Welcome to MasterBrand's First Quarter 2024 earnings conference call. Please note that this conference call is being recorded.

Thank you. Good afternoon. We appreciate you joining us for today's call. With me on the call today are Dave Banyard, President and Chief Executive Officer; and Andi Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our first quarter 2024 financial results. If you do not have this document, it is available on the Investors section of our website at masterbrand.com. I would like to remind you that this call will include forward-looking statements in either our prepared remarks or the associated question-and-answer session. Each forward-looking statement contained in this call is based on current expectations and market outlook and is subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today. More information about risks can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2023 Form 10-K and updated as necessary in our subsequent 2024 Form 10-Qs, which will be available once filed at sec.gov and at masterbrand.com. The forward-looking statements in this call speak only as of today, and the company does not undertake any obligation to update or revise any of these statements, except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables which are in the press release issued earlier this afternoon and are also available at sec.gov and at masterbrand.com. Our prepared remarks today will include a business update from Dave followed by a discussion of our first quarter 2024 financial results along with our 2024 financial outlook from Andi. Finally, Dave will make some closing remarks before we host a question-and-answer session. With that, let me turn the call over to Dave.

Thanks, Farand. It's good to be speaking with you all on our first quarter 2024 earnings conference call. I'm pleased to say that MasterBrand delivered a solid quarter to start the year. Net sales in the first quarter of 2024 were $638 million, a 6% decline over the same period last year. This mid-single-digit decline was in line with our expectations as we experienced the continued impact of anticipated trade downs and our return to normal promotional activity through the first quarter. Volume was roughly flat on a year-over-year basis as we saw growth with our customers servicing the new construction market offset by declines with our customers servicing the repair and remodel market. Again, this was in line with our 2024 end market demand assumptions laid out on the last call, which I'll revisit shortly. Operationally, the company continued to perform exceptionally well. We delivered adjusted EBITDA of $79 million in the first quarter and a related margin of 12.4%, 40 basis points higher than the same period last year. Our margin expansion was again driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of lower average selling price. Our first quarter performance followed our trend of delivering year-over-year margin expansion despite market softness. This is a testament to two things: one, our associates' dedication to The MasterBrand Way, our business system. And two, the success of our strategic initiatives, Align to Grow, Lead Through Lean and Tech Enabled. When we first introduced The MasterBrand Way, our focus was on deploying foundational lean tools and improving operations. During this early period, our executive team, myself included, spent a great deal of time training and coaching all levels of associates on how to use these tools. More importantly, our time spent on the plant floor was about fostering a culture of continuous improvement and driving the mindset of problem-solving at all levels of the organization. As this culture took hold, you saw our operational efficiency improve as well as our financial performance. Fast forward to today, Lean as a way of working is just part of what we do. Our associates, along with the core team of CI professionals are driving daily operational improvements utilizing our toolkit, and we continue to see the benefit of the work on our adjusted EBITDA margin performance this quarter. This quarter, we also continued to benefit from our strategic initiatives, specifically significant cost savings from our quality process initiatives and carryover savings from our prior year supply chain work. I'll provide a deeper update on our strategic initiatives shortly. Our continued discipline around working capital management allowed us to deliver free cash flow of $12 million in the quarter. Prior to last year, MasterBrand has historically been a consumer of cash in the first quarter. So this relatively strong performance is an encouraging trend to see. Now let me provide more detail on the end market demand we saw during the first quarter. Similar to our financial and operational performance, end market demand was in line with our expectations. Our customers servicing the U.S. single-family new construction market, we saw demand increase year-over-year, high single digits in the first quarter. Demand trends improved across multiple regions with large production builders continuing to outperform other segments of the market. Large production builders, both public and private, remain the best suited to address pent-up demand for housing and we are benefiting from our close relationships with them. We serve these builders through a combination of direct sales and sales through our distribution partners. Given the positive tone from builders and the new product and channel-specific offerings we continue to introduce for them, we remain optimistic about this portion of the market. This optimism is tempered with our view that land and labor constraints along with potential for some supply chain disruptions in certain categories could limit growth. We continue to believe this market will grow year-over-year mid-single digits with relatively normal sequential seasonality and moderating year-over-year growth rates later in the year due to more challenging comparables. As for our dealer and retail customers who primarily service the repair and remodel market, demand continued at a similar pace to the fourth quarter of 2023. On a year-over-year