Masonite International Corporation
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Greetings and welcome to Masonite's 2016 Third Quarter 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 is being recorded. I would now like to turn the conference over to Joanne Freiberger, Vice President and Treasurer.

[Joanne M. Freiberger:]

Thank you, Audrey, 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. The information for the webcast presentation that will accompany today's call is available on our website at www.masonite.com under the heading Investors. During this call, we'll 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, and in our 2015 annual report on Form 10-K, as well as subsequent quarterly report on Form 10-Q, 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 measure is included in the press release and in the Appendix of today's presentation, both of which are available on our website. On today's call, Fred will begin with a quarterly overview, Russ will discuss financial performance, and then Fred will summarize our prepared remarks before opening the call up to a question-and-answer session. And with that, let's turn the call over to Fred.

[Frederick J. Lynch:]

Thanks, Joanne. Good morning and welcome, everyone. We posted a very solid top-line and bottom-line results in the third quarter, despite a generally slower industry environment. This marks the 10th consecutive quarter of double-digit adjusted EBITDA growth at Masonite, with positive performance of all three reportable segments in the quarter. Our teams throughout the company continued to deliver on their commitments, driving purposeful execution of our strategies within each business. Year-to-date, our incremental adjusted EBITDA margins are in excess of 40%, as positive progress from pricing, mix, and operating leverage all came into play. Net sales growth in the North American Residential segment, our largest business, is 15% up year-to-date, with both wholesale and retail channels posting strong growth, again, in Q3 with net sales increasing 11% year-over-year. Our Door Stop International business, which sells entry doors in the UK residential repair and remodel market, had another strong quarter with net sales growth in the high-teens in local currency, despite the continued uncertainty surrounding the UK economy. While we are, of course, happy with the growth that we believe outpaced the housing markets, our primary focus remains on increasing the profitability of each business segment and Masonite overall. In particular, we continue to execute on our strategy to transform our Architectural wood door business and improve margins. As part of those efforts, we shared in our press release yesterday our decision to consolidate one manufacturing site and we will be taking an associated restructuring charge. And I'll speak to that further in a few minutes. We also continue to invest heavily in digital capabilities to grow our business by providing an unparalleled customer experience, enhanced by cutting-edge digital interactions. As part of this effort, we have merged all of our digital efforts into a single team that has been relocated to our new digital innovation center in Ybor City, Florida, and, again, more on that in an upcoming slide. This is an extremely exciting time to be working at Masonite, as we're delivering strong financial results at the same time we are transforming the way we do business. The combination of great financial results, exciting strategic initiatives, and talented, capable and motivated employees give us confidence that we're well on our way to achieving our 2018 growth framework. So specifically looking at our third quarter financial results, reported net sales increased 3%. Excluding FX headwinds and adjusted for the sale of our South African business, net sales were up 8% year-over-year. Adjusted EBITDA increased 29% and adjusted EBITDA margin for the company increased 270 basis points to 13.3%. Adjusted earnings per share was $0.89 versus $0.62 in the third quarter last year, a 44% improvement. We're also continuing to execute on our capital deployment plan by returning $44 million to our shareholders by repurchasing 657,000 shares during the quarter. As of today, we have repurchased $95 million of our $150 million authorization. This is our 14th consecutive quarter of positive average unit price growth as we continue to focus on high quality products and value-added services. We did experience an interesting phenomenon in Q3 with respect to category mix in both North America and Europe that affected the reported average unit price. In North America, Q3 net sales in our interior door category outpaced the industry with year-over-year growth in the mid-teens, while entry door sales grew at mid-single-digits. The key drivers of the interior growth were

[Russell E. Tiejema:]

