Masonite International Corporation
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Welcome to Masonite's Third Quarter 2017 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management's prepared remarks, investors 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 Joanne Freiberger, Vice President and Treasurer. Please go ahead.

[Joanne M. Freiberger:]

Thank you, Stacy, and good morning, everyone. I'm joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer; and Russ Tiejema, our Executive Vice President and Chief Financial Officer. And also in the room with us today to participate in the Q&A session is Tony Hair, President of our Global Residential Business; and Graham Thayer, Senior Vice President and Business Leader of our Architectural Business. The information for the webcast presentation that will accompany today's call is available on our website at www.masonite.com. During this call, we will be making forward-looking statements that are subject to risks and uncertainties, which are described in greater detail in the earnings presentation and press release that we've made available in connection with this call and in our 2016 Annual Report on Form 10-K, all of which are available on our website. Actual results may differ materially from those expected or implied. Forward-looking statements are as of the date they're made, and we undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of today's presentation. On today's call, Fred will begin with a company overview, Russ will discuss financial performance, and then Fred will summarize before opening the call up to a question-and-answer session. And with that, let me turn the call over to Fred.

[Frederick J. Lynch:]

Great. Thanks, Joanne. Good morning, and welcome, everyone. Our top line grew 6% in the quarter driven by volume growth in both our North American Residential segment and our Europe segment. Importantly, we achieved positive average unit price in all three reportable segments in the quarter. While the third quarter began with disappointing margin performance as we relieved higher cost inventory early in the quarter, we saw steady sequential improvement across the quarter and exited September with much stronger gross margins. Solid operating performance continued into October. Sustaining improved operational performance remains the top priority, and we believe there is additional opportunity to improve margins further going forward particularly in the area of distribution costs. Adjusted EBITDA increased 7% in the third quarter. While certain headwinds including inflationary pressures and higher distribution costs just mentioned essentially offset the benefits of the volume and higher average unit prices, we did benefit from reduced SG&A expenses. Another of those headwinds, which fortunately proved manageable for Masonite was the back-to-back occurrence of Hurricanes Harvey and Irma in the third quarter. Our first priority was to ensure the safety of our employees and our facilities. We were very fortunate that our employees were all accounted for and we had no equipment or inventory loss from the storms, although we did lose several production days surrounding Hurricane Irma due to facility closures, power outages, and the lack of staffing as employees dealt with the aftermath of the storm and ability to actually get to our sites. On the heels of the storms, we began working with our customers to maintain supply despite logistical challenges in the affected areas in order to help the rebuilding and repair effort. And our plants worked extremely hard to ensure that we could get the necessary products to our customers as needed. Now, this did lead to a small bump in the volume late in the quarter related to rebuilding efforts primarily in the retail channel; however, the extent and timing of any renovation-related demand that may materialize going forward are unclear, and expect that over the course of 2018, this could be a small tailwind to our business. In response to continued inflationary pressures impacting materials costs, labor rates and logistic costs, we've recently implemented additional price increases in all three business segments. In our Architectural segment, we remain enthusiastic about the progress we're making to transform that business, which we'll discuss in a few more minutes in detail. We also completed several capital deployment initiatives in the third quarter, taking advantage of what we viewed as a favorable high-yield bond market condition. We issued $150 million bond add-on priced at 104%, which gave us additional liquidity and flexibility. We leveraged our opportunistic share repurchase program to buy back 1.2 million shares in the quarter, and we also completed the acquisition of A&F Wood Door Products (sic) [A&F Wood Products] in early October. Let's turn to slide 6 to discuss volume and margin trends we've seen over the course of the year and the progress we've been making on the operational side of our business. As you can see in the top left graph, we saw a return to a more expected growth rate in the third quarter as channel inventory and year-over-year anomalies normalized, and we're encouraged by that trend. As I mentioned earlier, we've been keenly focused on improving productivity since recognizing the extent of the issue in the back half of the first quarter. While average weekly sales have continued to improve, our North American plants have implemented programs to reduce head count by almost 400 positions or 7% since the beginning of the year through a combination of lean