basis, we saw demand decline high single digits in both our retail and dealer channels as customers continue to note lighter-than-usual foot traffic and extended decision lead times. This was in line with our expectations for this portion of the market as consumers remain hesitant to make large ticket purchases given general macroeconomic uncertainty. Those who are willing to commit to larger purchases are being more thoughtful about total project costs and choosing fewer features in their order. Accordingly, our outlook for the U.S. repair and remodel market for cabinets remains unchanged. We still expect to see mid-single-digit declines for 2024 with year-over-year declines easing as we progress through the year and annualize these impacts, which we've already seen occur from the fourth quarter of 2023 to the first quarter of 2024. In Canada, both the new construction and repair and remodel markets remained slow year-over-year as expected, but we've seen signs of stabilization. We were pleased to even see areas of sequential improvement in order intake in new construction and repair and remodel markets, which appear to be signaling a bottoming effect. This and the steps that the Canadian government is taking to improve housing affordability for existing and new homebuyers are favorable signs for the Canadian housing market. While these are encouraging developments, we still expect to see soft end-market demand continue with year-over-year high single-digit declines in 2024. This outlook is based on new housing starts being meaningfully lower and repair and remodel activity being down mid-single digits year-over-year. End market demand was in line with our expectations for new construction and repair and remodel markets across North America, and we see relatively no change to our underlying assumptions. Therefore, we're reiterating our overall market demand expectation of down low single digits year-over-year in 2024. Our assumptions originally factored in the moderate reduction in interest rates later in the year. While there's been a lot of press around the timing of potential rate cuts, this remains a dynamic situation. We feel that we have a balanced approach related to Fed actions and our outlook does not depend on rate reductions occurring on any timetable. Our outlook was more predicated on rate stability rather than on future rate reductions. With this backdrop in mind, we still expect a gradual improvement in existing housing turnover, along with the solidifying of demand levels for new construction as the year progresses. Our assumptions also anticipated little improvement in larger ticket R&R spending within 2024 as consumer R&R spending would mostly be on smaller ticket items to start. So as you can see, we believe our end markets are largely progressing as anticipated and will continue to do so. Given 2024 looks to remain a transitory year from an end market demand standpoint, we remain focused on operating efficiency, serving our customers and continuing to execute on our strategic initiatives. Now I'd like to share some recent successes and updates from across these three initiatives. I briefly mentioned the new product and channel specific packages launched for our large builder partners servicing the new construction market. This is a good example of how our Align to Grow initiative is driving growth for MasterBrand. Through our close relationships with these large builders, we work to match our offering to their needs. We've seen excellent results from this approach with many of these top builders awarding us new business through the fourth quarter of 2023 and into the first quarter of 2024. It does take a lot for these projects to go into production. We are already seeing the benefit from the work we've done over the past year. We believe this is how 80/20 and the Align to Grow initiative will produce the growth we need to achieve our long-term financial targets. Moving to our Lead Through Lean initiative. This initiative is the furthest along in its journey, and we continue to make great strides here too. As I mentioned earlier, this is really about our culture of problem-solving at every level of the organization. While this culture has taken hold, as MasterBrand looks to grow, we need to further equip our associates to lead and address problems closest to the work. To help with this, we've introduced True Leader. Our program designed to ensure that frontline supervisors are skilled in leading others and coaching them for success. We've also taken steps to help associates know what success looks like through our newly introduced success model. This model focuses on the behaviors that truly differentiate great performance at MasterBrand and those that will be rewarded. We believe that enhanced training, clear expectations and related financial incentives will help our associates continue to deliver operational excellence and sustained growth. Now let me touch on our tech-enabled initiatives and specifically our work on quality processes. On our last call, I mentioned that our digital infrastructure team continued to make progress on cloud migration efforts and delivering near real-time data. Our quality team is already benefiting from this improved information with better data and insights as to where and when quality issues are occurring. As a result, we've been able to address these issues with more precision and are already seeing the financial and operational benefits. These insights, coupled with the technology we're implementing to inspect product should continue to drive our cost of quality lower. Lastly, we continue to make progress on rolling out the MasterBrand Connect portal to our dealers and distributors. The rollout of this portal is well underway, and we're continuing to build more functionality into the application. Reducing friction for our customers is a top priority, and we will have more exciting features to share later this year. With the end market demand progressing as anticipated, and our associates executing on our continuous improvement plans and strategic initiatives as expected, we're pleased to reiterate our full year 2024 outlook.