Okay, great. Thanks, Fred. Good morning, everyone. I'd like to begin with a review of each of our reportable segments, and we'll begin with North American Residential. Although it appears that the housing market experienced a softer third quarter when compared to the first and second quarters of 2016, Masonite experienced strong growth in both the wholesale and retail sales channels. Incremental business from Lowe's contributed to very strong growth at retail, and we also believe that the work that we've done with our retail partners in driving new products further contributed to strong sales in that channel. Average unit price in the third quarter decreased 2% compared to the same period last year. As Fred mentioned before, this is purely the result of category mix, not individual door prices. In fact, average unit prices in both the interior and entry door categories were higher year-over-year. And as Fred explained earlier, sales of interior doors were very strong in Q3, growing at a significantly faster rate than entry doors, which on average sell for approximately three times the price of an interior door. We believe our entry door business is roughly in line with the market and interior doors are outperforming the market. This is driven in part by the incremental business at Lowe's, which is primarily interior doors, and the strong performance of our new products portfolio, which skews toward interior doors as well. Let's turn to slide 11 and our Europe segment. Net sales were down 11% when compared to a year ago, but this is more than explained by negative foreign exchange. The British pound fell sharply versus the dollar when compared to a year ago, and the UK represents approximately 90% of our sales in the Europe segment. Excluding foreign exchange headwinds, net sales were actually up 2%. Despite this currency headwind, which also unfavorably impacted adjusted EBITDA by $1 million due to translation, profitability and margin expansion increased significantly due to the optimized portfolio of businesses we've established in the UK over the past two years. Adjusted EBITDA increased 34% and adjusted EBITDA margin expanded 370 basis points compared to the third quarter of last year. Offsetting some of the positive performance is Brexit-related uncertainty that we believe has driven some softness in the overall housing market. However, we remain positive about our investments in the UK and over the long term we believe the UK housing market has room for additional growth, as demographic suggest approximately 200,000 homes need to be built on an annual basis and the UK government has implemented several initiatives to stimulate supply. Our DSI business, which sells exclusively entry doors in the UK and is heavily tied to the repair, renovation and remodel market, delivered strong sales growth, reflecting the strength of the business model we are deploying with this product line. In fact, as Fred previewed in his opening remarks, DSI sales volume growth in local currency was up high teens in the third quarter versus the prior year. Turning to slide 12, net sales in our Architectural business increased 3% in the third quarter. Adjusted EBITDA increased 18% and margin expanded 110 basis points compared to the third quarter of last year. Sales volume declined approximately 3% for the segment in the quarter. As we discussed on our second quarter call, an ERP implementation, the first one done in a door assembly plant, impacted Q2 sales due to an extended backlog and operational inefficiencies as the plant transitioned to the new system. We worked through that backlog by the middle of the third quarter and production throughput was back on track by the end of the quarter. Not only are we now achieving better operational results, we are encouraged by the solid sales growth we have experienced so far in the fourth quarter. The Architectural business team is working to drive production efficiencies, improve business processes, and simplify the door buying experience through improved technology and a flexible manufacturing footprint. So, to summarize our consolidated financial results, let's go to slide 13, where our strong third quarter is reflected throughout the income statement. Again, net sales in the third quarter were up 3% compared to the third quarter of 2015 to $490 million. Excluding foreign currency headwinds and adjusting for the sale of our South Africa business, net sales increased 8%. Gross profit increased to $104 million, or 21.2% of net sales in the quarter, an increase of 280 basis points versus a year ago. Gross margin expansion was due to a combination of fixed cost leverage on increased production volumes, higher average unit prices, and lower commodities costs. SG&A increased approximately $3 million in the quarter, primarily due to an increase in non-cash expenses. Also recall that we had a $1.2 million benefit in the third quarter of last year from a business interruption insurance payment related to our previously owned operations in South Africa. Adjusting for this, plus higher depreciation and stock compensation expense, SG&A was down versus the prior year quarter despite higher personnel costs due in part to wage inflation. Adjusted EBITDA increased 29% compared to the third quarter of 2015 to $65 million. Adjusted EBITDA margin increased 270 basis points in the quarter from 10.6% last year to 13.3% this year. Net income was approximately $32 million in the third quarter and adjusted EPS was $0.89. This was a $0.27 improvement compared to the $0.62 in the third quarter of 2015. Slide 14 illustrates how our robust earnings growth has continued to support a strong balance sheet, even as we carry out our cash deployment framework, namely continued capital investments in the business and the execution of our share repurchase program. In fact, during the third quarter, we repurchased $44 million of stock. Subsequent to the end of the quarter, we repurchased an additional $4.5 million, bringing our total repurchases to almost $95 million since the authorization was put in place in late February this year. Total available liquidity at October 2, 2016, including unrestricted cash, an undrawn ABL, and an accounts receivable purchase agreement, totaled $213 million, or approximately 11% of Masonite's trailing 12-month net sales. Total debt and net debt to trailing 12 months adjusted EBITDA stood at 1.9 times and 1.7 times, respectively, compared to 2.6 times and 2.0 times a year ago. As outlined on slide 15, our view on key drivers for 2016 overall remains unchanged. We expect mid to high-single-digit percentage growth in the U.S. housing market and mid-single-digit percentage growth in the RRR market. New product rollout should continue to contribute to higher AUP and the commodities cost environment has been slightly favorable. As demand has been increasing, we have experienced a tightening labor market and the associated cost increases with the ramp-up to higher production levels. The UK's referendum to leave the EU has negatively impacted the UK housing market and its currency, which we expect will continue to be soft for the remainder of the year, as uncertainty in that market remains elevated. Turning to slide 16, we remain focused on our three-year growth framework and the milestones we believe are necessary to deliver that level of performance. Despite foreign exchange headwinds that have been double what we originally expected in 2016, our year-to-date net sales growth is almost 8%. Margin performance has also been very strong, resulting in year-to-date adjusted EBITDA growth of almost 30%. When looking at the fourth quarter, I would point out that Q4 of 2015 had several items that benefited the quarter by approximately $7 million, including utilities and sales tax refunds and an extra week of sales. This contributed to very strong year-on-year adjusted EBITDA growth in the fourth quarter last year, but, of course, now presents a tougher comp for us in Q4 of this year. Having said that, since we see nothing to suggest a significant difference in full-year results as compared to our original 2016 outlook, we're sticking with our approach of focusing on our progress toward the long-term framework rather than routinely updating current year guidance. And with that, I'll now turn the call back to Fred to summarize today's discussion.

