Welcome to MasterBrand's Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded. And now 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 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.

Thanks, Farand, and good afternoon, everyone. First, I'd like to thank you all for joining us here today for our first earnings conference call as a stand-alone public company. It's been a few months since our management team and I had a chance to introduce MasterBrand at our Investor Day in New York. Since then, we've not only completed the successful spin-off from Fortune Brands but also continue to execute well on our near-term and long-term goals. This afternoon, I'll be -- I'll update you on our transformation progress and provide insights on how we're navigating the current end market conditions. But before I do so, I'll give a brief overview of our fourth quarter and full year financial performance. Andi will provide greater details later in the call, and we'll share our 2023 outlook. I'm pleased with our strong finish to 2022. We delivered another quarter of solid financial and operational performance to end the year with net sales of $784.4 million, an increase of over 5% compared to the fourth quarter of 2021. This year-on-year growth was driven by the continued benefit of previously announced price increases across our business and strong performance from select brands. As an example, mantra, our affordably priced full plywood construction product grew double digits year-over-year in the fourth quarter, outpacing other parts of our business. Net sales growth was partially offset by volume declines in the broader business as higher interest rates and general economic uncertainty negatively impacted our customers. Adjusted EBITDA was $97.8 million compared to $66.7 million in the fourth quarter of 2021. This increase is due to favorable net average selling price, or ASP, along with continuous improvement benefits which more than offset material logistics and personnel inflation. Adjusted EBITDA margin was 12.5% compared to 9% in the comparable…

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 onetime separation costs in the fourth quarter…

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. Operator?

[Operator Instructions] And our first question comes from the line of 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, sure. Thanks, Adam. We've got a lot of -- continue to make a lot of great progress on our strategy since the Investor Day. I'll tick off a couple of examples on each of the sections, starting with a align to grow. There's really 2 key components to align to grow. The align part, which is we've talked a lot about. It's how we build a product set and a set of factories that have common characteristics to them that allow us to move production as necessary to meet the market. And a great example of that, it's an unfortunate situation, but it's an example where this really helped us I don't know if you remember back in January, there was a lot of severe weather in the Southeast. It made national news with tornadoes in Southern Alabama, where we were impacted by that as well. We have a plant in Southeastern Georgia. And the building, we share the building with another tenant, the building was damaged with the tornado during that time. And -- the best news of it all, of course, is that our team acted promptly and well and everybody was in the storm shelter when the tornado hit. But we sustained some damage to our building. And so that plant has been closed since then. We anticipate at this point that the plant will be back up and running by the end of March. But this applies to align to grow because we were able to effectively move that production and none of this impacted any of our customers. And so that just shows the flexibility that we have within our network. It also shows, I think, that all of our associates are really keyed into safety and can act quickly. But I think within…

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, sure. I think the one way -- the one word I would use to characterize the market at the moment is dynamic. And what I've learned and what we've learned over the past couple of months is the underlying demand is there. And we saw that early in the year when interest rates kind of stabilized in the later part of 2022 into early '23, people jumped right back into the market. So I think it's the challenge we're facing is that there's that dynamic movement of interest rates. And this market is -- the consumer is much more interest rate sensitive than I think they've certainly been in the last few years and that they've been in a long time. And so the way we look at the market, we're not going to try to react to these near-term swings because it's not a good way to run your business. So we're looking through that and picking an end point, and we've built our operational footprint, our capacity, our supply chains around that. And so that's what you're seeing from us is picking that end point out to the future where we think the market is going. And so we think it's going to be steady in that direction. Obviously, we'll have the seasonality of the spring and summer that we normally see. And we're seeing -- we think that's -- we're fairly back to that seasonality. And I think it's fair to say we've changed our view slightly from what we talked about at the Investor Day where we said that we were going to -- we expected the market to be down high single digits. We're now saying down low teens. The big change there is in the builder side, the single-family new construction. And what…

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 [indiscernible]?

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.

Just on the trade-down impact, is that -- I know it hurts ASP, but does it -- it seems like it doesn't have a negative impact on the percentage margin, at least on EBITDA margin. Just maybe some clarity around that.

