Masonite International Corporation
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Welcome to Masonite's 2016 Fourth Quarter and Full Year 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 will now turn the call over to Joanne Freiberger, Vice President and Treasurer.

[Joanne M. Freiberger:]

Thank you, Donna, and good morning, everyone. I'm joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer; Russ Tiejema, our Executive Vice President and Chief Financial Officer; Tony Hair, Senior Vice President of our Residential Business; and Larry Repar, our Executive Vice President and Chief Customer Experience Officer. 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 the press release that we've made available in connection with this call and in our 2015 Annual Report on Form 10-K and subsequent Quarterly Reports 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 statements 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, also available on our website. On today's call, Fred will begin with a company overview, Tony will discuss our new brand launch, Larry will discuss our new website and digital initiatives, Russ will discuss financial performance and our outlook, and then Fred will summarize before opening the call to a question-and-answer session. And, with that, let me turn the call over to Fred.

[Frederick J. Lynch:]

Thanks, Joanne. Good morning and welcome, everyone. 2016 was another great year for Masonite marked by strong financial performance and exciting new developments at the company. On a full year basis, all three reportable segments reported adjusted EBITDA margin growth. And excluding FX headwinds in Europe, all three showed net sales growth over the prior year. Our North American Residential business outpaced the housing market with 13% sales growth in 2016. Our DSI business in the UK continued to deliver above market growth with strong net sales, above 20%. And that's despite the uncertainty in the UK market in 2016. And 2016 marked our sixth consecutive year of positive average unit price growth. And the fourth quarter was our 15th consecutive quarter of AUP growth. Our strategic investment in digital capabilities is ongoing, as evidenced by our new Digital Innovation Center in Ybor City, Florida, which was designed with a focus on innovation and collaboration. And Larry will share more on the investments in digital in just a few minutes. And as we shared with you last quarter, the multiyear transformation of our Architectural business is underway, including commonizing our door chassis configurations, rationalizing duplicate product families, optimizing our manufacturing footprint and migrating multiple systems on to contemporary ERP platforms. In late February 2016, we implemented our first share repurchase program, which was approved for $150 million. By the end of our fiscal year, we utilized nearly three-quarters of that authorization. So, after market yesterday, we announced that our board authorized an additional repurchase plan of $200 million. Our past momentum continued as our 2016 adjusted EBITDA increased 24% and we delivered a 12.8% adjusted EBITDA margin. Since our registration and listing in 2013, our adjusted EBITDA and our adjusted EBITDA margin has more than doubled. The strength of our 2016 financial performance, combined with business momentum and the continued investment in exciting strategic initiatives, provided for a strong progression towards the long-term financial framework that we shared last year. Let's turn to slide six. Masonite has invested in providing our partners with innovative new products and a superior service proposition. And we believe these focus areas are valued by our customers as we have won additional profitable business with existing customers over the past 18 months. Our focus at Lowe's in 2016 was largely about executing on the new business wins of approximately $50 million annually. With this new business, we successfully transitioned Lowe's from the ReliaBilt brand to Masonite branded products in the markets that we serve. Doors outperformed the overall millwork category in these new stores as a result of new products, improved marketing and branding, better assortment and higher-priced doors. We believe our focus on training the Lowe's associates and helping them reach their target customers was also critical to driving improved point-of-sales results. We now enter 2017 with additional new business wins. We were notified of winning the Home Depot's Florida stores in late 2016 and now expect that to yield roughly $50 million annually. The business, which had been previously supplied by multiple interior and entry door vendors, is expected to transition in the April timeframe. New offerings and a better assortment of higher-priced products helped to drive better sales and profitability both for Masonite and our channel partners in wholesale, too, as we were awarded some incremental business with customers like Builders FirstSource and BMC. Despite the relative higher price of our overall product offering, our focus on superior service and product innovations were significant factors in winning this additional business. Innovative new products like the Everland and VistaGrande fiberglass exterior doors and the barn door kits and Heritage Series interior doors have higher prices and can drive a higher mix for both our channel partners and for us. Turning to slide seven, at the International Builders' Show in early 2017, we unveiled our new brand with a fresh new look and logo. It depicts the ongoing partnership between Masonite and our customers to continually create a better experience. Our new tagline, Open to Extraordinary, is an invitation to break perceptions, challenge the status quo and open the door's true potential – the extraordinary and unexpected possibilities as a defining element throughout the home. I'd like to now ask Tony Hair, who leads our Residential Business, to spend a few minutes discussing why we did this and what it means to Masonite's future. Tony?

[James A. Hair:]

Thanks, Fred. As Fred mentioned, Open to Extraordinary is an invitation to unlock the door's potential to be a defining element in the home. Our goal is to change the conversation around doors. We want to empower our builder and remodeler customers to change the conversation around doors through design trend knowledge, allowing them to become the voice of authority. Along with our channel partners, we believe we can make the door category more relevant. We believe that door is more than just a door and we continue to push the boundaries in helping customers elevate the role a door can play in a home's environment. We believe Masonite can take a leadership position by creating a differentiated brand experience. This includes highlighting our whole-home offering by coordinating interior and exterior door solutions. The first Masonite Trend Report of 2017 highlights current housebuilding trends and insights from leading industry experts and shares insider knowledge on current and upcoming trends, where to uncover design inspiration, and how a door can be and should be a dynamic design element in any home. By doing this, we believe we can rise above what we call the sea of sameness and stand apart from others in the category. We strive to be the indispensable door partner to our customers. And we're going to do this through our four brand pillars