Thanks, Dave. I'll begin with an overview of our first quarter financial results then I'll provide our thoughts around the remainder of 2024 and our full year outlook. First quarter net sales were $638.1 million, a 5.7% decline compared to $676.7 million in the same period last year. Our top line performance was primarily the result of year-over-year growth from our customers serving the new construction market offset by anticipated volume declines in the repair and remodel market as well as a softening in our net ASP, largely due to continued trade down activity and our reintroduction of customary targeted promotions. Gross profit was $204.7 million in the first quarter, roughly flat with $204.6 million in the same period last year. Gross profit margin expanded 190 basis points year-over-year from 30.2% to 32.1%. This year-over-year margin expansion was driven by cost savings from consistent execution on MasterBrand strategic initiatives, specifically our quality processes and carryover from last year's supply chain work and our continuous improvement efforts which more than offset the negative impact of lower ASP and personnel inflation. Selling, general and administrative expenses were $137.8 million, a 1.8% increase compared to the same period last year, primarily driven by personnel and personnel-related inflation and higher investments in our tech-enabled initiative. Net income was $37.5 million in the first quarter, a 7.1% year-over-year increase compared to $35 million in the same period last year. This increase was primarily driven by lower interest expense of $14.1 million in the first quarter compared to $17.4 million in the same period last year and a lower income tax expense of $11.5 million or a 23.5% effective tax rate in the quarter compared to $12.9 million or a 26.9% rate in the first quarter of 2023. Diluted earnings per share were $0.29 in the first quarter of 2024 based on 130.5 million diluted shares outstanding, an increase from diluted earnings per share of $0.27 in the first quarter of last year based on 129.5 million diluted shares outstanding. Adjusted EBITDA was $79.4 million compared to $81.5 million in the same period last year. Adjusted EBITDA margin expanded 40 basis points to 12.4% compared to 12.0% in the comparable period of the prior year despite lower sales. This margin expansion was driven by cost savings from our strategic initiatives and continuous improvement efforts, which more than offset the negative impact of trade downs. Turning to the balance sheet. We ended the quarter with $153.7 million of cash on hand and we remain undrawn on our $500 million revolver. Net debt at the quarter end was $554.3 million resulting in a net debt to adjusted EBITDA leverage ratio of 1.5x consistent with the fourth quarter of 2023 and down from 2x in the first quarter of 2023. Our balance sheet remains strong with the financial flexibility to invest in the business for growth. Operating cash flow was $18.7 million for the 3 months ended March 31, 2024, compared to $62.1 million in the comparable period last year and better than our expectations. As you recall, the first quarter of 2023 benefited from the planned inventory reduction from our 2022 strategic build. The first quarter of 2024 also reflects a larger annual incentive compensation payout year-over-year due to a higher attainment percentage. Capital expenditures for the 3 months ended March 31, 2024, were $7 million compared to $2.9 million in the prior year period. As Dave mentioned on our last call, we made the decision to accelerate investment in the business, specifically in our tech-enabled initiative, and we saw this higher investment spending continue in the first quarter. We plan to further ramp our investment spending, and we still expect 2024 capital expenditures to be in the range of $55 million to $65 million. Free cash flow was $11.7 million for the first quarter of 2024 compared to $59.2 million in the comparable period last year. While lower year-on-year, this is relatively strong compared to historical first quarter performance, especially in light of some of the larger cash uses. Finally, during the first quarter, we repurchased approximately $1.9 million of our common stock under our existing stock repurchase program. We have roughly $26 million left under our existing authorization. Now let's turn to our outlook. We are pleased with our performance so far and the year is unfolding as we anticipated. While there is certainly increased macroeconomic uncertainty, as Dave mentioned earlier, end market demand is progressing as anticipated. We believe our growth initiatives will allow us to achieve our previously stated 2024 financial outlook while continuing to invest in the business for growth. We are, therefore, reiterating our full year 2024 guidance. We continue to anticipate our 2024 net sales will be in the range of down low single digits to flat year-on-year. Let me provide some additional color on the drivers of our net sales in relation to the market. Our 2024 outlook contemplates the continued effect of trade downs and a more normalized pricing environment, including customary promotions. We saw this pattern develop in the second half of 2023. So there is some annualization impact from the normal pricing and promotion environment in the first half of 2024, but we would expect to see less impact in the second half of the year as we get to normalized comparisons. We anticipate a more normal inflationary environment, and we'll continue to evaluate price quarterly in response to that. As Dave mentioned, our 2024 outlook assumes big ticket repair and remodel will lag smaller ticket items, resulting in a timing difference between our net sales and our broader R&R market recovery. To offset this net sales headwind, we have a variety of new products and channel specific packages that launched late last year and in the early part of this year across both the new construction and repair and remodel markets. As part of our Align to Grow initiative, we have tailored these products to satisfy the specific end markets and regions best positioned for growth. As these products gain traction, these incremental sales will more than help offset the previously discussed impacts of trade downs and customary promotions. We remain confident that our existing manufacturing capabilities and our common box initiative provides the flexibility needed to adjust capacity up or down with demand. As we did in 2023, this flexibility, along with cost actions should allow us to deliver strong margin performance. This flexibility also provides us ample capacity to service our customers as demand strengthens. We will continue to be nimble and adjust our manufacturing network as needed to address any future market conditions. This ability to flex manufacturing, coupled with our strategic initiatives and continuous improvement efforts, will allow further investment in the business. As we highlighted on our previous earnings call, given the success of our early tech-enabled initiatives, we plan to invest an incremental $20 million into this initiative in 2024. With 2024 shaping up to be a relatively stable year, particularly from a demand perspective, we are taking this opportunity to further invest and position ourselves for future growth when a more robust demand environment returns. With this in mind, we continue to expect adjusted EBITDA in the range of $370 million to $400 million, with adjusted EBITDA margins of roughly 14% to 14.5% for 2024. Interest expense is still expected to be approximately $55 million to $60 million and our anticipated tax rate between 25% and 26% is unchanged. As a result, our expectation that our adjusted diluted earnings per share will be in the range of $1.40 to $1.60 also remains the same. As I mentioned earlier, we are still planning 2024 capital expenditures to be in the range of $55 million to $65 million. This investment is approximately 1.3x depreciation, which is within our stated long-term goals. Given the steps we have already taken to reduce working capital and these other factors, we continue to expect free cash flow to be in excess of net income for 2024, but the magnitude of working capital improvements in 2023 will not repeat.