[Frederick J. Lynch:]

Great. Thank you, Russ. So, last quarter we shared with you areas that we've identified as key enablers of profitable growth for our business. First are several structural tailwinds, including a continued market recovery, an optimized portfolio of businesses, and our ability to leverage and improve manufacturing cost structure. These last two reflect purposeful actions our company has taken to restructure the business over the last several years. And we believe they now provide a more cost-efficient platform to leverage market growth. Secondly, there are strategic focus areas, avenues that we can directly influence going forward to drive growth and continued strong financial performance. We're investing in technology and R&D to create innovative new products and digital initiatives to drive an unparalleled customer experience. We believe that making the process of selecting, configuring and buying doors easier for our customers, removing friction in the route-to-market process, if you will, can unlock additional demand for doors. Simultaneously, we're employing our MVantage Lean Enterprise system to improve operations with a focus on automation, efficiency, speed, and simplicity. We believe that this will be important in more efficiently leveraging our manufacturing capacity to respond to higher demand and drive operating leverage. We believe these combined areas of focus will drive profitable growth and support our long-term growth framework that Russ just commented on a minute ago. So, in summary, we once again delivered strong financial performance in the third quarter through a dedicated effort to provide high quality and value-added services to our customer. To recap, a few highlights. Net sales increased 3%, or 5% excluding negative foreign exchange and 8% adjusting for the sale of South Africa. In our North American Residential segment, our largest business, sales were up 11%, which we believe outpace the housing market. Gross profit increased 19% and gross margin expanded 280 basis points. Adjusted EBITDA margin increased 270 basis points to 13.3%, and the third quarter of 2016 represented the 10th consecutive quarter of double-digit adjusted EBITDA growth. We believe the investments we are making are transforming our business and we're committed to continuing our efforts to deliver above-market performance by providing an unparalleled customer experience. We continued to launch new innovative products and services, which are having a growing impact on our overall business and we're committed to driving operational efficiencies by incorporating our Lean Sigma Enterprise operating system throughout our organization. I want to again thank our 10,000 employees throughout the world for their efforts and dedications to Masonite's success. And with that, we'd like to open the call to questions.