[Lawrence Peter Repar:]

Thanks, Tony, and good morning, everyone. One of the ways we're improving the customer experience is through the new masonite.com website. In conjunction with the brand launch, masonite.com was redesigned after extensive research and customer feedback. Our new interactive website provides easier navigation, technical documents in a clean format, and inspirational videos and blogs to keep customers up-to-date on the latest trends. The site targets influencers, specifiers, and purchasers of doors and provide an extraordinary experience regardless of who you are or your objectives for visiting the site. Changing the conversation around doors starts with changing the experience on our website. Finding the right door design and style has been simplified on the new website and the introduction of specific content that focuses on complete home design and solutions for both interior and exterior doors. I invite you to spend some time on our new website. Our new Digital Innovation Center, as Fred mentioned earlier, is located in an eclectic part of Tampa called Ybor City and has become the central hub of designing and developing new digital tools to improve the customer experience for selecting, ordering, and buying a door. Our new office space is designed to foster and encourage innovation and collaboration. Our agile software environment is providing a sufficient and effective approach to develop customer-facing digital tools and applications designed to inspire and engage all channel participants. Within the new USA Wood Door website, the company we acquired about a year and a half ago, is the new door builder configurator, which is a new product configuration and purchasing tool. Door builder allows customers to configure, modify and purchase Masonite architectural wood door slabs that have been machined and finished. Door builder expedites the quoting and purchasing process with greater accuracy or, said another way, simplifying and standardizing the purchasing process, while reducing errors. On the Residential side, the MAX Masonite Xpress Configurator combines a sophisticated configuration capability of a deep options-based database with an easy-to-use graphic interface. The web-based door design and pricing tool provides dealers an easy and cost-effective way to showcase Masonite's product offerings. We also believe the continued rollout of our ERP in the Architectural business can transform the way our customers and manufacturing facilities communicate to get customers the right doors to the right place at the right time. The digital team in Ybor serves all Masonite businesses by discovering, developing and maintaining technology platforms to improve the customer experience by enabling a simpler, faster and easier way to inspire, configure and transact for our products. Fred?

[Frederick J. Lynch:]

Thank you, Larry. Before we move on, I just want to say what a privilege it has been to work alongside Larry these past 10 years. His deep knowledge of the door industry and industry relationships and contagious enthusiasm, as you can tell, has been instrumental to Masonite's success throughout the years in his tenure here. Larry has been a highly valued member of our leadership team and he will be greatly, greatly missed when he retires in August. And so, on behalf of the entire team at Masonite, Larry, we wish you the best.

[Lawrence Peter Repar:]

Thank you, Fred. It's been a wonderful and incredibly satisfying journey, thanks for the smart, dedicated, and hardworking Masonite employees I've been so fortunate to work with and honored to work with throughout my career. I also want to acknowledge and thank our loyal and successful customer partners who have contributed significantly to my career and Masonite's growth and success. Thank you all for what we have accomplished together over the years. Masonite, our employees and our customers are well-positioned for future growth and success. Thank you.

[Frederick J. Lynch:]

Great. Thank you, Larry. So, let's pick up on slide 13. In addition to our new digital capabilities, we're also investing in operational excellence on the manufacturing side. Increasing demand, coupled with the continued tightened labor market, presents its own set of challenges for our manufacturing plants. We continue to invest to improve manufacturing capabilities, expand capacity at existing facilities and automate parts of the door manufacturing process. As a result, our capital expenditures increased in 2016 and we're planning for a similar level of investment in 2017. Some of the recent CapEx projects we've completed in these areas include the addition of a new fiberglass press line in Laurel, a new automated paint line and presses in the UK, and an automated machine center for our Architectural business in Northumberland. In addition, we're focused on projects that improve productivity and throughput in our facilities in each of our business segments. Planned projects include reconfiguring interior assembly plant layout, standardizing the architectural door manufacturing process, and investing in equipment that optimize the yields on woodcut-stock components we produce to support our door assembly operations, among others. I'll now turn the call over to Russ to discuss more specifics of our financial performance in the quarter. Russ?

[Russell E. Tiejema:]