Yes. I mean, part of the efforts of the last few years has to -- has been to really get all of our product categories into a profitability range that we're happy with. And so -- and it has a lot of strategic implications. We want to be able to bring the right product that the consumer wants at the right cost to that consumer. And so -- and this is the kind of market where people are thinking about certain trade downs, and we see that. And we've spent a lot of time over the last 3 years building that engine that can make products in any price point that we're happy with.

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 that 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 there's -- interest rates are down. But I think generally speaking, the pace has been very steady from last year third quarter into today.

Got it. Wanted to follow up on the price/mix comment. Just wanted to be clear here that the negative mix would more than offset the pricing carryover, I just wanted to make sure I heard that. But also just wanted to get your thoughts on pricing in maybe a little bit of a softer market, if you're seeing any degradation in the -- in your bidding activity?

Yes. So maybe it's -- maybe it was unclear. I think the -- we are indifferent from a margin standpoint on the products we sell, for the most part, within our range. So I wouldn't say that there's a degradation of margin from a shift to lower price on products. And I also wouldn't say that it's trumping what I'll say, the price annualization that we'll see in the first part of this year. So sorry if I mischaracterized that, but that we will -- price will help continue that into 2023. To your other question around price, again, for us, it comes back to the starting point is we want to move our customers into the price point that they're comfortable with, so that they have the cost position that they're comfortable with. And we do a lot of work to help them using our various product categories to do that. So if they need a lower price product or a lower cost basket to build a kitchen, which obviously is a big part of what builders are asking for right now. We help them move into a different product category that can help them do that in many ways, more meaningful way than just a price reduction. So that's our first approach to this. I will say there's -- we have retail partners that we do have some of the price indexed around the commodities that go into the product, and that's going to ebb and flow. The nice part about that is it typically results in material costs out as well. They usually are fairly closely matched. And so we follow along and those retail customers are able to take advantage of that. So that's been our approach so far. I will say it's -- we're not out of the inflation world yet, and we're going to find out more information soon here on where that pace is going, but we're still seeing inflation in certain parts. And so I think it would be -- while demand has slowed compared to a year ago, I think you have to be careful about assuming that we're seeing any deflation because that's not the case.

Okay. That's helpful. This is my last question, just on the decremental margins coming in better than what you had initially indicated. Just wondering if you could speak to the -- just the sustainability of the permanence of some of these initiatives to drive better decrementals, whether it's -- if we're going to be in a longer downturn, how sustainable is this with the new near 20% decremental level? And then conversely, if the market does improve to the degree you can drive 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. There's a lot of waste still in our organization. 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. Let me just start, and I'll turn it over to Andi to be more specific. But the our -- the majority of our inventory, Tom, is in raw material. We're not a big finished goods holder. We don't have space for it, frankly, and we tend to -- most of our make-to-order product ships as soon as it's manufactured. So we don't carry a lot of finished goods in general. And I think we're -- we have direct control over that. So that's one that I think we're in a good place on. WIP very similarly, you end up with a steady state of WIP, and I think we're in a good place there. So the majority of the inventory increases that we saw last year were around raw material. And we actually started investing in that in late 2021, seeing that the supply chain wasn't getting any better and that we needed to make sure we could still deliver at a high service level to our customers. And we did that through, I'd say, the first quarter of 2022 and then started seeing that perhaps we need to change that. And as volumes start coming down at the same time you're trying to reduce inventory, it takes a little longer, but I still -- I'm really proud of the team's effort. We had -- I think we increased inventory by about $70 million last year, but yet still delivered, I think, really good cash flow for the year. And so I think we've got more to go. But -- and so I think we're going to have another great cash flow year this year in 2023 as we do that. But it was a conscious effort on our part to build inventory, and we just have to get it back down to the main product. Andi, do you want to add anything on that...