[Operator:]

Thank you, Mr. Lynch. One moment please while we poll for questions. Our first question comes from the line of Bob Wetenhall with RBC Capital Markets. Please proceed with your question.

[Michael Eisen:]

Good morning. This is actually Michael Eisen on for Bob this morning. And I was just hoping that we could start off talking a little bit about the surge in demand in the U.S. residential market. You guys talked a little bit of the pace and cadence you saw throughout the quarter and how those trends have held up quarter-to-date in 4Q?

[Frederick J. Lynch:]

Yeah. So, I'd say that on the interior side of the business, it's pretty constant throughout the quarter. We probably had a little slowness, as everyone did, starting into the beginning of the third quarter, in July and August timeframe. And as we sit here in Q4, we just grew one month, but we had solid performance in the first month from a sales perspective.

[Michael Eisen:]

All right, great. Thanks. It's helpful. And then as a follow-up, just looking through some of the read-throughs from other earnings calls we've seen in third quarter and some of the commentary earlier today, I was wondering if there's any indication that you guys have seen that there could be pent-up demand on the R&R spending in the market and how that has impacted the higher end of the products. And if we should anticipate that the strength of the lower-end interior doors will continue to outpace, or if there's a possibility for an inflection point as we move forward.

[Frederick J. Lynch:]

Well, I think it's important to note that we are actually seeing that mix-up within each category. So, for instance, even within the interior category, we're seeing the mix-up because of some of our new products. On the entry category, we also have some new products coming that are continuing to grow through the years. So, our issue was really related to mix between two different categories. From the retail perspective, all of our focus that we have on driving the digital frontend of the business and bringing new products to market are really there to drive our prices in the RRR market. The model that we see in the UK with DSI and that focus on the RRR market, we believe, we can unlock latent demand if we continue to bring the best customer experience and the best product offering to the consumer. So, that's basically the answer. Yes, we believe there is latent demand in the RRR arena, and we're doing everything we can to try to unlock that demand.

[Michael Eisen:]

Appreciate all the color. Good luck.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Our next question comes from the line of Nick Coppola with Thompson Research Group. Please state your question.

[Nicholas Andrew Coppola:]

Hi. Good morning.

[Frederick J. Lynch:]

Good morning, Nick.

[Nicholas Andrew Coppola:]

So, I wanted to dig in more on volume trends in North American Residential, quite strong there. Can you just talk more about the key drivers of the performance there? How big of an impact did the Lowe's win have and maybe any more granularity you can provide?

[Frederick J. Lynch:]

Yeah. The Lowe's win was a pretty substantial part of it. As we recall, last year when we won the business, we said that the impact of Lowe's business was going to be in the range of $50 million on an annualized basis. So, clearly, that had an impact, but we really saw it across all the residential business. You saw it equally in the wholesale arena and we attribute that to really couple of things. I'd say one is focus on new products, and I think the second is our teams are just doing a really good job of getting out there and making sure we're delivering a great experience to the customers. And I think the combination of those two has helped us to grow that portion of the business disproportionately.

[Nicholas Andrew Coppola:]

Okay. That's helpful. And then, I guess dropping down to Architectural, a similar question, just about the volume performance there. There was a bit of a decline there, and I think you called out in your opening comments that backlog from Q2 has been worked through at this point. What are you seeing just in terms of trends in the Architectural business now that you've worked through that backlog?

