MasterBrand - Q2 2023

Transcript

Operator (participant)

Welcome to MasterBrand's second quarter 2023 earnings conference call. During the company's prepared remarks, all participants will be in a listen-only mode. Following management's closing remarks, callers are invited to participate in a question and answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Farand Pawlak, Vice President of Investor Relations and Corporate Communications.

Farand Pawlak (VP of Investor Relations and Corporate Communications)

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 second quarter 2023 financial results. If you do not have this document, it is available on our investor section of our website at masterbrand.com. I'd like to remind you that this call will include forward-looking statements in either our prepared remarks or the associated question and answer session. Each forward-looking statement contained in this call is based on current expectations and market outlook, and is subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled "Forward-Looking Statements" in the press release we issued today.

More information about risk can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2022 Form 10-K and our first quarter 2023 Form 10-Q, which are available 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 masterbrand.com. Our prepared remarks today will include a business update from Dave, followed by a discussion of our second quarter 2023 financial results from Andi, along with our current 2023 financial outlook.

Finally, Dave will make some closing remarks before we host a question and answer session. With that, let me turn the call over to Dave.

Dave Banyard (President and CEO)

Thanks, Farand. Good afternoon, everyone, and thank you for joining us here today on our second quarter 2023 earnings conference call. MasterBrand delivered a quarter of strong financial performance. Net sales in the second quarter were in line with our expectations, as lower volumes from softer end market demand were partially offset by higher average selling price. Despite this sales decline, we delivered flat adjusted EBITDA year-over-year. Adjusted EBITDA in the second quarter of 2023 was $106.3 million, compared to $106.8 million in the second quarter of 2022. Our ability to preserve adjusted EBITDA dollars on lower sales drove adjusted EBITDA margin considerably higher than last year, with 281 basis points of year-over-year margin expansion.

This was also higher than our internal estimates going into the quarter, as our teams continued to execute at a high level. We also made great improvements in working capital and delivered strong free cash flow within the quarter. Our supply chain efforts are in full swing, and we are ahead of plan on our inventory reductions from last year's investments. This, along with improvements in accounts receivable, helped us generate free cash flow of $123.4 million in the second quarter of 2023, an 82% increase over the same period last year. Our strong free cash flow is allowing us to continue to invest in the business, paying down debt and return value to shareholders at the same time. One method of returning value to shareholders is through our previously announced share repurchase program, which we began executing on this quarter.

These financial results are only possible because of the team's consistent execution. Our focus on utilizing the established tools of the MasterBrand Way is allowing us to repeatedly achieve or exceed our operational targets and make meaningful progress on our strategic initiatives: Align to Grow, Lead Through Lean, and Tech Enabled. Today, I'd like to share some more details on how those initiatives helped deliver such an outstanding quarter, and some of the investments we've made in the quarter that we believe will drive growth in future periods. Before I do that, I'd like to provide you with a brief update on what we saw in our end markets during the second quarter. If you remember, at the time of our last earnings call, our customers that served the new construction market were performing better than anticipated.

This strength continued through the quarter as builders benefited from a pause in interest rate hikes and historically low inventory levels of existing homes for sale. Our flexible manufacturing network enabled us to service this sequential increase in demand from builders, particularly production builders, helping drive our second quarter financial performance. While year-on-year demand for new construction is still down overall, we're encouraged by the trajectory of this end market and recent builder commentary. The repair and remodel market, which we serve through our dealer and retail customers, has become more dynamic. While the U.S. retail channel was largely in line with our expectations in the first quarter, we saw a slightly greater sequential POS decline in the second quarter than anticipated. We expect this demand to remain soft for the balance of 2023.

As we had previously discussed, we work very closely with our retail partners to manage inventory reductions and appropriately level set our production to accommodate their needs, allowing us to preserve margin as demand slows. Our business with US dealer customers improved sequentially as expected, in line with normal seasonality. However, we are hearing from our dealer network that the end consumer is getting multiple quotes before doing a remodeling project and being more thoughtful with their budget. This focus on cost is driving some trade downs as people look to give up features to achieve a desired price point. As we've discussed before, our breadth of product offering, from premium to stock, allows us to work with all our customers, and we can shift between product lines to find the right solution for them at their various price points.

