intangible asset impairment, restructuring charges and restructuring-related items as well as additional Fortune Brands Home & Security allocations and one-time separation costs in the fourth quarter of 2022. These intangible asset impairments, restructuring charges and restructuring-related items were largely due to our continued strategic transformation resulting in a leaner, more agile manufacturing footprint. Excluding the impact of these charges, along with net cost savings as a stand-alone company, separation costs and defined benefit actuarial gains and losses, adjusted net income increased 66.6% year-over-year to $67.5 million. Diluted earnings per share were $0.12 in the fourth quarter, down from a pro forma diluted earnings per share of $0.27 in the fourth quarter last year. It is important to note that prior year pro forma diluted earnings per share is calculated using 128 million shares outstanding. 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 MBC outstanding. Adjusted diluted earnings per share were $0.52 in the fourth quarter. This is a 62.5% year-over-year increase compared to a pro forma adjusted diluted earnings per share of $0.32 in the fourth quarter of 2021. Adjusted EBITDA was $97.8 million in the fourth quarter, an increase of 46.6% compared to $66.7 million in the same period last year. Our definition of adjusted EBITDA includes estimated net cost savings as a stand-alone company and excludes separation costs, restructuring charges and restructuring-related items, asset impairment charges and defined benefit actuarial gains and losses. Adjusted EBITDA margin expanded 350 basis points to 12.5% compared to 9% in the comparable period of the prior year. Moving on to our full year results. We delivered net sales of $3.3 billion in 2022, an increase of approximately 14.7% over the prior year. As Dave mentioned, this was slightly higher than the expectation laid out at our Investor Day. The year-over-year growth was driven by favorable net ASP, partially offset by a small volume decline. Gross profit was $940.5 million, up 20% compared to $783.9 million last year. Gross profit margin expanded 120 basis points year-over-year from 27.5% to 28.7%. Like the fourth quarter, full year margin expansion was driven by higher net ASP and continuous improvement initiatives, which more than offset material logistics and personnel inflation in our factories. Selling, general and administrative expenses were $648.5 million, up 22.9% compared to the same period last year, primarily due to higher pre-spend corporate allocations from FBHS and the inflationary impact on outbound logistics and labor costs, partially offset by our continuous improvement efforts that allow for better utilization of fixed costs and personnel. These results include $5 million of strategic investments in the business. SG&A as a percentage of net sales was 19.8%, an increase of 130 basis points compared to last year due to the reasons previously explained. I would like to note that we'll not be discussing operating income as a financial metric going forward. Operating income was used by FBHS to speak about the various operating segment's performance. As a stand-alone company, we believe our net income, EPS and adjusted EBITDA are more meaningful measures to discuss going forward. However, given we did provide near-term guidance for adjusted operating income at our Investor Day, I'm going to briefly touch on how we perform for 2022. Operating income for the full year was $203.3 million, down 13.2% from $234.3 million in 2021. This is primarily due to higher pre-spend corporate allocations from FBHS and the full year impact of intangible asset impairments and restructuring charges and restructuring-related items. Excluding restructuring charges and restructuring-related items, asset impairments, separation costs, defined benefit actuarial gains and losses and parent company allocations, adjusted operating income was $375.3 million. Adjusted operating income margin for 2022 using historical FBHS reporting methodology was 11.5%, consistent with our guidance at our Investor Day. Net income was $155.4 million compared to $182.6 million in the prior year, primarily due to higher pre-spend corporate allocations from FBHS, separation costs and the full year impact of asset impairments and restructuring charges and restructuring-related items, partially offset by the benefit of higher gross profit, including net cost savings as a stand-alone company and excluding separation costs, restructuring charges and restructuring-related items, asset impairments and defined benefit actuarial gains and losses, adjusted net income increased 30.5% year-over-year to $260.4 million. Diluted earnings per share were $1.20 in 2022, down from a pro forma diluted earnings per share of $1.43. Again, the prior year pro forma diluted earnings per share is calculated assuming that there were no dilutive equity instruments prior to separation as there were no equity awards of MBC outstanding. Adjusted diluted earnings per share were $2.02 in 2022. This is a 29.5% year-over-year increase compared to a pro forma adjusted diluted earnings per share of $1.56 in 2021. Adjusted EBITDA was $411.4 million in 2022, an increase of 29.3% compared to $318.1 million last year. Adjusted EBITDA margin expanded 150 basis points to 12.6% for the full year compared to 11.1% in the prior year. We are extremely pleased with our ability to deliver strong full year margin expansion. Turning to the balance sheet. Our balance sheet remains strong with cash on hand of $101.1 million and $265 million of liquidity available on our revolver. Net debt at the year-end was $877.9 million resulting in a net debt to adjusted EBITDA leverage ratio of 2.1x. This net debt to adjusted