[Frederick J. Lynch:]

Yeah. The backlog clearly impacted our Q3, but I will tell you that, as we go into Q4, that is behind us and we're seeing nice trends.

[Nicholas Andrew Coppola:]

Okay. Thanks for taking my questions.

[Nicholas Andrew Coppola:]

You got it.

[Operator:]

Our next question comes from the line of Jason Marcus with JPMorgan Chase & Co. Please state with your question.

[Jason A. Marcus:]

Hi. Can you hear me?

[Frederick J. Lynch:]

Yes, now we can. Good morning, Jason.

[Jason A. Marcus:]

Hey. So, my first question is on pricing in Europe. You saw a nice acceleration in the average unit price in Europe versus, I think, what you saw in the last several quarters. But I wanted to get a sense as to what you're seeing in terms of apples-to-apples pricing your customers at different product lines across Europe? And then I'd also be interested in some of the demand trends that you're seeing outside of the DSI business in Europe.

[Frederick J. Lynch:]

Yeah. So, again, you had the opposite effect in Europe. So, because our entry door business, which there sells fully finished doors direct, that has a much higher average unit price than our interior door business. Most of the effect of average unit price in Europe was really, again, a mix effect, where we sold the higher preponderance of entry doors versus interior doors. On a like-for-like basis, we had nominal price improvement, but that was really being driven by the mix shift.

[Jason A. Marcus:]

Okay, great. And then next question, I wanted to see if you could talk about some of the trends that you are seeing in the Canadian market, and just what you're seeing with some of your energy exposed markets and how that's played out.

[Frederick J. Lynch:]

Canada has actually been a stronger market for us this year than we would have anticipated going in. Again, we're seeing nice strengthening in Canada on the interior side of the business. And again, I think that's largely driven by the fact that some of our new designs are really – the expert to those – the consumers are looking for that type of product. And so I think we've been fortunate that we picked the right product for Canada when we came into this year. And again, we believe that we're getting higher than industry growth on the interior side in the Canadian market.

[Jason A. Marcus:]

Okay, great. And just one last if I could on the share repurchases. Obviously, a nice acceleration in the quarter. I wanted to see if once this current authorization is used up, is that something you'd expect to renew?

[Russell E. Tiejema:]

Well, we won't comment on that right now. We're in the middle of laying out our budgeting for the next year, and looking at what capital deployment is going to look like over the near to mid-term, and we'll make a determination at that time and we'll talk to you guys about that later if there's going to be any additional authorization.

[Jason A. Marcus:]

Okay, great. Thanks.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Our next question comes from the line of Alex Rygiel with FBR and Company. Please state your question.

[Alex J. Rygiel:]

Thank you. Good morning and nice quarter.

[Russell E. Tiejema:]

Thank you.

[Frederick J. Lynch:]

Good morning, Alex.

[Alex J. Rygiel:]

Incremental margin in the quarter was off the charts, little bit difficult to think about kind of how we should think about that in the fourth quarter and next year. I'm not asking here for specific guidance on incremental margin, but if you could sort of bracket a range or talk us through what your target is or your goal is for incremental margin over the next, call it, handful of quarters.

[Russell E. Tiejema:]

Yeah. Alex, it's Russ. The way I would think about this is, if you take a look at our three-year growth framework, the implied margins in there were in the neighborhood of 30%. And as you've heard us comment in prior quarters, Q2 in particular, that EBITDA pass-through rate, those incrementals are going to be a little bit lumpy depending on specific cost in the quarter and specific mix impacts or dynamics that you may have in any given quarter. So, we prefer to look at this kind of over the year and over the horizon of that growth framework. And if you take a look at in North America in particular, our EBITDA pass-through rates or incrementals year-to-date have been in that low 30% range. So, again, that informs our view that the margin accretion in the business is strong and it's performing in line with the viewpoints that we had when we laid out that framework through 2018.