This presents a headwind to net sales and adjusted EBITDA dollars. Our adjusted EBITDA margins are relatively unaffected by shifts in product categories. We don't often talk about the Canadian market, given its relatively small size compared to the US. We have seen both the new construction and repair and remodel markets in this region underperform our expectations. We are taking actions to address the softening demand. We expect this portion of our business to continue to be weaker in the second half of 2023. On balance, new construction seems to be trending a little better, and repair and remodel is trending a little worse than our prior expectations. Regardless of these end market shifts, we remain confident in our ability to continue to drive our strategic transformation forward. As I mentioned earlier, our second quarter is largely a result of our continued operational excellence.

This includes both continuous improvement efforts and our strategic initiatives. Our Align to Grow initiative, specifically our supply chain work, had a meaningful impact on our second quarter financial performance. Our Tech Enabled initiative is already benefiting the organization, and our rapid execution is enabling us to increase the number of projects launched and accelerate other projects already in progress. There's a lot of exciting work underway, so I'll spend a little time discussing both of these areas further. For those of you who remember our Investor Day, you will recall that we discussed our supply chain as a near-term opportunity for our Align to Grow initiative. Our ability to consolidate and improve the efficiency of our supply chain was limited by the complexity in our product offering and manufacturing processes.

As we implemented our Common Box initiative and deployed standard processes across the plants, organizing our extended supply chain and realizing the full benefits of our scale became a possibility. Given the supply chain challenges faced during COVID, our ability to make changes was limited. Now, in 2023, we've been able to focus on our supply chain optimization. We are realizing the benefits of these efforts earlier than expected, which helped support our strong margin performance in the second quarter. While it's still in its early stages, our Tech Enabled initiative is already improving operations and contributing to our financial performance. As a reminder, the goal of this initiative is to simplify and modernize our technology foundation to drive better insights and outcomes for the business. This can be on the plant floor, in the back office, or customer-facing.

I mentioned in a prior call, we've been implementing RFID technology across our facilities. RFID tags help improve inventory tracking and accuracy. This automated tracking has allowed us to save on labor, as individuals that previously spent time tracking parts have now been reallocated to other, more value-added areas. Additionally, the improved inventory accuracy has allowed us to control working capital more tightly. Our improved technology foundation goes beyond the plant floor and to the back office as we look to get near real-time analytics across the company. We continue to enhance our data lake to support this effort. We recently consolidated another facility onto a common ERP platform. The process was seamless as our digital and technology function did a great job partnering with operations to get this done.

Adding manufacturing, customer, consumer, and pricing analytics to our data lake strengthens our technology architecture and increases our ability to act with speed and agility. Those are some examples of how our Tech Enabled initiative is supporting the business today. We are also investing in additional technology to improve the overall buying experience for our customers. We've accelerated investment in new tech platforms that improve our connection with our channel and expect to roll these improvements out late this year or early 2024. The tools of The MasterBrand Way are deeply embedded in this initiative. We utilize cross-functional agile teams through every phase of development and implementation, making sure that we have all the inputs needed to get the right technology in place.

Agile also helps us reduce waste in the process, identifying barriers early and keeping the team focused on eliminating those barriers, so that when a new technology is launched, it works and adds value. It's early days for us in our Tech Enabled initiative. Our accelerating investment in these technologies will make them more robust and bring value to our customers sooner. Based on our strong financial performance and the project pipeline supporting our strategic initiatives, we've decided to increase our investment spending for 2023. A lot of exciting work taking place across the company and a softer demand environment presents an ideal time to prepare for future growth. With these investments, as demand strengthens, we believe we can grow in excess of the market as outlined in our long-term targets.

Now, before I hand the call over to Andi, I want to address another area of success in the quarter. I'm pleased to say that in June, MasterBrand published its inaugural Environmental, Social, and Governance report. I've said this on several occasions: Being a leader in the industry comes with an even greater responsibility to do what's right for all stakeholders. We take this commitment seriously, and I'm extremely pleased with our ESG efforts to date. Along with the report, we've launched an ESG page on our corporate website under the About Us section of our homepage, where you can find the ESG report, along with future updates on our ESG journey. This journey is continuing. After publishing the report, MasterBrand received notification that it was being recognized as one of America's Safest Companies by EHS Today magazine....

For over 20 years, America's Safest Companies competition has sought to identify those characteristics that differentiate great safety programs from good ones. We're pleased to be recognized for our practices and procedures that exemplify safety excellence and our industry-leading safety record. With that, I'll hand the call over to Andi for a closer review of our second quarter financials and our revised 2023 outlook.