initiatives, automation projects, and shift schedule optimization. We've also taken steps designed to optimize costs across our internal supply chain. For example, by rebalancing the supply of facings to our North American door plants utilized more facings from the U.S. and Canada and fewer from our plant in Ireland, which can provide capacity to North America when demand is higher. The gross margin trend shown here in a rolling three-month average compared to our full-year average illustrates the impact of both the lower volume and productivity earlier in the year, which we tackled with concerted efforts in the plant; as well as the headwind early in the third quarter as we digested material cost increases and labor inflation and continued to work on distribution efficiencies. We believe the upward trend shown for the three-month period ended September and also October demonstrates the positive impact of our improvement actions to-date. While we're encouraged by this trend, we recognize there are opportunities to improve productivity further, particularly in our distribution operations, which have been impacted by higher inflation and process inefficiencies. Work continues on balancing service levels and logistics costs by rebalancing freight lanes between our plants and our customers and within our network by optimizing supply of door fab plants to the nearest door assembly operations. With the increasing introduction of new products, we have added some new complexities to our operations, and so we made the decision to augment our continuous improvement organization with specialty consulting firms to address these. Together, our teams are being tasked with identifying additional areas for improvement within our manufacturing operations, including production scheduling processes, inter-plant material flow, and optimizing inventory across our internal supply chain to simultaneously reduce certain types of raw material stocks while improving material flow throughout the door plants. So in summary, while we've incurred self-inflicted challenges this year from an operations perspective and it has taken us longer to recover than we initially anticipated, we believe we're steadily making the improvements necessary to continue to drive incremental margins. Importantly, we believe these challenges are temporary and not structural. And with our continued focus on operations as well as getting paid fair value for our product and services, we're encouraged that additional opportunity exists to resume margin growth next year and beyond. So let's turn to slide 7. Just after the quarter ended, we completed the acquisition of A&F Wood Door Products (sic) [A&F Wood Products] for approximately $14 million. Located outside the Greater Detroit, Michigan area, A&F has a very similar business model as USA Wood Door, providing custom finished and machined commercial and architectural door products on a quick-ship basis, and joins USA Wood Door as part of our Architectural segment. A&F expands our quick-ship model to a wider geographic area, picking up coverage in key markets in the Midwest such as Chicago, Indianapolis, Detroit and Columbus, Ohio. We're excited about this acquisition and how it fits into a growing niche part of our business to provide high-quality, custom machined and specified doors with short lead times at very attractive margins. And we're pleased to welcome the A&F Wood Products team to the Masonite family. Slide 8 provides a quick update on the progress of our Architectural business transformation. Recall that our objective is to integrate our business – our network of architectural manufacturing plants into a more cohesive business unit. We believe this will provide us with a competitive advantage in the future with production flexibility, simplified ordering and superior customer service. On our previous call, we discussed the advantages of reducing our overall product line to a smaller and more simplified grouping of products without reducing our total product offering. These new product offerings have been officially launched and we now have just 8 product lines, down from 29, separated into the Aspiro and Cendura series of doors. Aspiro represents our higher-end series of doors, more frequently utilized in highly specified architectural door applications, while Cendura represents more value-oriented models, more often used in stock commercial door projects. And just last week, we went live with the launch of a common door chassis across the new product families, which we expect will significantly improve our manufacturing flexibility. By launching this streamlined family of products which are configured and constructed in a common way, we both simplify the process for our customers to specify Masonite architectural doors and make it easier to flex the production of our products across multiple architectural door plants. So we're pleased to have now executed on this next phase of the Architectural transformation. On a final note, we were informed last Friday that following a recent line review, a large retail customer will be moving a portion of their stores to a competitor in the second quarter of next year based on a competitive bid situation. We expect this to negatively impact our 2018 revenues by 1% to 2%. As we've said in the past, we expect year-to-year shifts in retail volumes to occur following line reviews and they should be considered an ongoing part of our business, both now and in the future. And so with that, I'll turn the call over to Russ to discuss our third quarter financial performance. Russ?