[Alex J. Rygiel:]

And then secondly, as it relates to more recent housing starts versus completions and sort of the mix shift from multi-dwelling units to single family, can you blend that all together and help us to think about sort of the next 12 months as it relates to demand for your product or for -

[Frederick J. Lynch:]

Yes. So, we always talk about housing starts as being in combination of multiple-family and single-family. So, we do a single-family equivalent. And, as you recall, single-family door had about double the number of doors than a multi-family project would have. And so, again, we don't have any better data than anyone else has with respect to what housing starts are going to be and what the ratio of multi-family to single-family will be. But what we can tell you, as you go through your modeling, just assume that we're going to get twice the number of doors through a single-family home than we're going to get from a multi-family home.

[Alex J. Rygiel:]

It's helpful. Thank you very much.

[Frederick J. Lynch:]

Thank you.

[Russell E. Tiejema:]

Thanks, Alex.

[Operator:]

Our next question comes from the line of Al Kaschalk with Wedbush Securities. Please state your question.

[Al Kaschalk:]

Good morning, everybody.

[Frederick J. Lynch:]

Good morning.

[Al Kaschalk:]

The execution on the margin front is good to see. I wanted to push down a little harder on the volume side, particularly North America. And given the comment you just made about the single-family equivalents, which has been consistent, why wouldn't we expect that volume trend to continue positively into the first half of 2017, given that completions has always been an even better metric for you?

[Frederick J. Lynch:]

I don't think we said that. That wasn't going to be the case if volumes wouldn't increase.

[Al Kaschalk:]

Okay. Again, just I know you want to avoid the guidance question, but the expectations should be that given the softness that maybe you cited in – or the lag in – the slower industry environment, plus the lag in closings for you, should translate into some decent volumes through -

[Frederick J. Lynch:]

Yeah. And again, we're very happy with where the volumes were in the third quarter. The revenues were quite strong in interior despite that general lag in the industry.

[Al Kaschalk:]

Right. We're just trying to siphon off the Lowe's benefit to see that trend. So, okay.

[Frederick J. Lynch:]

And again, that volume – volume for Lowe's is about $50 million on annualized basis. So, we've given you that number. That's a good number.

[Al Kaschalk:]

Yeah. Okay. I sure hope you wouldn't give us that on – on the UK side -

[Frederick J. Lynch:]

I'm just trying help – we're just trying to help you guys with your models.

[Al Kaschalk:]

No, no, I know. A little joke thing. On the UK side, again, and not to ask for guidance, but that trend here was – the volume was a little softer. The uncertainty is remaining. Is there any reason from the underlying business that we should not expect year-over-year comp to be negative on the UK side?

[Frederick J. Lynch:]

Yeah. I think if you look at the UK side, there's really two stories there. The DSI model, which continues to be strong, which is focused on the RRR projects, seems to be, at least at this point, somewhat immune to any Brexit effect. The remainder of our business is largely focused on – we are focused on new housing. I think that that will continue to be affected by what's occurring in the UK with respect to how the builders are reacting to Brexit. And we know there's been some slowdown in 2016. I do think though longer-term, demographically speaking, there's a big latent demand for new homes in the UK. And so, we continue to be encouraged by that longer-term outlook. But this Brexit, obviously, drives quite a bit of uncertainty. And, quite frankly, what's come out recently in just the last week about parliament having the ultimate decision on this could question whether Brexit will happen ever at this point in time. So, we're not in a position to really be able to, at this point in time, determine what the long-term effects of Brexit will be – or the near-term effects of Brexit will be. But I would say long-term we feel very confident about the demographic need for housing.

[Al Kaschalk:]

Great. And if I may have one last add-on here. On the Architectural side, one plant closing. How many plants do you have related to that business? And I know there's a lot of moving parts there as you right-size that operation, but -

[Frederick J. Lynch:]

Yeah. There's 11 plants overall – facilities overall that are associated with the Architectural business segment, and that's a combination of door manufacturing facilities and component facilities.