Thanks, Fred. Good morning, everyone. Let's turn to slide 15 to summarize our consolidated financial results for the fourth quarter of 2016 versus the fourth quarter of 2015. Net sales were down 1% to $481 million. However, excluding foreign currency headwinds, the 53rd week in the 2015 calendar, and adjusting for the deconsolidation of our South Africa business, net sales actually increased 8%. Gross profit increased to $96.5 million or 20.1% of net sales, an increase of 50 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 cost. SG&A decreased approximately $4 million due to a $2 million benefit from foreign currency and $1 million each from lower personnel costs and depreciation and amortization. Adjusted EBITDA increased 7% to $61 million. Recall that the fourth quarter of 2015 had several non-recurring items, including a utilities refund and a reversal of a sales tax accrual in addition to the 53rd week. If you adjust for these items, fourth quarter adjusted EBITDA would have grown by approximately 23%. Adjusted EBITDA margin increased 90 basis points to 12.6%. Net income was approximately $15 million and adjusted earnings per share were $0.55. This was a $0.01 improvement from $0.54 in the fourth quarter of 2015. Let's turn to a review of each of our reportable segments, beginning with North American Residential. Net sales increased 8% in the fourth quarter and 13% for the full year, while adjusted EBITDA increased 9% in the fourth quarter and 28% for the full year. We experienced solid growth in both the wholesale and retail channels during the fourth quarter. Strength from the additional Lowe's business, as well as stronger sales from areas like Louisiana and North Carolina that were rebuilding from summer storms, contributed to higher growth rates in retail. Average unit price in the fourth quarter decreased slightly compared to the fourth quarter of 2015. As with the third quarter of 2016, this was the result of category mix, not individual door prices, with AUP increasing in both the interior and entry categories. For the full year, AUP increased 1.2%. The decline in the Mexican peso did negatively impact net sales results in the fourth quarter by approximately $2 million. And as Fred mentioned earlier, we were notified of additional business wins through both wholesale and retail channels that we expect will benefit us in 2017, largely starting in the second quarter. Let's turn to slide 17 and our Europe segment. Net sales in the fourth quarter were down 16% when compared to the fourth quarter of 2015 due primarily to the decline in value of the pound sterling. Excluding foreign exchange headwinds, net sales were up slightly. For the full year, net sales, excluding foreign exchange headwinds, were up 6% compared to 2015. The ongoing uncertainty about Brexit has resulted in an uneven housing market in the UK. Private homebuilders have maintained a relatively stable outlook, while public or government-sponsored housing has been less predictable. In aggregate, however, we're optimistic about the longer-term health of the UK housing market despite the recent slowdown in new residential construction activity, given the current deficit in available new housing. Our DSI business continues to perform extremely well, again increasing full year sales in excess of 20%. And as I mentioned previously, the decline in the pound compared to the U.S. dollar and euro negatively impacted results from both translational and transactional exchange. As a result, our UK business implemented price increases that were effective January 1. Turning to slide 18, net sales in our Architectural business were down 6% in the fourth quarter compared to the fourth quarter of 2015 but increased 2% for the full year. Adjusted EBITDA increased 18% and margin expanded 170 basis points compared to the fourth quarter of last year. On a full year basis, adjusted EBITDA increased 8% and margin increased 40 basis points. The fourth quarter sales volume decline was primarily due to strong demand in the fourth quarter of 2015, including the 53rd week. However, average unit prices increased in the fourth quarter of 2016 because demand in the fourth quarter of 2015 was stronger in stock doors which carry lower average unit prices, but shifted to higher end doors in the fourth quarter of 2016. For the full year, average unit prices increased almost 4% over 2015. Slide 19 summarizes our consolidated financial results for the full year 2016 versus 2015. Net sales for the year were up 5% or up 11% excluding foreign currency headwinds and adjusting for the deconsolidation of our South Africa business. Gross profit increased to $410 million or 20.8% of net sales, an increase of 210 basis points. For the year, SG&A increased 7%, primarily due to an $8 million increase in personnel costs, due to wage inflation, investments in additional personnel and higher stock-based compensation; a $4 million increase in professional fees, primarily related to IT and digital initiatives; and marketing costs that were $1 million higher in 2016, largely driven by preparation for our new brand launch last month. 2016 adjusted EBITDA increased 24% to $253 million. Adjusted EBITDA margin increased 190 basis points to 12.8%. Net income was approximately $99 million in 2016. Diluted adjusted EPS more than doubled to $3.03 for the full year 2016 compared to $1.49 in 2015. Now turning to slide 20, the strength of our adjusted EBITDA growth continues to enhance our balance sheet and debt metrics. Total available liquidity at January 1, 2017, including unrestricted cash, an undrawn ABL and an accounts receivable purchase agreement totaled $223 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 1.6 times, respectively, compared to 2.3 times and 1.9 times a year ago. I'd like to now frame up our outlook for 2017 by starting with key macro factors we believe will affect our business. We anticipate mid to high-single-digit growth in U.S. new home completions and mid-single-digit growth in the RRR market. We also expect the new business wins, higher value products and recently implemented price increases drive higher AUP and adjusted EBITDA margins. There are also factors that counterbalance these tailwinds to some degree. The housing market in the UK is forecast to grow in 2017 but that growth is likely to be modest and uneven throughout the year as Brexit-related uncertainty continues. In the U.S., a tightening labor force is increasing labor cost, which, in combination with hiring new manufacturing personnel to support growth, make productivity gains more difficult to achieve. Commodity markets will likely increase in the aggregate in 2017, primarily in steel and petroleum-based materials. And, of course, there's significant uncertainty around potential U.S. tax and regulatory policy changes. Overall, we expect net sales will be up 7% to 9% versus 2016 or approximately 8% to 10% excluding expected currency headwinds. Our outlook for adjusted EBITDA for 2017 is between $285 million and $305 million for the full year. Taking into account an effective tax rate expected to be in the low-20% range and based on our current share count, we expected adjusted earnings per share to be between $4.10 and $4.60 in 2017. Cash taxes are expected to be between $9 million and $12 million. It's worth noting that while we expect continued strong results for 2017 overall, net sales and margin growth is expected to be more pronounced post Q1 given the difficult imperative we faced on very strong results we delivered, particularly in North American Residential in the first quarter of 2016. As Fred previewed earlier, in 2017, we plan to continue our increased pace of investment in the business and expect approximately $80 million to $85 million of CapEx spending this year. This is in line with our capital spending in 2016, but higher than in previous years on the strength of the return profiles of our planned projects. When looking at capital expenditures, we evaluate both maintenance and strategic projects on an individual basis. Maintenance projects often represent good paybacks on risk mitigation alone such as by avoiding unplanned downtime in the event of unexpected maintenance or equipment failures. Strategic capital projects are typically larger in scope and involve investment in areas such as new product programs, new manufacturing technologies, or IT systems. These projects are subject to a rigorous review at the senior management level. And we typically target a payback of approximately three years or less or a return of at least two times our estimated cost of capital before committing large amounts of capital to these types of projects. Our long-term growth framework is predicated on continued market growth and margin expansion initiatives such as new products and value-added services intended to further shift our product portfolio to higher value offerings with higher average unit prices. Meanwhile, we plan to continue investments and initiatives aimed at driving improved factory productivity to help mitigate inflationary pressures we anticipate in labor and commodities costs. In some cases, these initiatives require upfront investment in R&D, systems and people which we believe will ultimately drive leaner operations, higher productivity, and margin expansion over the long-term. On slide 24, we present our updated long range growth framework, now reflecting our view through 2019. We believe that the growth initiatives we are investing in, in combination with the continued housing market recovery, should support a compound annual growth rate of 7% to 9% for net sales over that timeframe. When combined with expected operating leverage and our continued focus on improving both margin and cost performance, we expect this to translate to adjusted EBITDA margins between 16% and 17% by 2019. Further, we would expect that all of our reportable segments will achieve adjusted EBITDA margins in excess of 15% by that time. Our cash deployment strategies remain unchanged and our growing adjusted EBITDA supports strong cash generation that allows us to continue simultaneously investing back into the business, while evaluating additional acquisitions and repurchasing our shares. The extent of our repurchase activity in 2016 and the additional authorization announced yesterday afternoon demonstrate our commitment to returning capital to investors. 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, in 2017, with the tailwind of our new brand launch, we're focused on elevating the door category by being trend leaders and inspiring customers to think about doors differently. We're transforming our Architectural door business by creating a more efficient footprint and simplifying the product offering as we focus on a common chassis and continue to implement a single configurator and ERP system across the entire business. We're also investing in tools and projects designed to improve our productivity across our manufacturing network by finding more efficient routes to market, automating selected parts of the manufacturing process and developing the digital tools to improve ordering, manufacturing and delivery. We believe the strategies we are pursuing at Masonite are delivering strong financial performance through a dedicated effort to provide high-quality products and value-added services to our customers. Net sales increased 11% when adjusted for foreign exchange and the deconsolidation of MAL. Adjusted EBITDA increased 24% and margins increased 210 basis points. During the year, we repurchased $109 million of shares and currently have authorization to repurchase up to approximately $240 million of additional shares. At the February 21 closing price of $68.55, that would equate to 3.5 million shares or 12% of our total outstanding shares. The strong results that we shared with you today were made possible by our 10,000 employees working hard to help people walk through walls. Thanks to each and every one of you. We believe the investments we are making are transforming our business and we're committed to continuing our efforts to provide an extraordinary customer experience in 2017 and beyond. And, with that, we'd like to open the call to questions. Operator?