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

The first question we have is from Adam Baumgarten of Zelman & Associates.

Question on top line. I think you said volumes were flat, so that would imply price was down around mid-single digits. Can you walk us through how much of that was trade down versus like-for-like price reductions?

Yes. I think most of it is trade down, Adam, similar pattern to what we saw through the second part of last year. If you remember back, it sort of started in the late part of Q2 into Q3 last year, and the impact was roughly similar. So it's mostly that. Because trade down occurs both primarily in new construction because you have large customers there where you're talking about large developments. But we're seeing the consumer also trade down inside the dealer network as well. So you see a lot of it there. And then there's like we've highlighted before, the cabinet market has a normal customary promotional cadence to it, and you're seeing some of that there. And that's less of an impact in the total picture. So it's mostly the trade-down effect.

Okay. Got it. And then just on input costs. Any change to how you're thinking about that for the year?

Yes, I believe input costs are behaving normally. In a typical environment, we experience some fluctuations. We're seeing some increases in commodity materials, similar to the situation before COVID. There is some normal inflation occurring in specific categories, and labor inflation remains unchanged. We are responding as we typically do by reviewing our pricing quarterly to adjust for any movements beyond what we can manage through productivity and other means. Nothing seems to be outside of a normal pattern, but we are noticing slight firmness in some commodities.

Okay. Got it. And then just last for me. Just to the extent you have any and if you could size it just multifamily exposure?

Very little, if any. We might have some through our distribution partners. We don't always see what they're bidding on, but it's very limited and minimal.

The next question we have is from Garik Shmois of Loop Capital Markets.

Just first on pricing. It sounds like you're expecting the pricing comps to ease in the back half of the year, just given the timing of when you're starting to see the trade-down effect in some of the normalized promotions back in 2023. But just kind of curious, a big ticket repair and remodel continues to lag as you expect. What gives you some of the confidence that promotions will be at normal levels in the second half of the year, and that you're not going to have to see another kind of step down in that activity?

Yes, that's a good question. The pace we've observed hasn't changed much, and it's now been nine months since prices stopped rising. We're seeing that consumers can handle the current price situation, and we're not disappointed with the volume, which is aligning with our expectations. There hasn't been any strong push or pull on pricing based on consumer behavior through our dealer network. It feels like we're in a normal environment, which gives us reassurance. Despite some fluctuations in interest rates, they haven't significantly influenced our outlook. We're seeing a steady pace, with business following a typical seasonal pattern that boosts our confidence for the rest of the year. We usually notice a pickup in business during the second quarter, with the third quarter being the strongest as orders from the second quarter are fulfilled. Then, activity usually decreases in the fourth quarter. This is our usual pattern, and the current order trends reflect that. Overall, it feels like we're having a standard year, which strengthens our confidence moving forward.