[Russell E. Tiejema:]

Thanks, Fred. Good morning, everyone. On slide 10, we summarize our consolidated financial results for the third quarter of 2017 versus the third quarter of 2016. Net sales of $518 million represented an increase of 6%. Gross profit was essentially flat at $104 million and gross margin declined 110 basis points to 20.1% of net sales due to higher material cost of sales and higher distribution costs, as Fred previewed earlier. You can see from the adjusted EBITDA bridge included here that gains from volume and higher average unit price were essentially offset by those increased material and distribution costs. Manufacturing, productivity gains served to offset wage inflation experienced in our manufacturing plants. In material costs, there were three primary drivers. First, we have seen commodities inflation began to accelerate, particularly in steel and resins, but also in wood, primarily in the UK as suppliers continue to seek price to recover from FX headwinds. Second, in some cases, we had higher internal supply chain costs as we utilized a higher cost mix of components such as facings from Ireland, or dealt with spikes in demand such as the ramp up of additional retail business in Florida, by augmenting door supply from plants that were less cost effective in meeting that higher demand. Some of these inflationary impacts and higher internal costs began to materialize late in the second quarter in the form of higher cost raw material and work-in-process inventory, before finding its way to the income statement as we sold through that inventory. Finally, efforts to reduce components inventories early in the quarter led to lower labor and overhead absorption. In distribution, we continued to incur a higher cost in the quarter, primarily in outbound freight expense. This resulted in part from shipping inefficiencies as we gradually eliminated prior arrangements to supply certain wholesale customers from more distant door plants. And as we continued to leverage more distant door fab plants early in the quarter to complete the accelerated ramp-up of new retail business in Florida. We also incurred higher logistics inflation in the quarter in the form of higher fuel costs and higher carrier rates, due in part to carrier capacity constraints incurred in the Southeast, particularly in Florida on the heels of Hurricane Irma. SG&A was approximately $4 million lower, primarily as a result of tightly controlled personnel costs and a reduction of our bonus accrual. Together, these factors resulted in adjusted EBITDA of $70 million, a 7% increase compared to last year, and adjusted EBITDA margin that increased 20 basis points to 13.5%. Net income was approximately $29 million, a decrease of $3 million from last year. Recall the third quarter of 2016 benefited from a $5 million gain related to the sale of our South Africa business. Adjusted earnings per share increased $0.11 to $1 compared to $0.89 last year on the benefit of a lower average share count due to our higher level of share repurchases during the quarter. Let's turn to a review of each of our reportable segments beginning with North American Residential. Net sales increased 8% in the third quarter, while adjusted EBITDA decreased 10%. Volume increased 5% over the third quarter of 2016 aided by new retail business in Florida and we continue to see steady improvement in average unit prices. Much of the material and distribution cost headwind discussed in the prior slide was related to the North America Residential business, serving to more than offset the positive impact of volume and higher pricing. In addition, there were higher marketing and brand-related spending as compared to the third quarter of 2016 and year-on-year increases in corporate allocations. Let's turn to slide 12 and our Europe segment. Net sales increased 7% when compared to the third quarter of 2016 due primarily to the higher volumes from the merchant and contractor remodel channels. However, volume was down in the builder channel due in part to general weakness amongst the top UK builders, which comprise a majority of our revenues in this channel. New housing starts from the top-10 builders in the UK have been relatively muted this year, up only about 2%. Despite this, we remain optimistic about the long-term outlook of the UK market, given the ever-increasing demand for new housing stock as compared to current rates of new home construction. Adjusted EBITDA in the Europe segment increased approximately 4% to $8 million. While adjusted EBITDA margin for the segment was 30 basis points lower, this was driven by weaker results in our Ireland components business due to severance costs and temporary productivity losses incurred in the quarter due to head count reductions as we lowered the supply of facings to North America. Adjusted EBITDA margins for the UK business showed solid year-on-year improvement. In light of the continued weakness in the pound sterling and FX-driven material inflation we have experienced, we have announced and are implementing additional price increases in the UK. On slide 13, you'll see that adjusted EBITDA in the Architectural segment increased 21% and adjusted EBITDA margin increased 240 basis points as compared to the third quarter of 2016, despite a net sales decline of 4%. Sales volume declined approximately 8% in the third quarter as we experienced production backlogs related to the transition of orders from the closed Algoma, Wisconsin facility to other architectural plants. It took longer than expected for those plants to ramp up production to meet the increased volume. Average unit prices increased almost 4% as a result of price increases implemented in July of this year. The execution of our Architectural transformation is progressing well, as Fred discussed earlier. And the closing of our Algoma, Wisconsin facility reduced costs in this segment. The launch of our streamlined product portfolio and common door chassis leaves us optimistic that we can now improve our service levels, more efficiently meet demand, and help us continue to grow margins in this segment. Turning to slide 14, total available liquidity at October 2, 2017 totaled $323 million, including unrestricted cash and accounts receivable purchase agreement and our ABL facility. Fred mentioned earlier our successful execution of a $150 million add-on to our existing 5.625% senior unsecured notes during the quarter. We are very pleased with the outcome of that issuance, which priced at a yield to worst of 4.37%. This add-on served to improve our liquidity profile while maintaining debt ratios well within our objective of 3 times total debt to trailing 12-month EBITDA across the cycle. At the end of the third quarter, total debt and net debt to trailing 12 months adjusted EBITDA were 2.5 times and 1.9 times, respectively. Year-to-date, we repurchased $110 million of our stock, which leaves us with $131 million of remaining availability under our share repurchase authorizations. And with that, I'll turn it back to Fred to summarize today's discussion.