EBITDA ratio is based on the adjusted EBITDA provided in our earnings release, which varies slightly from the adjusted EBITDA under our credit agreement. The credit agreement definition also excludes the management equity compensation. We've chosen to lead this item in our definition of adjusted EBITDA because it is indicative of ongoing operations. Full year operating cash flow was $235.6 million compared to $148.2 million last year. This year-on-year improvement in operating cash flow is inclusive of elevated working capital due to continued inflation, inventory builds designed to mitigate supply chain disruptions and restructuring-related cash outflow and separation costs. Our teams have already taken steps to bring our working capital in line with our 2023 outlook, which I will discuss shortly. Capital expenditures in 2022 were $55.9 million, and free cash flow was $179.7 million compared to $96.6 million last year. Overall, the team delivered strong 2022 results in the face of numerous challenges. We've achieved year-over-year double-digit net sales growth and adjusted EBITDA margin expansion of 150 basis points. At the same time, we continue to invest in our business to drive our strategy and deliver the growth and margin expansion outlined in our long-term financial targets. Before turning to the financial details of our outlook, let me build on Dave's earlier market comments and the operating environment we anticipate in 2023. Since our Investor Day, we have seen market conditions further soften. At that time, we anticipated the market to be down high single digits in 2023. We now expect our end markets to be down low double digits. This market outlook reflects larger declines in single-family new construction and more moderate declines in R&R, as Dave mentioned. We believe we will continue to outperform the market, so we expect our performance to be slightly better from an order intake perspective. Our net sales will be further impacted by 2 additional factors. First, we will continue to benefit from the positive impact of price annualization in 2023 due to our previously announced pricing actions in 2022. This benefit will be partially offset by the shift we are seeing to lower-priced products in general, which will reduce overall ASP. Adjusted EBITDA margins are relatively immune to shifts in product categories, but net sales and adjusted EBITDA dollars will be negatively impacted. Second, as mentioned at our Investor Day, our backlog has returned to a more normalized level due to our strong operational performance. This will present a headwind of nearly $200 million in 2023 or roughly a mid-single-digit impact to net sales year-over-year. Taking these factors into account, we now expect our 2023 net sales to be down mid-teens year-over-year. In anticipation of this environment, we have already taken action and continue to take actions to preserve margin performance. We are proactively executing our pricing strategies, supply chain improvements, cost controls, and continuous improvement initiatives in order to maintain margins. Coupled with our relatively higher variable cost structure and our flexible manufacturing network, we believe we will have best-in-class decremental margin performance in 2023. Our management team and organization have been through these market cycles before, and we know how to navigate them and deliver results. Similarly, we also know that now is not the time to stop investing for future growth. We will continue to invest further in our strategic initiatives especially in high-return areas such as our tech-enabled initiatives. We expect additional corporate expense of about $5 million to $10 million in 2023 for investments in these areas. We believe we can balance near-term margin performance with long-term value creation for all our stakeholders. Given our net sales expectations, our ability to manage costs and our continued strategic investments, we expect adjusted EBITDA in the range of $305 million to $335 million with related adjusted EBITDA margins roughly 11% to 12% for 2023. In terms of quarter-by-quarter cadence through this year, while we won't be providing quarter-by-quarter guidance, I will highlight that we expect to return to a normal seasonal pattern in 2023. In a typical year, first quarter and fourth quarter are lower margin periods with the spring and summer seasons driving higher sales and subsequent margins. First quarter 2023 margins will be further impacted by the flushing out of higher-priced inventory. MasterBrand has delivered best-in-class margin improvements over the last 3 years, and we are on track to continue this performance utilizing the prudent tools of the MasterBrand Way in 2023. I recognize you are looking at us as a stand-alone company and creating your models for the first time. With that in mind, I will take this opportunity to provide some brief color on some other areas. Interest expense is expected to be approximately $70 million to $75 million primarily related to our $979 million of debt. We anticipate a tax rate between 25% to 26%. We are planning 2023 capital expenditures to be in the range of $50 million to $60 million as we pace our investments to align with anticipated future demand. Given the steps we have already taken to reduce working capital and these other factors, we expect free cash flow in excess of net income for 2023. Lastly, we expect no meaningful change in 2023 to our shares outstanding of approximately 128 million shares. In closing, MasterBrand has a history of delivering financial and operational excellence. While the market backdrop currently presents a more challenging environment for 2023, we believe our outlook reflects the continued strong performance you should expect from us through the cycle.