[Operator:]

Thank you, Mr. Lynch. Our first question today is coming from Tim Wojs of Baird. Please proceed with your question.

[Timothy Ronald Wojs:]

Hey, guys. Nice job and nice to see the momentum here.

[Russell E. Tiejema:]

Thank you, Tim.

[Frederick J. Lynch:]

Thanks. Good morning, Tim.

[Timothy Ronald Wojs:]

I'm going to sneak in two questions if you don't mind. I guess the first one, just bigger picture. You guys have done a really good job picking up some new business over the last couple years. And, as you kind of look past – out in 2018, 2019, how do you kind of frame up the ability to continue to take share in terms of what might become available from a product – or from a line review standpoint, things like that? And then, secondly, just on the share repurchases, is that, one, included in guidance? And then two, how should we think about the use of that through the year? Thanks a lot for the time.

[Frederick J. Lynch:]

Okay. Great. We'll let you get away with two questions this time, Tim. So, I'll start with your first one.

[Timothy Ronald Wojs:]

Thanks, Fred.

[Frederick J. Lynch:]

I'll start with the first one. This is Fred. Our focus is never about gaining share for the sake of share. Our focus is about gaining value. As you can tell and you heard with what both Tony and what Larry said, it's about new products. It's about innovation. It's about unleashing demand in the market by making the process of shopping for, selecting, purchasing and installing a door more easy, simple and fast. And I think you're seeing that across everything that we're doing. The way we look at the new business wins that we have had, I can tell you, particularly in the retail space, we have been told by our customers that, although you're higher price, we like what you're bringing to the market because you're helping us drive our average unit price up in the marketplace. And it's all about new products in those markets. And so we think we're fortunate that when – back in 2012, we made a concerted effort to really reinvest in our R&D, in our products. The focus on design that our marketing team and Tony's teams have put in place is really changing the game. And people are coming to us and saying we want those doors. And I think that's allowing us to get above-market growth at these customers when they do switch their stores, the markets that they put Masonite in after having a different brand prior to, like Lowe's had with ReliaBilt. So, that will continue to be our focus. It's all about value, all about value.