[Frederick J. Lynch:]

Thank you, Russ. In the third quarter, we experienced improved financial performance throughout the quarter from increased volume, higher AUP and lower SG&A costs. Gross margins were down in the quarter as we digested cost increases, but we experienced significant month-to-month improvement through the quarter, and further pricing actions designed to address continued inflation are being implemented in all three reportable segments. While we believe that we've made solid progress addressing the operational issues in our business, we have more work to do and continue to uncover new opportunities, and that remains the top priority. We're excited about the acquisition of A&F Wood Products as it allows us to expand the geographic reach of our quick-ship model in architectural wood doors. The $150 million bond add-on improves our liquidity and provides further opportunities to invest in our business while maintaining conservative debt levels. And while the third quarter started off slowly, the improvements that our operating teams have made since that time are encouraging. And I want to thank them for their recovery efforts and determination. Productivity metrics improved in the quarter, and we saw that in expanding margins throughout the quarter. There are inflationary pressures that we continue to work through, and given the timing of the holidays, the fourth quarter can be somewhat unpredictable. However, we remain focused on continuing to improve operational performance, while ensuring we are getting paid fair value for our products. We continue to believe the business can achieve mid- to high-teen adjusted EBITDA margins over the long-term, and we remain focused on actions we believe that will help deliver that level of performance. And so with that, I'd like to open the call to questions. Operator?

[Operator:]

Thank you, Mr. Lynch. Our first question comes from Bob Wetenhall with RBC Capital Markets. Please go ahead.

[Robert Wetenhall:]

Hey. Good morning, and I want to commend you guys for putting in a tremendous amount of detail that's really helpful in the slide deck. And Fred, thanks for your comments about volumes trending through the quarter, it's really helpful. I wanted to see if I could get a margin bridge between the third quarter of last year I think when you were kind of around a 16% margin and this quarter where you're at 13.8%. And you've got a couple of moving pieces; obviously hurricane headwinds, Russ cited input cost inflation, and then some operational issues, which sound like they're largely rectified. Can you give us a sense for the margin walk back to kind of what you would perceive, to Fred's comments about kind of mid- to high-teens profitability in North American Residential, just between what happened in 3Q, 2017 and kind of where you think this should be?

[Russell E. Tiejema:]

Hey. Good morning, Bob. It's Russ. I would point you back to the EBITDA bridge that we provided for the quarter as a roadmap to really where the issues have been for us and where we've made progress. So clearly, on the materials side, we are seeing an inflationary – a stronger inflationary environment than I think folks anticipated earlier. We came into the year with an outlook of 1% to 2%. We still think that that's a reasonable outlook on the commodities inflation side, but it's probably toward the high-end of that range. And you're specifically seeing accelerated inflation in the area of steel as well as chemicals, so in our case resins, and also a little bit in wood, as I commented on during the prepared remarks. So that's going to be an inflationary pressure that we're going to continue to have to absorb. Some of the operational issues, though, that we saw in prior quarters, we feel that we have, to your point, largely rectified. Our direct labor productivity metrics are trending back in line. Our overhead spending is back in line. Distribution area is an area where we're making some progress, but there's still more work to do. So the way we look at it is as we continue to get leaner and more efficient in optimizing our shipping practices and our distribution practices, that in addition with the price increases that we're implementing to overcome the inflationary factors that I cited, that is really what brings the business back to margin accretion going forward.