Yes, just I think a couple, if you remember from Investor Day, we mentioned that inventory was up year-on-year about $100 million. And 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 off-line 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. First and foremost, we -- one of the first things I addressed when I joined the company 3 years ago was capacity, and we've been consistently investing in the right capacity since then, since early 2020. And so -- and the facilities we took offline this year are -- they are coming in several different flavors. So bear with me. One of them was a facility that we don't need anymore. That one's offline, and we'll be selling that building at some point. The -- one of them is a situation where our efficiency, and this is in Winnipeg, Manitoba, in Canada. We've gotten the efficiency down in that portion of the business that we didn't need to buildings. So we're holding on the other one. We have some growth ideas that we might use it, but it's -- we were able to drive efficiency in that business enough to consolidate into 1 building. And then the last one is more of a situation where we have the capacity. We don't need it right now. So I'd call it more of an idling of that facility. Obviously, that one will take a little time to get back online, but because we'll have to bring people in and train them, but we have that available to us should the market turn. But I'd also say with the existing capacity we have today, we have upside ability should that market turn differently than how we're forecasting the market today. So we're prepared for that as well as, frankly, a further downturn. We'll go after further action. We always want to get the fixed cost under control is the first move you have to do. And that's what we did 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. Great question. I think it's -- align to grow really divides up your thought process in the smaller, what I'll call, digestible chunks. So it may come across in some ways as smaller in a discrete fashion. But I'd say in general, you think about we have the best dealer network in the industry. And we -- but we know we don't have 100% of the wallet of that in every case. So first move is to gain share of wallet in your existing channels. And so that's always your first move, and you do that with either different service offerings or new products like this RTA product that I highlighted earlier. So we've done a lot of that with the mantra product. That's what's allowed us to accelerate the growth of that product -- product line. And then obviously, your next move is to go find those channels that you want, but you don't have. And it's a more competitive dynamic, obviously, in that, and there is some stickiness to particularly in the dealer channel to do that. But we think that align to grow really allows us to see the opportunities with the right service offering. And then as we further develop our tech-enabled initiative, I think there's going to -- we're going to bring forward some things that really make that a compelling story. So that's generally the approach you can bucket in those 2 large buckets, if you like. But I think each one is going to be on the street level smaller within the realm of responsibility that we give to people.

Okay. Okay. No, that's helpful. And then just from an input cost perspective, I mean, -- are you seeing kind of, I guess, a leveling out of input costs at this point? I mean, are you still seeing kind of pockets of inflation or any sort of kind of the outright deflation at this point?

Yes. So I think there's a couple of things to add to that, and I'll let Andi kind of give you guys a breakdown of our COGS here that might be helpful. But I think first and foremost, most like price, we're sort of still annualizing the inflation we saw last year. So that's going to take some time through the year. Plus our inventory was purchased last year. So it's -- some of that has higher costs. I will say vast majority, if not all, of our domestically sourced material is now into what I'd call a normal lead time in a normal safety stock. So that's turning a lot quicker. -- we're pretty comfortable with the inventory position we have from a domestic supply chain, which is things like hardwood. The overseas material that it just has a longer lead time and you've got to work and we want to be good partners for our suppliers and work with them to manage that inventory level down. So that's -- those 2 dynamics do affect and roll through the P&L here, particularly earlier in the year. However, we are seeing things -- if you follow some of the indexes, obviously, there's been some decline or flattening of prices in certain areas. And then in others, there hasn't been as much. The key things -- obviously, we buy a lot of wood, particleboard, plywood -- we do buy resin and that's also oil products are part of our finished products that we buy, and then we buy hardware that's steel, and those are the general inputs. Andi, do you want to talk a little bit about the breakdown of our COGS, so...

Yes. So when you look at our cost of the goods sold about 50% of it is material, and that includes freight [indiscernible]. So just like resin, obviously impacted by fuel oil costs as well. And then our majority buys by far are wood and wood products. And then the remaining cost of sales is about 30% labor and then 20% overhead, and that overhead is variable and fixed. A little bit about 50-50 between fixed and variable on that overhead. And I think what's important to mention is our distribution costs, which includes spread out. We have it in SG&A. I believe others have it up in cost of goods sold. So we have that down in SG&A, and it's about -- it is usually around mid-single digits of net sales, and that's obviously impacted by fuel and 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?

So we do anticipate -- in like 2022, our free cash flow was 115% of net income. And we, again, in 2023, plan to deliver free cash flow in excess of net income. A couple of dynamics going on. Obviously, performance, EBIT performance is we're going to maintain margins and deliver there. We're well on our way to working capital improvements that we talked about already on inventory, and we will be controlled in our CapEx spend. We're going to focus our CapEx spend on particularly efficiency-related items, tech-enabled items, and we'll keep that highly controlled. So again, we expect a strong free cash flow again in excess of net income 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.