[Russell E. Tiejema:]

And, Tim, it's Russ. I think your second question was related to the share repurchase program and whether or not that was baked into our assumptions, I'm assuming, on the EPS side for 2017. And the answer is no. I mean, by definition, an open market share repurchase program that we would execute opportunistically, just as we have during 2016, really can't predict the impact on share count in any given quarter. So, that is not factored into the EPS guidance that we've given.

[Timothy Ronald Wojs:]

Well, keep up the good work. Thanks.

[Frederick J. Lynch:]

Thank you, Tim.

[Operator:]

Thank you. Our next question is coming from Bob Wetenhall of RBC Capital Markets. Please proceed with your question.

[Robert Wetenhall:]

Hey, guys. Great finish to a very strong year. The transformation has been nothing short of a huge success. I wanted to ask on the long-term growth framework that Fred and Russ outlined. You're talking about top-line CAGR growth of 7% to 9% and EBITDA margin target of 16% to 17%. You had also called out kind of 1.5 million housing starts, I guess, by 2019. I was just trying to understand, you talked about cash flow deployment. And to get to your new long-term growth targets, do you have to do M&A? Is that a piece of the narrative here? And what are the other assumptions around the guidance you're providing for these targets?

[Russell E. Tiejema:]

Hey, Bob. It's Russ. M&A is not factored into the guidance that we've provided here. And I would just point folks back to the different factors that we outlined on slide 23 of our WebEx. This really outlines the different parts of the growth framework. Obviously, market growth is going to be a tailwind we would expect. Frankly, sitting here a year ago, we would have thought that the new housing market would have recovered at a faster pace in the U.S. It's not. We see a little bit more of an elongated recovery, but we still feel that by the time we're into or exiting the 2019 timeframe, there's a good basis for the housing market to return to its historical average of 1.5 million units. We are encouraged, though, that the initiatives that we've been putting in place here around product mix and AUP has continued to drive us along the pathway of margin improvement despite the new housing market running a little bit slower in its recovery than we would have anticipated. But back to this slide, it essentially lays out the three key factors

[Frederick J. Lynch:]

Yeah. And I do want to just reinforce also. It's not just average unit price improvement as a result of new products but we anticipate continued like-for-like pricing.

[Robert Wetenhall:]

And, Fred, on that – and then I'll pass it over. Average unit price in North America was down by – was basically flat to slightly negative. But can you give us a little framework to think about the difference between like-for-like pricing in North America versus the mix impact of a shift towards interior residential doors? Because some of your prior comments, you're obviously getting upsell with your customers because you're driving more value in the channel. So, you're getting compensated for that but AUP is going lower. So, there's obviously a dynamic here and I was hoping you guys could spend a minute just talking about how that narrative plays out as we go into 2017.

[Frederick J. Lynch:]

So, I'll talk a little bit about it qualitatively and then, Russ, you can jump in on the quantitative section. The big difference, of course, is, as we look at each product category, we're seeing average unit price improve in both interiors and entry. But entry doors are at a much higher price than interior doors. And our growth in interior was actually quite phenomenal in 2016, largely driven by new products, some customer wins and also, I would just say, very strong service propositions that allowed us to take advantage of the demand in the marketplace. With respect to – when I think about respective dealing and managing, you mentioned like-for-like pricing, we have announced price increases that will take place or has taken place in the first quarter. And so we'll continue to drive both, average unit price through mix and average unit – or additional pricing through like-for-like price. I don't know if you want to add anything quantitative to that?

[Russell E. Tiejema:]

Yeah. Sure. I would just add that the narrative around the mix impact in AUP is essentially unchanged from what has looked like the last two quarters. And that we're seeing growth rates on the interior category in excess of 10%. And in the fourth quarter, we saw growth rates on the entry category in the mid-single-digit range. And so when you take into account that the average unit price is order of magnitude about 3x on an entry door as it is in interior door and you take a look at that differential growth rate in the two categories, pretty soon you can come up with about a 3% headwind roughly on AUP just by that differential growth rate between the two categories.

[Robert Wetenhall:]

Got it. That's helpful. Your stock is up 10%, great way to finish the year. Good luck in 2017.

[Frederick J. Lynch:]

Thanks, Bob.

[Russell E. Tiejema:]

Thanks, Bob.

[Operator:]

Thank you. Our next question is coming from John (sic) [Jason] Marcus of JPMorgan. Please proceed with your question.

[Jason A. Marcus:]

Hey. It's Jason Marcus of JPMorgan here. First question, just on your U.S. housing outlook, I think, you said you expect mid it to high-single-digit growth in overall U.S. housing completion. I wanted to get a sense as to how you're thinking about single-family versus multi-family and what the implications could be there as you see continued growth in 2017 in interior versus exterior and if that could cause a little bit of a headwind relative to the prior year?

[Frederick J. Lynch:]

Yeah. So I think we tend to believe what we're seeing out there from the prognosticators with regards to growth that single-family is beginning to outpace multi-family, largely just because multi-family is kind of coming to a peak level. As we've talked about in the past, for us, that's typically a positive because single-family homes require about double the number of doors that a multi-family unit would require. So, while, again, we expect that moderate growth of that mid-single-digit, the more that it's just the single-family that's a benefit to us.

[Jason A. Marcus:]

Right. But from a mix perspective, how would that impact average unit price?