[Frederick J. Lynch:]

And I would just add, Bob, one thing you do not see on this bridge is a miss on the direct labor and overhead, right. So, we've actually been able to cover what has been pretty substantial wage increases with improved productivity. We dramatically increased our senior management Gemba walks in our facilities over the last six months to really get to understand what was occurring in our plants and how do we improve that. And I think we're encouraged by the fact that our teams have done a great job in improving, but we've also fortunately uncovered some additional opportunities that we think can make our operations even better. And we're going to be focused on that as we move forward. I think that big red line is – big red box you see on materials and absorption, that absorption hit us pretty hard in the first month of the third quarter. You saw that, if you go back to that that graph on page...

[Russell E. Tiejema:]

Slide 6.

[Frederick J. Lynch:]

...slide 6, and so that then is backwards, a little bit from the progress we're making. But as you can see, as that early month – those early issues are moving behind us, we're starting to see much better progression.

[Robert Wetenhall:]

Is it fair to say, and I was really speaking more towards the North American Residential business, that the 270 basis points of headwinds between operational issues earlier in the year, the impact of hurricane activity and the input cost inflation are all kind of transitory factors and should we expect to see much better margin improvement once you get ahead of that next year?

[Russell E. Tiejema:]

Yeah. It's safe to assume that a vast majority of the inefficiencies that you saw in that bridge were indeed related to North American Residential. And yes, we would view those as transitory issues.

[Robert Wetenhall:]

Excellent. And Fred, you called out positive pricing momentum in all three segments, North American Residential and European volumes are also trending mid-single digit, which is a big uptick. I'm not looking for guidance, but I am looking for some help in how you're thinking about the set up for 2018 for the door industry and Masonite, in particular? Thanks and good luck.

[Frederick J. Lynch:]

All right. Thanks. Bob, we're still going through our planning process right now as you look into 2018. So I would say that when we come back after the fourth quarter, we'll be talking a little bit about what we see happening from a market dynamics perspective and growth rates overall in the industry at that time.

[Operator:]

Thank you. Our next question comes from Mike Wood with Nomura. Please go ahead.

[Michael Wood:]

Hi. Good morning. Just wanted to ask you a little bit more color on that slide 6 you had on your presentation, where you show that rolling three-month gross margin performance. It looked to me like I can go back and see June on that dotted line that you have there and you ended up reporting the gross margins that quarter like 20.6%. October looks like you're well above that line. And I know it's a rolling three-month line. So I was hoping you can give us some color in terms of maybe where October stood relative to that rolling three month in terms of where we're entering fourth quarter from a gross margin standpoint and whether it's safe to assume from looking at that?

[Frederick J. Lynch:]

No, I'll start that just by saying that we obviously when we put this chart out there, we figured we'd be asked those questions. We want to avoid month-to-month discussions because we don't go through our full processes until the end of each quarter. So we're not going to give you the specifics on that. But I think you can see that in each of those months, because it is a rolling 12-month – sorry rolling three-month average, you can see that ongoing improvement. I would say, though, that if you look at the top graph, we just want to be cognizant of this that – and we're very encouraged again by the weekly – average weekly net sales trend. We do see a slowdown typically in the end of December, a little bit in November as well because of the Thanksgiving holiday. So, just recognize that we will be faced with that again as we come into the fourth quarter of this year.

[Michael Wood:]

Okay. And then on the cost side I guess, can you give us some kind of estimate in terms of what the hurricane impact was on third quarter from the impact inefficiencies? And where do you stand now after the changes you've made with that direct labor hours per door produced in terms of where you are versus your goal?