Thanks, Andi. Before we move to Q&A, I also want to take a moment to thank our more than 13,000 associates. Without them, we wouldn't have achieved year-on-year double-digit growth in both net sales and adjusted EBITDA for 2022. Our first priority is always their safety, and we're maniacal about it. I'm proud to say that in 2022, we achieved an OSHA recordable rate of 1.04, a year-on-year improvement of 5% from 2021. Over 69% better than the industry average, our goal is zero, keeping our teams safe is core to our culture. More so than ever, the concept of safety extends beyond physical. We're a leader in our industry and that leadership extends to being a good steward of resources. Accordingly, we're working to build an inclusive environment where employees feel safe coming to work and bringing their authentic selves. Tomorrow, we will recognize International Women's Day as a company. In advance of that, I would just like to thank all the women of MasterBrand for their contributions to our success. We've worked hard to bring many of the employee resource groups over during the spin from Fortune Brands. Our female-focused ERG included SAGE or support, advocate, grow and empower is for all women and their allies. Its purpose is to empower and raise the visibility of women through networking, professional development, engagement, and business opportunities. I know the group has some great events planned for tomorrow, and I look forward to them. Now with that, I will open up the call to Q&A.

And our first question comes from Adam Baumgarten with Zelman.

Maybe just to start, Dave, if you could give an update on how the company's strategy is progressing year-to-date and you gave some really good color at the Investor Day on some of the evolution you guys have driven in the business. But maybe sort of since the Investor Day, any kind of updates would be super helpful?

Yes, thanks, Adam. We have made significant progress on our strategy since the Investor Day. To highlight a couple of examples for each section, starting with align to grow, there are two key components. The first part, alignment, involves building a product set and factories that share common characteristics, allowing us to adjust production as needed to meet market demands. A relevant example, albeit unfortunate, is the severe weather in the Southeast we experienced in January, which included tornadoes in Southern Alabama that affected us as well. Our plant in Southeastern Georgia shares a building with another tenant, and during the tornado, that building sustained damage. Fortunately, our team acted quickly and was safe in the storm shelter during the incident, but the plant has been closed since then. We expect it to resume operations by the end of March. This situation illustrates our capacity to adapt and ensures that our customers remain unaffected. It also reflects the commitment to safety among our associates and demonstrates our quick response ability amidst changes. The second aspect of align to grow is centered on growth. This part directs the organization to focus on areas with growth potential, be it in specific channels, with particular customers, or certain product lines. For instance, we launched a new ready-to-assemble cabinet product in early January, based on the mantra platform, and it has been successfully introduced in selected markets during the first quarter. Next, I’ll briefly discuss the other two elements, lead through lean and tech-enabled, which complement each other. Lead through lean focuses on addressing our organization's most challenging issues and empowering all associates with the right tools. A significant part of our tech-enabled initiatives supports this effort. Recently, we've implemented lean events not only in our factories but also in our back office. Over the past few months, our back office teams have improved efficiency, reducing traction by 60%. They collaborate with our tech-enabled initiatives, where we focus on identifying and eliminating waste. The tech-enabled team then helps solidify these improvements through automation or other technological solutions. This teamwork has yielded impressive results throughout the business.

Great. That's super helpful. Just on the 2023 revenue guidance, I think you mentioned at one point outperforming the market, but it seems like that's maybe not necessarily the case given the mid-teens revenue decline versus the market down low double digits. Can you maybe walk through in more detail kind of what's driving that? And if you expect that to reverse at some point or even go the other way?