[Al Kaschalk:]

Okay. Good luck, guys. Thank you for the color.

[Frederick J. Lynch:]

Thank you.

[Russell E. Tiejema:]

Thanks, Al.

[Operator:]

Our next question comes from the line of John Baugh of Stifel. Please state your question

[John Baugh:]

Thank you for taking my questions and congrats on a nice quarter. First thing, I think you commented that like-for-like pricing in the North American market for entry as well as interiors was up. Any more granularity on that?

[Frederick J. Lynch:]

No, it's up.

[John Baugh:]

Okay. Just a point of clarification. Adjusted EBITDA in Europe, does that include or exclude the FX, I think, it was $1 million impact?

[Russell E. Tiejema:]

That would include that impact, John.

[John Baugh:]

Okay. You mentioned heritage doors helping, I think, not only your volumes, but your AUP in retail. Is there any way to qualitatively, if not quantitatively, discuss what's going on in the retail channel with mix or AUP moving up?

[Frederick J. Lynch:]

Yeah. I would say that we didn't – heritage doors had some impact on the retail. It actually has more impact, I would tell you, today on the wholesale business. And what's important about these products is, as you bring new products to market, it actually also pull through the opportunity for existing products just as much. So, that's really the dual benefit of continuously bringing new products to market. We're still in a situation, though, where the retail channel has a much lower percentage of new products being sold and deployed in the marketplace as you compare to the wholesale channel. And it's an area of focus for us with our retail partners, because we believe that we can add substantial value to our sales and to our retail partners if we can continue to drive that mix on the floor at the large big boxes away from traditional six panel products and more towards higher-value new products that we both could pay more for, because the consumer wants it and the consumer is willing to pay more for.

[John Baugh:]

Okay. Thank you. And then remind us again when precisely those begin to impact numbers.

[Russell E. Tiejema:]

It rolled-in in Q4 of last year, John. So, we're getting to a point now when we will anniversary that starting next quarter.

[Frederick J. Lynch:]

It was late Q4, though. It's probably like the December timeframe where we actually started to see sales.

[John Baugh:]

That's helpful. And then final one. Is there a rough weighting between – you comment about the DSI business and the UK versus the new build, any rough weighting between those two?

[Frederick J. Lynch:]

I'm not sure I understand the – you're looking for the...

[John Baugh:]

Well, you mentioned DSI was up high teens, so I guess we could kind of try and do the math. But I'm just looking for the weighting of the business between these two markets.

[Frederick J. Lynch:]

We think about the business in the UK probably being close to 60%, our traditional business. 60% is new construction and then remainder – with RRR; other would be in the – 40% other – 40% is the other two.

[John Baugh:]

Beautiful. Thank you so much. Good luck.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please state your question.

[Kevin Hocevar:]

Hey. Good morning, guys. Nice quarter.

[Frederick J. Lynch:]

Thank you, Kevin.

[Kevin Hocevar:]

I think you mentioned on your slides that the pricing actions you took in the first half of the year in Architectural are starting to roll though. So, wondering if you could give us some type of update on how much of that benefited the third quarter. Did you see the full impact of that yet or should that continue to trickle up here in the fourth quarter and going forward?

[Frederick J. Lynch:]

Yeah. I would say that we would expect that to continue to trickle up. We did not see the full impact of that. If you recall, the Architectural business is different than the Residential business. So, when we go out with a price increase, we start to price new projects and new bids based on that. And some of those, if they're stock orders, which will be – have a relatively short lag time, we'll start to see the impact on that. So we might be bidding a project in July of this year that's going to be installed in July of next year. And so, while we bid that project at a higher new price, we're not going to see that realization of that price increase until sometime next year. And so, we'll see, I think, over time a general improvement. We're expecting just a general improvement in margin as a result of that price increase earlier this year.