[Russell E. Tiejema:]

So Mike, it's Russ. I'll take the first part of that. Relative to the hurricane, there was not what we would consider a material impact. Now, I'll remind everyone, we've got several operations around Florida. That's really where the impact was felt for us, not so much in Texas. But in addition to our corporate offices here in the Tampa area, we've got plants up in the Jacksonville area. And then several plants across the Southeast that, while they weren't hit directly by hurricane-level weather activity, they were impacted by severe weather and wind and some outages, and that would be around Georgia and South Carolina, Alabama. In some cases, we were down for a few days, particularly in Florida. And that was a day ahead of the storm as we closed the operations and prepared facilities and let people get home to their families to prepare their homes. And then particularly in the Jacksonville area, we were down for a couple of days immediately after the storm just because of power outage in the Greater Jacksonville area. But once we got back up and running, the operation stabilized. We made up our production schedules. So while there was some costs, frankly, we wouldn't consider it material and we've not disclosed any specific amounts.

[Frederick J. Lynch:]

And I would just say from a – if you saw – and you will see in the Q that our direct labor and overhead as a percent of sales were relatively flat on a year-over-year basis. So to answer your second question, we believe we've gotten that back in line to where it has been. With that said, that's part of being a continuous improvement organization, and our lean enterprise – MVantage Lean Enterprise operating system will be focused on trying to capture more from that. And our capital programs and automation programs, we're looking at trying to capture more from that over time because we recognize that labor inflation is going to continue. We have a shortage of labor in this country right now, and that's going to continue to be a stress on our organization. So a combination of process improvement, lean initiatives, capital improvements aimed at making us less reliant on – or less affected by labor constraints remains an important part of our strategy.

[Michael Wood:]

Okay. Thank you.

[Russell E. Tiejema:]

Thank you.

[Operator:]

Our next question comes from Kevin Hocevar with Northcoast Research. Please go ahead.

[Kevin Hocevar:]

Hey. Good morning, everybody.

[Frederick J. Lynch:]

Hi, Kevin.

[Kevin Hocevar:]

Fred, I think you mentioned having price increases that you're implementing across all of the businesses. And I know you typically don't talk about the success – well, your expectations for price increases that haven't yet been implemented. But I think some of them might have been implemented recently. So I'm wondering if you can comment on that, the level of success you're having, and kind of your thoughts if you think we should see an acceleration in that AUP in the fourth quarter?

[Frederick J. Lynch:]

So I'm going to ask Tony and Graham to comment on what's happening with respect to pricing. So Tony, why don't we start with you?

[Tony Hair:]

Yeah, Kevin. So as we said, we announced a price increase in the North American business through wholesale, and that price increase was mid-single digits effective the beginning of the quarter. I would say that certainly we are expecting good value out of that, and the response has been, for the most part, positive among the customer set that we've done that. On the UK side, we announced a price increase in the end of second quarter effective the end of third quarter. We also have seen a favorable response and expect good returns out of that price increase. And what we're monitoring there is the offset of the material cost increases that are coming our way due to the currency fluctuations in what we buy in other currency denominations in the UK. So we feel pretty good about where we're going with pricing in the Residential side.

[Andrew G. “Graham” Thayer:]

On the Architectural side, we announced price increases in May of 5% for what we refer to as our stock door program, which is our off-the-shelf-type product, and 12% increase for project work, which is quoted out into the future. We tend to get that type of – we get the stock door price increase fairly quickly in timing, whereas the project work takes – it can take 12 to 18 months to flow through. So we're seeing a fairly good flow-through in the price increase, but it does take some time to settle in, and we see good volume and a good environment for the pricing going forward.

[Kevin Hocevar:]

Okay. Great. Super helpful. And on the corporate and other item, that was about an $8 million beneficial swing in EBITDA from the third quarter of 2016 to 3Q 2017. It was a $5 million bad guy last year, $3 million good guy this year. So how should we think of that? Can you describe what drove that? I think you've talked in the press release about a $8 million reduction in personnel expense. So wondering if that was captured in there, or if something else. And how should we think of corporate expense for the full year this year and then versus what should we expect next year?