Yes, absolutely. I would describe the market right now as dynamic. Over the past few months, we've learned that underlying demand remains strong. Earlier in the year, as interest rates stabilized at the end of 2022 and into early 2023, consumers quickly reentered the market. However, we are challenged by the fluctuating nature of interest rates, and today’s consumers are more sensitive to these rates than they have been in recent years. Our approach is to avoid reacting to short-term market shifts, as that isn't a sustainable way to manage our business. Instead, we're focusing on a longer-term perspective and have structured our operational capabilities, including capacity and supply chains, around that outlook. We see a steady trajectory ahead, and while we do expect the usual seasonal patterns of spring and summer, we're aligning more closely with that seasonality. Initially, we anticipated a market decline in the high single digits; however, we have slightly revised our expectations to reflect a decline in the low teens. This change is largely due to new construction in the single-family sector, as builder backlogs have begun to decrease due to completed houses. Our expectation for this shift has accelerated more than we initially thought, contributing to the adjustment in our market outlook. Additionally, our backlog has changed significantly since the start of the year. We now consider our backlog to be at a normal level, in contrast to the inflated backlogs of 2021 and 2022, which created operational challenges. While our backlog is down approximately $200 million compared to the beginning of 2022, we view this normalization positively, as it improves visibility into customer demand and enhances our agility. When you combine the adjustments in backlog and our market dynamics, you see the overall decline. On the positive side, we anticipate gaining market share this year, with a commitment to increase our share by 100 basis points annually. Our price increases are being implemented throughout the year, which also plays a role in our overall performance. After assessing all these factors, we arrive at a mid-teens decline projection. We still see opportunities for improvement, especially as we managed our backlog more effectively than many competitors and have adjusted our fixed costs to align with the current market conditions.

Okay. And then just lastly, a couple for me. On just the kind of the biggest drivers behind the better than previously expected decremental margin guidance? And then just to clarify on the mix piece, I know the trade down is affecting ASP, but just to confirm, that's not an EBITDA margin impact, if anything, could it be actually accretive to margins with the shift?

Yes, let's take the pieces that you've asked. You talked about the decrementals. And we feel that our decrementals are now 20% or better. A couple of things on that. One is we've gotten after the fixed cost side of things ahead of this. So we come into the year feeling that we've done the fixed cost actions that we needed to, to get there. And then on top of that, our funnel I think Andi highlighted some numbers around that, that our funnel of continuous improvement has really filled in nicely, and we know we have a team that can execute on that. So we're confident in that. Your second question remind me again, sorry.

Regarding the impact of trade-down, I understand it affects the average selling price, but it appears that it doesn't negatively impact the percentage margin, particularly the EBITDA margin. Could you provide some clarification on this?

Yes, part of our efforts over the last few years has been focused on ensuring that all of our product categories reach a level of profitability that we are satisfied with. This has significant strategic implications. We aim to deliver the right products that consumers want at the right prices. Currently, in this market, consumers are considering trade-down options, and we've recognized this trend. Over the past three years, we have dedicated substantial time to develop a system capable of producing products across various price points that meet our standards.

And the next question comes from the line of Garik Shmois with Loop Capital Markets.

Thanks for the color today. First question is just on the end markets, particularly on the R&R side of the equation, you highlighted that you've seen a weaker outlook on the new residential piece. But just curious, over the last several months since Investor Day, is your outlook on the R&R side changed at all?

No. I think R&R has been very steady, even going back into the third quarter of last year. So I think we have good visibility of the pace of that market. There's going to be some ups and downs associated with interest rates because some people do borrow against their home to do those projects. So you see a little bit more activity when interest rates are down. But I think generally speaking, the pace has been very steady from last year third quarter into today.

I wanted to clarify the comment about price and mix. It seems that the negative mix will outweigh the pricing carryover, so I wanted to confirm I understood that correctly. Additionally, I'm interested in your thoughts on pricing in a potentially softer market and whether you're noticing any decrease in your bidding activity.