Andi Simon (EVP and CFO)

Thanks, Dave, good afternoon, everyone. It's great to be joining you here today. I'll begin with an overview of our second quarter financial results, then I'll discuss our updated 2023 outlook. Second quarter net sales were $695.1 million, an 18.8% decline compared to $855.6 million in the same period last year, in line with our expectations. The anticipated volume declines in the market were partially offset by higher net average selling price, primarily attributable to previously implemented pricing actions. As I discussed on our last call, the second and third quarters of last year were particularly strong as we benefited from a higher than usual backlog, we are in a period of more challenging year-over-year comparisons.

Gross profit was $236.2 million in the quarter, down 5.3% compared to $249.6 million in the second quarter of last year. However, gross profit margin expanded 480 basis points year-over-year, from 29.2% to 34%. This significant margin expansion was primarily due to our strong operational performance. In particular, the supply chain portion of our Align to Grow strategic initiative is paying off and delivering ahead of schedule. In addition, we are being extremely thoughtful and diligent as we take steps to manage our capacity in a dynamic environment, and we are still benefiting from the restructuring actions we took last year and in the first half of 2023.

Our restructuring-related savings are tracking ahead year-to-date with an expected savings of over $5 million per quarter in 2023. Important to mention, our second quarter performance includes insurance proceeds of $2.2 million related to the tornado damage sustained at our Jackson, Georgia facility earlier in the year. Selling, general and administrative expenses were $141.7 million, 14.6% lower compared to the same period last year. As I've previously discussed, we were allocated a portion of Fortune Brands Home & Security costs in 2022, that allocation is now gone. We have standalone costs, if you compare the impact of the two, it is a net savings year-over-year in 2023.

You should expect increased SG&A spend in the second half of the year versus the first half as we continue to ramp up the pace of investment in our strategic initiatives. I'll provide more color on this when I discuss outlook shortly. We delivered net income of $51.2 million in the second quarter, compared to $40.9 million in the same period last year. The 25.2% year-over-year increase was driven by a $26 million asset impairment charge related to a trademark in the second quarter of 2022 that did not reoccur this year. This was partially offset by second quarter 2023 interest expense of $17.2 million related to debt necessary to fund the dividend to Fortune Brands at the time of the spin.

As a reminder, in 2022, we did not have any external debt assigned to our balance sheet, and therefore, there was no external interest expense in our earnings during the prior year. Diluted earnings per share were $0.39 in the second quarter, an increase from a pro forma diluted earnings per share of $0.32 in the second quarter last year. Please note that prior year pro forma diluted earnings per share is calculated using 128 million shares outstanding. As under US GAAP, it is assumed that there were no dilutive equity instruments prior to separation, as there were no equity awards of MBC outstanding. We held adjusted EBITDA flat at $106.3 million, compared to $106.8 million in the same period last year, despite significantly lower volumes.

Adjusted EBITDA margin expanded 281 basis points to 15.3%, compared to 12.5% in the comparable period of the prior year, due to very strong gross margin performance, along with savings from our continuous improvement, strategic initiatives, and restructuring actions. We delivered very strong margin performance this quarter, and we will continue to methodically execute on pricing strategies, supply chain improvements, cost controls, and continuous improvement initiatives throughout the back half of the year, while also accelerating the pace of our business investments. We calculate Adjusted EBITDA by removing the impact of non-operational results and special items from EBITDA. Our definition of Adjusted EBITDA includes estimated net cost savings as a standalone company and excludes separation costs, restructuring charges and restructuring-related items, asset impairment charges, and defined benefit actuarial gains and losses.

Turning to the balance sheet, we ended the second quarter with $110.2 million of cash on hand and $410.9 million of liquidity available on our revolver. Net debt at the quarter end was $705 million, resulting in a net debt to adjusted EBITDA leverage ratio of 1.7 times, down from 2 times at the end of the first quarter of 2023, our second successive quarterly reduction. Our balance sheet remains strong with the financial flexibility to invest in the business for growth. Operating cash flow was $194 million for the six months ended June 25th, 2023, compared to $76.1 million in the comparable period last year.

This significant year-on-year improvement in operating cash flow reflects the execution of our working capital improvement plans, as well as terrific operational performance. We expect our working capital to continue to decrease as the year progresses. Capital expenditures for the six months ended June 25th, 2023, were $11.4 million. We now expect to spend $50 million-$55 million in 2023, with the majority of cash outflows scheduled for the second half of the year. Our projects are on track. However, we believe our capital spending will be lower than prior guidance, due in general to project costs being favorable to original estimates. Free cash flow was $182.6 million for the six months ended June 25th, 2023, compared to $54 million in the comparable period last year.