[Frederick J. Lynch:]

It's interesting. In the past, we would have said that single-family homes tend to have better mix than multi-family homes. And I think we still believe that to be the case. But if you saw some of the building that was occurring in the last couple of years, there have been some more higher-end multi-family type buildings. There's been greater need for products that are wider because of ADA, et cetera. So, that differential in mix probably doesn't exist to the same level. When it comes to entry doors, clearly, single-family homes will drive a much higher value entry door than a multi-family unit.

[Jason A. Marcus:]

Okay. Great. And then just quickly on the new business wins, I think you said it should largely come in effect in April and it's about $50 million. Is that $50 million an annualized number? Is that what you would expect for the full year for 2017? And then -

[Frederick J. Lynch:]

Yeah. That -

[Jason A. Marcus:]

And then how should we think about the margins of those new business wins in aggregate relative to average (40

[Frederick J. Lynch:]

So, we don't speak about margins on a specific customer basis. But, as I said earlier, this was a good win for us. We like the focus on new products in this marketplace. We are displacing, as we said, more than one vendor and we're combining that into a single portfolio and we're a single source of product for the customer in the Florida market. And, again, the Heritage Series on the exterior and the Everland are big wins on the exterior side. So we're pretty excited about this win. The way you think about it is, yeah, we'll start in April. It'll be a rolling transition through the second quarter and so look at getting somewhere a little over half of that impact in 2017.

[Jason A. Marcus:]

Great. Thanks.

[Operator:]

Thank you. Our next question is coming from Alex Rygiel of FBR. Please proceed with your question.

[Alex J. Rygiel:]

Thank you for taking my question and very helpful slides, gentlemen. Appreciate it.

[Frederick J. Lynch:]

Thanks, Alex.

[Russell E. Tiejema:]

Thank you.

[Alex J. Rygiel:]

First question is just a little bit more clarification on that last answer. As it relates to the 2017 new business wins in their entirety, not just Home Depot but – and not necessarily the distributors either. But in its entirety, how much extra revenue in 2017 do you think is available to you now because of those market share wins that weren't fully appreciated in 2016 or not yet recognized in 2017?

[Frederick J. Lynch:]

That's a tough one because there's often – all the time we have business wins and moves back and forth. We just think about kind of the big line reviews last year. It probably – as we said, I just mentioned that one customer is probably in the $25 million plus range. You're going to be looking at $25 million to $60 million kind of range on pure business wins from major line reviews. But, again, we're out there focusing on winning business each and every day through our existing customers, through their existing channels of distribution. And that's happening on a day-to-day basis at the dealer level and the end customer level, mostly driven by new products, by innovation and by service and delivery excellence. And so we look at the whole package. It's not these incremental wins that drive our business long-term. It's the whole focus on our business model.

[Alex J. Rygiel:]

Of course. And then as it relates to North America Residential, the sales in the fourth quarter are about similar to the third quarter. But yet your margin was down a little bit sequentially. Can you give us a little bit color into that? In addition, did you happen to see any pre-buy ahead of the price increases? This is sort of the third year or fourth year in a row where you've gone through sort of January-like price increases. Have your customers gotten smart in starting to sort of pre-buy into that?

[Russell E. Tiejema:]

Hey, Alex. It's Russ. One thing that I would point out relative to the Q4 comps note that we reminded folks of some one-time items that occurred in Q4 of last year. So, specifically, we had a significant utilities rebate and we had an adjustment to some of our sales tax accruals. Those two items really accrued to the residential business last year, so that made for a very difficult margin comp year-on-year. That's why you're not seeing the amount of margin accretion this year as compared to 2015 based on the volume.

[Alex J. Rygiel:]

Yeah. I think I was trying to get to the sequential decline in the margin from 3Q to 4Q on a flat sales number.

[Russell E. Tiejema:]

Yeah. I think, in that case, you're just seeing timing of expenses. As we've talked about, it can be a lumpy quarter to quarter depending on timing of expenses. And given that we did just launch the new brand in Residential in January, we had some additional costs in the Residential business in preparation for that during the fourth quarter. You had a question relative to pricing. I'm going to let Tony talk about that one relative to your customer pre-buy.

[James A. Hair:]

Yeah, Alex. Just a couple of notes there. One, we did have some additional expenses as we got prepared to launch the brand and pull the trigger as we did with – at IBS at the beginning of 2017. Relative to customers, we do see some pre-buying ahead of price increases. We usually announce those 90 days out, so they have time to plan. So, we do see some of that. We also see some customers in an effort to hit rebate tiers will advance buy at the end of the year as well. So those two dynamics can have an impact.

[Alex J. Rygiel:]

And, lastly, Russ, can you come back to sort of your directional thoughts on the first quarter? I didn't quite follow them all.

[Russell E. Tiejema:]

Well, I was just pointing out the fact that we had very, very strong results in Q1 of 2016. I think our sales volume in the North American Residential business alone was up on the order of 20%. So that tough comp alone leads us to believe that a lot of the growth in margin and revenue on a year-on-year basis is going to be more of a post Q1 event as opposed to right out of the gate here. And Tony, to some degree, supported that point with the point he just made about pre-buy during Q4 and what that means for revenue trajectory into early Q1.

[Alex J. Rygiel:]

Very helpful. Thank you. Congratulations.

[Russell E. Tiejema:]

Thank you.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Al Kaschalk of Wedbush Securities. Please proceed with your question.