[Kevin Hocevar:]

Got you. Okay. And then on slide 15, you called out in the tailwind side that – well, last quarter you'd mentioned you expected benign commodities. In this quarter's slide deck, you said you expect favorable commodity market. So, wondering what you've seen changed there and what type of benefits do you expect from commodities this year.

[Russell E. Tiejema:]

Yeah. This is Russ. Here's the way I think about it is, last year we think we got about 1% tailwind in our material cost overall due to lower commodities costs. We came into this year thinking that we'd probably see a little bit of additional commodities benefit year-on-year, but not nearly to that degree. I wouldn't suggest that we're going to see the full benefit year-on-year in commodities that we got last year, but oil prices have remained low, at least to this point in the year. And so, we've not seen the ramp-up in some of the chemicals-based baskets which drive some of our costs, for example, in resins as quickly as we may have anticipated earlier in the year.

[Kevin Hocevar:]

Got you. Okay. And just one last one. I think you – and maybe I missed it, but last quarter you called out certain transactional FX headwinds in the quarter. Did you mention how big that was this quarter? And I guess if FX stays where it's at, what would you expect going forward? And then, you also called out as headwinds the Mexican peso in your slide there. So wondering, especially with what's happening today, what type of impacts you could see there as well.

[Russell E. Tiejema:]

Yeah. Again, it's Russ. I'll give a little bit of color on FX. We didn't specifically comment on transactional FX impacts. We did incur some impact in the quarter though. I did mention about $1 million worth of impact for translational, and that's principally related to the UK. On the transactional side, it was about twice that, but it is roughly evenly split between both North America and the UK, because we do have cost for product that we produce in Mexico that's in dollar-denominated inputs. So, we had some transactional headwind in North America related to our Mexican production, and then we had some in the UK-related to euro-denominated components that we purchase in for assembly of doors in the UK. And so, couple of million dollars, call it, of transactional impact in the quarter roughly split between North America and the UK.

[Kevin Hocevar:]

Okay, great. Thank you very much.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Our next question comes from the line of Josh Chan with Robert W. Baird. Please state your question.

[Josh K. Chan:]

Hi. Good morning. Fred, Russ and Joanne, congrats on a good quarter.

[Frederick J. Lynch:]

Thank you. Good morning, Josh.

[Josh K. Chan:]

Good morning. Thanks for the color on the North American AUP interior versus exterior. So, as you kind of lap that Lowe's business this coming quarter and maybe some of new products last year, is it the expectation that the growth rate in interior and exterior kind of converge? And obviously, the corollary to that is, would it be reasonable to expect AUP to kind of resume on a positive trajectory here?

[Frederick J. Lynch:]

Yes. I'd say that, obviously, we will be lapping that growth from the end of this quarter. So, it will be a tougher comp for us to have those type of growth rates. So, I think, just naturally from a mathematical perspective, the answer is, yes, that we would start to see that converge.

[Josh K. Chan:]

Okay. And then shifting over to the Architectural side, the plant backlog, obviously, shifted things around. I'm wondering what you're seeing – on an underlying demand basis, what are you seeing on the commercial marketplace and any change in the trend there?

[Frederick J. Lynch:]

Yeah. I mean, right now we're seeing demand from an order intake perspective and from a project quoting perspective that would argue a mid-single-digit level demand increase going forward. So, that's kind of how we're planning for it.

[Josh K. Chan:]

Okay, great. Thanks for the color and good luck.

[Frederick J. Lynch:]

Thank you.

[Russell E. Tiejema:]

Thank you.

[Operator:]

That does conclude our question-and-answer session. At this time I will turn it back to Mr. Lynch for closing remarks.

[Frederick J. Lynch:]

Okay. Well, thanks very much, and I want to thank everyone for joining our call today. I know you all have a lot on your minds and lot of other calls going on. We appreciate it. We look forward to speaking to you soon. Thank you.

[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 23. To access the replay, please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. Enter your conference ID number 13647756. Thank you for your participation. You may disconnect your lines at this time.