This is a $128.6 million improvement year-over-year. We continue to expect free cash flow in excess of net income for 2023. Finally, as you know, on May 9th, we announced the authorization of a stock repurchase program under which we may repurchase up to $50 million of MasterBrand common stock. During the quarter, we repurchased 404,858 shares of our common stock under this program at a cost of approximately $4.4 million or an average of $10.89 per share. Turning to our outlook. We remain optimistic about the increased demand we've seen from our customers servicing the new construction market and expect this trend to continue through the balance of the year.

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

Our original 2023 outlook called for strategic investments of $10 million-$15 million for the full year. With roughly $6 million spent in the first half of 2023, we now plan to spend $10 million-$15 million in the second half of the year, bringing our estimated full year 2023 investment spend to $16 million-$21 million. Based on our strong operational performance and this revised investment spending, we are raising our adjusted EBITDA outlook range to $345 million-$365 million, a $25 million increase at the midpoint compared to our prior outlook. On this updated range, we now expect adjusted EBITDA margins of roughly 12.5%-13% for 2023. This revised 2023 outlook reflects our ability to maintain or expand adjusted EBITDA margins year-on-year, even in a softer environment.

This outlook does not contemplate any additional insurance proceeds related to the tornado damage sustained at our Jackson, Georgia, facility earlier in the year. We have reduced our expected 2023 interest expense to be $65 million-$70 million and maintained our anticipated 2023 tax rate of approximately 26%. The established tools and principles from our business system, The MasterBrand Way, have helped the team deliver strong performance in the first half of 2023. We are confident that we can extend this performance through the remainder of the year and position the company to achieve its long-term financial targets discussed at our Investor Day last year. With that, I'd like to turn the call back to Dave.

Dave Banyard (President and CEO)

Thanks, Andi. Overall, we're very pleased with our second quarter performance. The team's ability to maintain adjusted EBITDA dollars on declining sales and deliver outstanding adjusted EBITDA margin expansion is a testament to the strength of The MasterBrand Way and our culture. This culture is driving our continuous improvement and strategic initiatives forward at an exceptional pace. The momentum we developed in the first half of 2023 gives us confidence to raise our adjusted EBITDA outlook for the full year and accelerate our investment spending. Lastly, I would just like to thank our more than 13,000 associates at MasterBrand for their hard work and dedication. With that, I'll open up the call to Q&A.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press Star two if you would like to remove your question from the queue. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Adam Baumgarten with Zelman Associates. Please proceed with your question.

Adam Baumgarten (Managing Director)

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

Dave Banyard (President and CEO)

Yeah, thanks, Adam. The way I describe the pricing environment today is it's, we're kind of back to normal pricing environment. You know, we have not raised price this year, nor do we feel that we need to. There's a couple different aspects that I'll talk to about the current, you know, what normal looks like. First off, we do have some contracts with some large customers that, that are index-based, those are gonna move with the indexes as they go. We're seeing that as material costs do come down. We're seeing some of those come down a bit. I think I'll also go back.

We've moved you know, there is a lot of talk in the market of people wanting a lower cost for their project, so we, we spend a lot of time working with customers across all different parts of the market to get them into the right configuration. Sort of think of it as value engineering, if you will, from the from the designer standpoint. So using the breadth of our portfolio to move folks into the right price point that suits their needs at the time. Then beyond that, you know, I'd say a normal pricing environment for cabinets, as you know, has some promotions in it. I think we use that sparingly, but we use it in cases where we think we need to for, for larger projects and things like that.

Generally, I'd say in summary, it's, it's a normal price environment, sort of akin to the way it was before COVID and the inflation.

Adam Baumgarten (Managing Director)

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

Dave Banyard (President and CEO)

Yeah, I don't think we really have a number to give you. It's definitely a factor. It plays into the year-over-year revenue numbers. Again, it was, at least in the second quarter, it was in line. Obviously, I think we hit the revenue number that we thought we would. I think for the full year, you know, it's, it's not material of a change for us, but it does affect, you know, when you. Material in the sense that it's, it's not gonna be much different than what we anticipated at the beginning of the year. I think, you know, it year-over-year, it will have an impact, but I think from our expectations and how we're planning the year, it's, it's immaterial.