[Russell E. Tiejema:]

Yeah. Kevin, it's Russ. Within the corporate sector, the reduction that you saw was principally associated with the reductions in our incentive compensation accrual. And we took reductions this year based on our performance to plan, whereas in the prior year, we actually were adding a slight amount to the accrual. So it made for an exacerbated year-on-year comparison for incentive comp in particular. Now, that said, I also feel really good about how we tightly controlled SG&A costs elsewhere in the business. We were very diligent about maintaining head count levels and maintaining lower costs wherever we could, in part because we are seeing inflation across the business, and we did have some higher marketing and advertising spend that would have been in the North American Residential business. And we have had some higher professional fees as we've augmented our teams with some of the specialty consulting services to help us drive operational improvement in the business. So again, we're going to point back to the fact that we've made some good progress on the operational side of the business. We think the traction that we need to continue driving for is really in gross margins. We'll make the right investments as we need to in SG&A to help drive that.

[Kevin Hocevar:]

Okay. Great. And just last one for me on the – back to that EBITDA bridge on slide 10. I thought this was super helpful that you guys included that in there. On the distribution piece, so that was – I know this has been a headwind and you called out $5 million EBITDA headwind this quarter. I'm wondering – I don't think bridge was included in prior quarter. So, has that been consistent, is that about what it was in prior quarters? And then, as we look ahead, I know you're taking actions to try and improve this. How do you expect that to trend going forward?

[Frederick J. Lynch:]

So as we think about – this is Fred, and I'll have Russ follow-up on more exact information. But if you think about the distribution costs, we divide it into really three categories. One is the actual cost of our freight. So the cost of trucking, the rate of trucking, fuel surcharges, et cetera, et cetera. And we have seen inflation in that. We saw accelerated inflation of that in the third quarter, primarily due to the hurricane-related issues, where we saw short-term increases in that cost. The second piece of that cost is how efficiently are we managing those freight lanes and how efficiently are we using or not using LTL as opposed to making sure we're using full truckloads. And then also, shipping from the most-efficient plants to our customers or, internally, within the organization. So, that's kind of a middle chunk of that and that chunk is an area where we definitely had increased costs, both in the second and the third quarter. A portion of that was, as we readied to ourselves for some of the retail shifts that we had this year, as well again as having to deal when we have issues like hurricane issues, where we don't let our customers down, so we'll shift from a plant pretty far away in order for it to get to Florida when our Florida plants are falling behind. It's just what we do and it's the right thing to do. And then the last piece of that is, when we think about shipping and distribution costs within the plant itself. And that's everything from distribution labor to distribution supply, and how do we affectively run that. And when we look at that adjusted EBITDA bridge on a year-over-year basis, all three of those were driven in the quarter and all three of those have opportunity to improve going forward, particularly the latter two. The first one is going to be market-driven.

[Russell E. Tiejema:]

Yeah, I would just follow up. And first of all, I think Fred framed it very well. I would just follow up by saying that, in prior quarters, we've clearly seen distribution headwinds. Last quarter was not terribly dissimilar to what you see here. The change that we've seen, again, is in the inflationary side and the fact that fuel charges are up. We're seeing carrier constraints. I actually commented on that during my prepared remarks, the fact that on the heels of the hurricanes we actually have seen the rate increases with the carrier companies as they've dealt with some of the constraints in their own shipping lanes. We saw it to a significant degree in Florida, actually. FEMA was actually utilizing a fair amount of carrier capacity into the state of Florida on the heels of Hurricane Irma and that provided for some constraints and it drove rates up. In the absence of that, we would be getting some traction here. And we acknowledged all along that our first order of business was addressing operational inefficiencies in the plants. We feel that we're back on track with respect to that. We've taken the initial steps to really help us optimize our distribution cost, but that's really where there's still some work to be done.

[Kevin Hocevar:]

Got you. Okay. Thank you very much.

[Operator:]

Thank you. There are no further questions. I would like to turn the floor over to Fred for closing comments.

[Frederick J. Lynch:]

Great. Well, we appreciate everyone's participation in today's call. Thanks for that. We hope you enjoy the upcoming Thanksgiving holidays, and we look forward to speaking to you at the end of the fourth quarter.

[Operator:]

Thank you for joining the Masonite International Third Quarter Earnings Call. This conference call has been recorded. The replay may be accessed until November 22. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. Enter conference ID number 13672286. Thank you.