Yes, I understand it might have been unclear. From a margin perspective, we are mostly indifferent about the products we offer within our range. I wouldn’t say that there’s a decline in margins due to a shift toward lower-priced products. Additionally, this shift isn’t overshadowing the pricing adjustments we anticipate in the early part of this year. I apologize if I misrepresented that, but pricing will support us as we move into 2023. Regarding your other question on pricing, our priority is to transition our customers to a price point that they’re comfortable with, ensuring they maintain a manageable cost position. We put considerable effort into assisting them through our various product categories to achieve this. If they require a lower-priced product or cost-effective options for building a kitchen, which is currently a significant request from builders, we guide them toward alternative product categories that can meet their needs in a more substantial way than just lowering prices. This is our primary strategy. We do have retail partners whose pricing is indexed to the commodities that go into the products, which can fluctuate. The beneficial aspect of this approach is that it generally aligns with material costs, allowing our retail customers to capitalize on these changes. That has been our strategy so far. However, we are not completely out of the inflation environment yet, and we expect to gather more information soon about the ongoing pace, as inflation is still present in certain areas. While demand has slowed compared to a year ago, it’s essential to be cautious about assuming we are experiencing any deflation, as that is not the case.

Okay, that's helpful. This is my last question regarding the decremental margins coming in better than initially indicated. Could you discuss the sustainability of some of these initiatives to improve decrementals? If we enter a longer downturn, how sustainable is the near 20% decremental level? Conversely, if the market improves, to what extent can you achieve better than normal incremental margins?

I mean what you've just stated is kind of the goal of the strategic initiatives that we've built, starting with align to grow is designed to identify where in your portfolio you have gaps in terms of profitability and where you're not servicing the customer well enough, you're providing something that you're not getting paid for, all these kinds of things. And so it starts there. And then it moves on to our lean efforts, which really goes after every bit of waste that we have in the organization. And for good or bad, we have a lot more to do there. We know that. So that, in my view, just this opportunity. And then to me, the tech-enabled part of it, as I highlighted in my example earlier, really accelerates stickiness of change because when you automate something, you almost make it permanent. And so yes, it's aggressive. That's the kind of company we want to be. And we're going to continue to go after the waste that we have in our organization. And at the same time, use these tools to help really show our customers that we're the right partner to grow with. And we think both of those have a good effect on the P&L at the end of the day.

And the next question comes from the line of Tom Mahoney with Cleveland Research.

I wanted to ask about the components of inventory growth year-over-year at the end of the year, and you spoke to efforts to move through working capital and move it lower I guess, early in the year, in particular, but through the year, can you size those efforts or speak to what you're doing on those fronts?

Yes. I'll begin and then hand it over to Andi for more details. The majority of our inventory is in raw materials, as we don’t hold much in finished goods due to space constraints. Most of our make-to-order products are shipped immediately after manufacturing, so we generally don’t carry a lot of finished goods. We maintain direct control over this aspect, and I believe we're in a good position. Similarly, our work-in-progress inventory remains steady, and I feel positive about that as well. The significant inventory increases we experienced last year were primarily in raw materials. We began investing in this area in late 2021, anticipating ongoing supply chain challenges and the need to ensure we could deliver high service levels to our customers. This approach lasted through the first quarter of 2022, after which we recognized a need to adjust our strategy. When volumes decrease while simultaneously trying to reduce inventory, the process takes a bit longer. However, I’m proud of the team’s efforts; we increased inventory by about $70 million last year yet still achieved strong cash flow for the year. I believe we have more opportunities ahead and expect another excellent cash flow year in 2023 as we continue this work. Building inventory was a deliberate decision, and our goal now is to reduce it back to align more closely with our core products. Andi, do you have anything to add?

Yes, just I think a couple, if you remember from Investor Day, we mentioned that inventory was up year-on-year about $100 million. In reality, you'll see in the cash flow, it was up 70%, and that's because we started those initiatives early in October. So we were able to reduce inventory pretty significantly in November and December. And so far, year-to-date, we are continuing on our trend to reduce that inventory down to more normal levels, relieving that excess safety stock from the supply chain disruption.

Got it. That's helpful. And then in terms of facilities, you talked about 3 facilities offline in 2022. Are those able to come back as demand returns? Are there any further facility closures or plans contemplated in the outlook and the better decrementals that you're guiding to today? Can you talk through that?

Sure. One of the first things I addressed when I joined the company three years ago was capacity, and we've been consistently investing in the right capacity since early 2020. The facilities we took offline this year vary in circumstances. One was a facility we no longer need, which we plan to sell eventually. Another situation involves our efficiency in Winnipeg, Manitoba, where we've improved enough to operate out of one building instead of two, although we’re keeping the other building for potential growth ideas. Lastly, we have a facility that we don't currently need, so it will be idled for the time being. It will take time to bring it back online when necessary, as we will need to train staff, but it is available should the market change. Additionally, with our current capacity, we have the potential for upside in case the market performs differently than we anticipate. We're also prepared for a possible downturn and are focused on controlling fixed costs, which was our priority for most of the second half of last year.