Okay. Follow-up question is just on some of the tech-enabled initiatives that you're accelerating, any way to size that? Is there maybe an outsized impact on costs or SG&A or CapEx over the next several quarters? Are you pulling from future years because you see opportunities right now. So just a little bit more color on what you're doing there, and maybe some of the financial impact.

Absolutely. It aligns with the guidance we've provided regarding capital, expenses, and EBITDA. That said, it can vary a bit at times. We are managing several distinct projects rather than a single large investment. Each project has its own value and is assessed individually. We anticipate seeing more activity in Q2 compared to Q1, and certainly more than the previous year. Therefore, Q2 is likely to have a higher spending rate on some of these initiatives, primarily because once we plan a project, spending actually ramps up during implementation. Some costs are incurred during the planning phase, but a significant portion comes from implementation, which includes both capital and mostly SG&A-related expenses. So, I expect Q2 spending to be slightly above average this year, tapering off toward the year’s end, differing from last year’s cost flow. While it may be uneven, completing these projects quickly leads to quicker benefits, motivating us to execute them efficiently. We've prepared for these initiatives and believe we have the capacity to carry them out, so we are inclined to proceed swiftly.

The next question we have is from Tom Mahoney of Cleveland Research.

I was wondering if you could call out any differences in demand by region of the country, if anything sticks out in the trends you're seeing so far year-to-date?

Yes. The main difference this year compared to last year is that new construction has shown improvement in various regions. Last year, early on, new construction was weak in many areas, although the Southeast had some strength. Now, that dynamic has shifted as other regions have recovered. Larger builders had built ahead to maintain business last year in those areas, but they have eased off a bit, possibly due to tougher comparisons. Nationwide, overall building activity has grown year-over-year, while remaining steady sequentially. There has been an increase in activity in other parts of the country, particularly in the Southwest, which was slow at this time last year but has improved significantly now. The Northeast and Midwest typically see less construction in winter, but this year, due to more favorable weather, we observed some activity that is not usually seen during these months. However, the pace of activity in those regions remains steady and normal.

Understood. You mentioned the SG&A cadence and some investments throughout the year. I'm curious if there is a corresponding cadence to the productivity savings that we should consider regarding gross margin as we progress through the year. Also, was the first quarter better than your expectations for gross margin, or was it more in line with what you anticipated? How do you view that?

Yes, I will respond and then Andi can provide more details. I believe we can try to maintain our gross margin as consistently as possible. In a stable environment, this should be achievable. Of course, some inflationary pressures, particularly in labor, will impact our cost of goods. However, overall, we are confident about where we currently stand as we look ahead. Continuous improvement should either counter any inflation or enhance productivity. Typically, we see slight improvements as the year progresses, and I believe we are in a good position. Andi, do you have anything to add?

Yes. So I mean, the big part of that gross margin improvement overcoming that personnel inflation is the current continuous improvement and strategic initiatives, but it's also that carryover effect of our supply chain initiatives last year because that really started coming through mid-second quarter last year. So we got some carryover effect of the supply chain initiatives in Q1 that helped build that gross margin. And then from an SG&A perspective, that tech investment is all in SG&A. So you won't see that in the gross margin.

Got it. Got it. And then just the last one, if I could squeeze it in. Any key variables that you're looking at between the low end versus the high end of the range? Is it just demand related and revenue related? Are there any other moving pieces that you're thinking about?

Yes. The main factor we're examining is what might restrict builders from exceeding our forecast. While we believe demand exists, there are constraints builders could encounter. Some of these constraints may involve a slowdown in demand, but we don’t necessarily need demand to accelerate to meet our forecast. If certain constraints materialize, such as land and labor availability or other commodity challenges, we could see the higher end of our range. Currently, we anticipate the repair and remodel market will remain stable throughout the year, and we don’t expect any significant changes there. If there are positive developments, that's great, but we're not counting on those to reach the upper end of our range. Our focus is primarily on new construction, and we feel well-prepared for the current market conditions.

There are no further questions at this time. And with that, I would like to hand the call back to Farand Pawlak for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us. We appreciate your interest and your continued support. We look forward to updating you on our future calls. This concludes our call for today.