[Al Kaschalk:]

Hey. Good morning, guys.

[Frederick J. Lynch:]

Good morning, Al.

[Russell E. Tiejema:]

Good morning, Al.

[Al Kaschalk:]

Real quick one on the share count assumption for 2017, if you could provide that. I assume that means you're level set relative to where you ended the year on a fully diluted basis.

[Russell E. Tiejema:]

Yeah. That's right. We don't provide any projections for share count. We just provide the guidance based on year-end count.

[Al Kaschalk:]

Okay. And then just on the broader picture, given the mix shift and the other dynamics going on, I wanted to maybe lift up and look at EBITDA and then the percentage of operating cash flow of EBITDA and the conversion there. It looks like it's around 70%, 71% today. And whether it's the right metric or not, it is I think indicative of what you've guided from an EBITDA perspective, that you're going to be generating a fair amount of operating cash flow. So could you support a view that that number should see some increase, whether it's $0.75 of every $1 that you generate in EBITDA goes to operating cash flow?

[Russell E. Tiejema:]

Yeah. We've talked about this and we've not provided any explicit guidance on operating cash flow or, for that matter, free cash flow or free cash flow conversion. But I would tell you that, as we look into 2017, we would anticipate our free cash flow conversion, which we defined as operating cash flow less our planned capital expenditures, to be order of magnitude roughly equivalent to our net income. In 2016, I think we ran at just less than 90% free cash flow conversion on that basis. We would expect that to improve slightly in 2017.

[Al Kaschalk:]

Okay. And then if I could just follow everyone else in asking seven questions, I'll take three questions. My third question would be just in terms of the timing of last year's SG&A. You had a little bit of noise in there in terms of the investments you were making. I think we're seeing some of that investment come through now. Should we think about 2017 as a relatively level investment on CapEx or does the strategic and growth CapEx come in chunks?

[Russell E. Tiejema:]

I'm sorry, Al. I want to clarify. Are you talking about CapEx or SG&A, because I heard both of those woven into your question?

[Al Kaschalk:]

Yeah. I know. I did wove them both in. And I guess I was trying to get four questions in, but -

[Russell E. Tiejema:]

We caught you.

[Al Kaschalk:]

Yeah. You sure did. You're as sharp as a tack over there. Either way you want to address it, whether it's SG&A or CapEx, that's fine. I guess I just want you to be able to provide expectations in terms of either the expense side of things from this investment or the CapEx dollars. I'll let you choose the rest. Thank you.

[Russell E. Tiejema:]

Well, I tell you what. I'll give you a piece on both. I'd just reiterate the point that I made during my prepared remarks that from a capital spending basis, we expect it to be largely carryover to what we saw in 2016. That is a little bit higher level than you saw in prior years. And that's really on the strength of some of the return profiles that we see on some significant strategic projects that help support growth in the business and some of our manufacturing efficiency initiatives. Fred previewed some of those in his remarks also. On the SG&A side, on a full year basis, if you take a look at our SG&A as reported in our GAAP financials, we lost about 20 basis points of leverage. If you back out some of the non-cash expenses like stock comp expense and depreciation and amortization, we actually got about 20 basis points of leverage in our SG&A on more of an EBITDA basis. And we would expect that to continue or even accelerate slightly into 2017.

[Frederick J. Lynch:]

So, with that said, we did launch the brand in the first quarter. So, you would anticipate that we're going to have a little bit lumpier spend in Q1 in 2017.

[Russell E. Tiejema:]

Yeah.

[Al Kaschalk:]

Thanks a lot, guys, and good luck.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Kevin Hocevar of Northcoast Research. Please proceed with your question.

[Kevin Hocevar:]

Hey. Good morning, everybody, and congrats on a great end of the year.

[Russell E. Tiejema:]

Thank you.

[Frederick J. Lynch:]

Good morning, Kevin.

[Kevin Hocevar:]

Wondering if – you talked about in your – the slide 21, you talked about 2017 tailwinds that you expect price increases in all the business segments. So, wondering if you could comment on that. I know Architectural – I know you had a price increase in early 2016 that takes time to ramp and you've got a couple price increases here in, well, one in each, North America and Europe. So just kind of wondering if you could comment on what level of success you're seeing there and what your expectations are for 2017.

[Frederick J. Lynch:]

Yeah. I think that at a high level, as you mentioned, we have price increases in all the segments coming through in the first quarter. And we expect that we'll meet the price increase that we've put in place, so -

[Kevin Hocevar:]

Got you.

[Frederick J. Lynch:]

Both of those are in the low to mid-single-digit kind of level.

[Kevin Hocevar:]

Okay. And then with the share repurchase, I think you mentioned in the press release that you expect to deploy that over the next two years. So wondering what that means for M&A. I mean, it looks like you'll probably still have some ample cash to put toward M&A as well. So, does the timing of that over the next two years depend on the M&A opportunities as well or can you still deploy that over a two-year period and then still pack on M&A on top of that?

[Frederick J. Lynch:]

So, I think, the great thing is we – and I'll start and I'll have Russ finish up. The great thing is we have a balanced approach to capital allocation and capital deployment, and which is we're fortunate to be in that situation because we are generating strong free cash flow. So, I think that in and of itself – we have been, I think, thoughtfully acquisitive over the last five years or so looking for acquisitions that makes sense. At the same time, we're always very diligent with our investors' dollars and making sure that we're going to apply them to the businesses that are going to provide the types of return. And so we'll continue to do that. Our acquisition profile has also been lumpy because as we acquire things, we make sure that we're putting the time and effort in into integrating them in an appropriate manner. But when you look at where our debt levels are and the free cash flow that we should generate and even with the stock buyback you could imagine that we have ample liquidity to be really strategic.