Adam Baumgarten (Managing Director)

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

Dave Banyard (President and CEO)

Yeah, I mean, I, I kinda look at the ERP, to some extent, a hazard to bring it up because it, it seems like such a pedestrian thing to talk about when you're talking about technology today. We do have a number of facilities. I, I, it's rough order of magnitude about, you know, I'd say 5-6 more that need to have modernization put in. Really, the key to that is that that allows us to bring the data into a more unified picture for the company. This is not a, you know, lock, stock, and barrel redo the ERP system. This is upgrading to the latest version or a different system. None of these are very large projects where we're, you know, taking massive amounts of resources to do them.

I think that generally speaking, we still have a roadmap of things to go do. That's part of some of the things that we're accelerating. I think, you know, to me, ERP is kind of get it done and move on. It it just helps us with the data, seeing certain parts of the business with a little more clarity than we've seen in the past and being able to react to it. We we have workarounds for that today, obviously, but it just makes things more efficient the more you do that.

Adam Baumgarten (Managing Director)

Okay, got it. Thanks, best of luck.

Dave Banyard (President and CEO)

Yeah, thanks, Adam.

Operator (participant)

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

Garik Shmois (Managing Director and Senior Equity Analyst)

Oh, hi. Thank you. Congrats on the quarter. Wanted to ask, first, just with respect to the margin walk for the second half of the year, you know, certainly you have a very strong first half, and the second half outlook implies some sequential deceleration. Just wondering if you can go into some detail to what you're seeing as some of the drivers sequentially. You know, I think you did call out an increase in investments, relative to before. Are you seeing any, any other changes, whether it's with respect to mix or costs or anything else that, you know, would speak to the first half, second half moving margin?

Dave Banyard (President and CEO)

Yeah, sure. I'll give some maybe highlights, and if Andi wants to fill in, if I missed anything. You know, generally speaking, start with the top line. The revenue will be smaller as we go, so third quarter will be slightly less than second quarter. Fourth quarter typically is the lowest, or first and fourth quarter are typically lower. There's a revenue volume impact on, on overall profit ability. We are increasing our investment, as we said, I think, significantly from what we had anticipated before, because I think we can afford to do that. I, I like the, I like the list of projects that we have, and this is accelerating certain ones of those.

We do- you know, the fourth quarter is always- fourth and first quarter always have a lot of holidays in them, and they're really inefficient times to be running the plants. You do see an impact on that, and it's, it's one of those where, you know, if I were you to ask the question: Well, don't you guys have a very flexible network? You do, but you don't flex, for one week, Christmas holidays. You know, you, you kind of just absorb that. If you look back through history, you'll see that- if you look back through history, you'll see that we have this kind of pattern to our profitability through the year. Last year, third quarter was the strongest. This year, you know, I think second quarter will be the strongest.

We're gonna have a little bit of that dynamic, just from some inefficiencies around how you run the plants based on the time of year, and so forth. Andi, is there anything I missed on that?

Andi Simon (EVP and CFO)

No, that's exactly it. It's just seasonality and then the strategic initiative investments.

Garik Shmois (Managing Director and Senior Equity Analyst)

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

Dave Banyard (President and CEO)

Yeah, I wouldn't say cancellations, no.

Garik Shmois (Managing Director and Senior Equity Analyst)

Okay.

Dave Banyard (President and CEO)

I think the dynamic is, it's an odd one at this time of year. I think you're seeing this in the press, too. I mean, people are spending more on their vacations this year, That's probably dollars we're competing with. What's interesting about it is you see more activity of people interested in redoing their kitchens. They're just not pulling the trigger on it right now. I think, you know, that gives us pause. I don't think it's a long-term problem. I think it's people are either building up their budgets to go do it, or they're dreaming a little bit now, and eventually, you know, we anticipate that they're gonna wanna do the kitchen at some point, or the bathroom.

I think there's just a bit of distraction for the consumer, and I think the consumer's also a bit in a wait-and-see mode. I mean, you see people setting up accounts for home equity loans, but they're not taking the money out, things like that. Those are kind of the, the kinds of things we're seeing. I think if you talk to our dealer network, I'd say they'd say that traffic is, is down and that people are shopping around a bit more. It may just be that the lag of, you know, people thinking about their kitchens, they're waiting a little longer to do it. We get a little bit of an air pocket in the actual order book because of that.