And the next question comes from the line of Tim Wojs with Baird.

Maybe just a bigger picture question, Dave. When you think about just the goal to kind of gain share every year for the organization, I mean, are there 2 or 3 specific buckets that you're kind of targeting for those share gains? Or is it just a little bit of share in a lot of different spots?

Thanks, Tim. That's a great question. I believe that aligning to grow effectively breaks down your thought process into smaller, more manageable pieces. While it may appear more discrete, generally speaking, we have the best dealer network in the industry. However, we recognize that we don’t capture 100% of the potential revenue in every instance. Therefore, the first step is to increase our share of wallet within our existing channels. This is always our priority, and we achieve this through different service offerings or new products, like the RTA product I mentioned earlier. We've made significant progress with the Mantra product line, which has been key to accelerating its growth. The next step is to identify additional channels that we currently do not access, which is more competitive and involves some loyalty, especially within the dealer channel. We believe that aligning to grow helps us identify opportunities with the right service offerings. As we continue to develop our tech-enabled initiatives, I believe we will present some compelling advancements. Overall, our strategy can be categorized into these two broad areas, but within each area, there will be smaller, street-level initiatives based on the responsibilities we assign to our team.

Okay. No, that's helpful. From an input cost perspective, are you seeing a leveling out of input costs at this point? Are there still pockets of inflation or any signs of outright deflation?

Yes. I think there are a few points to add, and I'll let Andi provide a breakdown of our cost of goods sold, which might be helpful. First and foremost, like with pricing, we are still experiencing the effects of the inflation from last year, so that will take some time to work through. Additionally, our inventory was purchased last year, meaning some of it carries higher costs. I can say that the vast majority, if not all, of our domestically sourced materials are now on regular lead times and in standard safety stock, which is improving our turnover. We are quite satisfied with our inventory position from a domestic supply chain perspective, particularly with items such as hardwood. The overseas materials have longer lead times, which we must manage carefully. We aim to be good partners with our suppliers to help manage those inventory levels down. These two dynamics will impact our profit and loss statement, especially earlier in the year. However, we are observing some trends—certain indexes show a decline or stabilization in prices in some areas, while others have not experienced much change. Key materials we purchase include wood, particleboard, plywood, resin, which is oil-based, and steel hardware. Andi, would you like to discuss the details of our cost of goods sold?

When examining our cost of goods sold, approximately 50% is attributed to materials, which includes freight. Resin costs are impacted by fuel oil prices. Our largest purchases are wood and wood products, while the remaining sales costs consist of around 30% labor and 20% overhead, which is split roughly evenly between fixed and variable expenses. It's also important to highlight our distribution costs, which are included in selling, general and administrative expenses, while others may categorize them under cost of goods sold. These costs typically account for mid-single digits of net sales and are influenced by fuel, oil, and freight constraints.

Okay. Okay. Good. And then just, I guess, last one, just how do you think about normalized free cash flow for the organization? And I guess, for '23, how would '23 kind of perform relative to what a normalized cash flow number should be?

We expect that in 2022, our free cash flow was 115% of net income. In 2023, we plan to achieve free cash flow that exceeds net income. There are several factors at play. Our EBIT performance will allow us to maintain margins and deliver on that front. We are making progress on working capital improvements, particularly concerning inventory, and we will manage our capital expenditure carefully. Our CapEx will be concentrated on efficiency-related and technology-enabled initiatives, and we will keep it under strict control. Therefore, we anticipate a robust free cash flow exceeding net income again in 2023.

And Tim, I'll put a point on it. You know this about me, but I think cash is a great measure of performance, and it's top of mind for us. So we'll continue to drive that as we go forward.

At this time, there are no further questions. And now I'd like to turn the floor back over to Farand Pawlak for any closing comments.

Thank you, operator, and thanks, everyone, for joining us. We appreciate your interest and support for the company, and we look forward to speaking on future calls. This concludes our call.

Thank you, everyone. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.