[Russell E. Tiejema:]

Yeah, really nothing to add. I think Fred summarized it well. Just given the optionality we have with the balance sheet strength we have, borrowing capacity that's available, we feel like we're in a good position to simultaneously execute on each of those pieces of our cash deployment framework, including continuing to evaluate strategic acquisitions as they arise and as they make sense for our portfolio simultaneous with repurchasing shares. Obviously, you can modulate between those two depending on the size of any M&A target. But in the absence of any significant M&A over the last month, we've been certainly assertive on the share repurchase program and would continue to expect or would expect to continue doing that.

[Kevin Hocevar:]

Okay. Great. Thank you very much.

[Operator:]

Thank you. Our next question is coming from John Baugh at Stifel. Please proceed with your question.

[John Baugh:]

Thank you and congrats on a great year. And I think that I can count. I have two questions. Number one, the UK, could you update us or refresh our memory on the weighting of DSI versus the new construction piece and is it your expectation that DSI still grows in that 20% plus rate or is the scale getting such that that's tough to compete against?

[Russell E. Tiejema:]

Well, DSI is not a huge part of our UK footprint, but it's sizable and it is growing. And what encourages us about the DSI business is that it is 100% repair and remodel. And so the strength that that business has continued to exhibit suggests that despite all of the headline concerns around Brexit and despite the fact that new construction is seeing some headwinds, the consumer in the UK seems to continue spending on their homes. And DSI, just by virtue of its unique distribution model, it's a direct sale to contractor. And the ease and speed with which it allows a homeowner to configure and have a new entry door installed, we think that's really unlocking latent demand in the market. It's not as if the remodeling market in the UK is growing at 20% per annum. It's certainly much lower than that, but we're unlocking and delivering additional demand.

[John Baugh:]

Okay. And then if you could help me just to clarify your assumptions for 2019 on, I guess, maybe housing starts, was that 1.5 million by 2019 or at some point later? And then are you seeing any shift in the size of single-family home starts or making any assumptions about the size which may influence number of doors for start? Thank you.

[Russell E. Tiejema:]

Sure. Our general view is 1.5 million units by the time we get into 2019. But let's be clear. There are a lot of other strategies that we're executing around product mix, around price, around operational efficiency that we think are just as important, if not more so, to our margin profile. Relative to the size of homes, we've not made any explicit assumptions for average footprint of a home and what that means to the average number of door openings in it. But going back to some remarks that Fred made previously, we do think that there is the opportunity for a shift back to more single-family versus multi-family. And by virtue of 2x the number of door openings in a single-family detached home, we think that is a volume tailwind as well.

[John Baugh:]

Great. Thanks. Good luck.

[Russell E. Tiejema:]

Thank you.

[Operator:]

Thank you. Our next question is coming from Jim Barrett of C.L. King & Associates. Please proceed with your question.

[Jim Barrett:]

Good morning, everyone.

[Frederick J. Lynch:]

Good morning, Jim.

[Jim Barrett:]

Fred, the company is knocking the cover off the ball in Residential. I'm trying to understand why Architectural, even after adjusting for one less week in 2016, is not tracking at a mid-single-digit rate which is consistent with your long-term expectation for the market. And then on a related point, I assume, given your scale, given all that you're doing in Architectural, longer-term, you're expecting to take market share. Is that how we should think about the business conceptually in future years?

[Frederick J. Lynch:]

So, I will first say that we're going through what we refer to as the architectural reset within the company. We acquired a number of businesses that we've put together. I'll say that our initial integration didn't go as fast as we would like. We stepped back and relooked at that and took a much bolder approach to – as Russ mentioned earlier and I referred to is to really change the manufacturing footprint to put the products on a common chassis, readjust our branding approach. And so we have that process in place. We started that last year or in the middle of 2016. And we will have a major initiative on that as we go into 2017, including the completion of our ERP migration by 2018. So, again, we've taken both of those. We have exited some business that doesn't make sense, hence the top line. We are in the process of shutting down a location. And as part of the shutting down location, we're also exiting some product lines as well that we felt weren't as profitable. But we are very confident about our strategy and we're very confident about the position that we can create in this industry and in this marketplace to make a big impact. So, we're excited about the Architectural piece, but it's a bold bridge plan (58

[Jim Barrett:]

Okay. Great. Thank you very much. That was helpful.

[Frederick J. Lynch:]

Thank you.

[Frederick J. Lynch:]

Okay. It looks like we're at the end of our timeframe with no more questions. We appreciate everyone's participation and we look forward to talking to you later in the year. Thank you very much.

[Operator:]

Thank you for joining the Masonite International fourth quarter earnings call. This conference has been recorded. The replay may be accessed until March 9. To access the replay, please dial 877-660-6853 in the United States or 201-612-7415 if you're calling internationally. Please enter conference ID 13653876 followed by the pound sign. Please allow a couple of hours for the replay to be made available. Thank you for your participation in today's conference. You may disconnect your lines at this time and have a wonderful day.