Again, it as we look at the market, we know, we think we're gonna kind of be right in line with where we thought for the year in terms of revenue. It's just, it's gonna come from different parts of the market. You know, the builder market is stronger than. You know, when we talked in the last quarterly, you know, builder, we were questioning what's gonna happen towards the tail end of the year. We're more confident today that builders are gonna continue to build, and they've brought starts up and so forth. I think we're trading one for the other. Yeah, R&R in general is a little tepid at the moment, but again, I think the long-term fundamentals are good for us, and so I'm not too worried about it.

Garik Shmois (Managing Director and Senior Equity Analyst)

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

Dave Banyard (President and CEO)

Yeah, it continues to come down. You know, builders still are carrying an excess backlog of homes under construction, so that's- it's still got a bit of noise in it. Generally speaking, I think that by the end of this year, they'll be on pace to be, you know, kind of normalized in terms of starts with, with completions. For us, it's typically towards the tail end of whatever their cycle time happens to be. You know, floors have to go in, windows and doors have to be on, and so forth, in a house before they put cabinets in. It's, you know, the later third of a build is where we tend to see the cabinets go in. You know, our lead times have come down.

Our, you know, any inventory that was in the system is out, I think we're now kind of at what I'd say is a normal book and turn pace for that. We get the order, you know, several months into a start.

Garik Shmois (Managing Director and Senior Equity Analyst)

Understood. Thanks again. Best of luck.

Dave Banyard (President and CEO)

Thanks, Garik.

Operator (participant)

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

Tom Mahoney (Senior Research Analyst - Partner)

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

Dave Banyard (President and CEO)

Yeah, I'd say we don't quantify specifically. You know, our material cost in general is about half of, of, you know, 50% of sales. That's about the best I can give you. 50% of cost of sales. 50%, sorry, 50% of cost of sales. Thanks, Andi. Mm-hmm. In terms of inventory, you know, I, I'll, I'll take a moment here to say that the supply chain organization within MasterBrand did an amazing job in the first half of this year. As you know, we invested in inventory last year in the first half, and they did an amazing job of working through that much quicker than we expected. It's why you see strong cash flow that we had in the quarter.

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

Tom Mahoney (Senior Research Analyst - Partner)

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

Dave Banyard (President and CEO)

Yeah, absolutely. I think we still have that backlog period still to work through. It was not, you know, it wasn't done by the end of the second quarter last year. We, you know, third quarter in particular is gonna be a big chunk of that backlog is not there. Comparing Q3 to Q3 of last year is, that's gonna be the biggest decline of the year. In terms of the market, I'd say this year we're probably on par with the market, if you take that backlog portion out. Really, the work that we're doing on these growth initiatives is probably more centered on 2024.

Some of these are customer and consumer-facing type initiatives, you know, we don't have that completed yet, so until they're completed, they're really not gonna generate any kind of outsized growth. We're excited about them. You know, beyond that, there's what I'd call the normal going and winning share by selling the value proposition, which we think is a strong one, and, and we're continuing to do that every day. You know, I think with our large builder customers, with our large retailers, we're out there every day trying to win share, and, and I think we've been, we've been successful at that. Those types of wins tend to take a little longer to come into the P&L when you change a big program over.

Our goal with the growth initiatives is to, to grow across all parts of the business. Some of them take time because when you win, it takes time to change over, and some of them take time because the initiatives that you're building to get that growth take time to develop. That's why we think it's prudent for us to, to spend more money this year to go after that, so we're really ready to go in 2024.

Tom Mahoney (Senior Research Analyst - Partner)

Great. Then I think in the first quarter, you had highlighted some restocking of the wholesale channel facing builder customers that benefited revenue in the quarter. Was there any moving pieces around that in the second quarter? Maybe did recur, didn't recur, continued, didn't continue?

Dave Banyard (President and CEO)

I think maybe, if I remember correctly, it might be the flip of that, it's been that we serve a number of our building- builder customers through a distribution network. I think they were destocking through that period. There was a, you know. That was Q4 and big into Q1. I think that's sort of the opposite of perhaps how you're portraying it here. I'd say no, we're kind of out of that mode now. We're in what I'd say, as houses get started, we get the order, you know, within a couple of months, and then we deliver it within a couple of weeks. We're in what I'd say is a normal pace for the new construction market in terms of our orders and delivery.

Tom Mahoney (Senior Research Analyst - Partner)

Okay, great. Thank you.

Dave Banyard (President and CEO)

Thank you.

Operator (participant)

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

Farand Pawlak (VP of Investor Relations and Corporate Communications)

Thank you, operator, and thank you everyone for joining us. We appreciate your interest and look forward to speaking to you in the future. This concludes our call.

Operator (participant)

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