Masonite International Corporation
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Welcome to Masonite's 2015 Fourth Quarter and Year End Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management's prepared remarks, investors are invited to participate in a question-and-answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Joanne Freiberger, Vice President and Treasurer.

[Joanne Freiberger:]

Thank you, Melissa 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 will be making forward-looking statements that are subject to risks and uncertainties, which are described in greater detail in Item 1A of our Annual Report on Form 10-K, which is available on our website. Actual results may differ materially from those expected or implied. Forward-looking statements are as of the date that 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, both of which are available on our website. On today's call, Fred will begin with a company and industry update. Russ will provide a review of the fourth quarter and full year financial performance, followed by our outlook. Fred will then summarize our prepared remarks before opening the call to a question-and-answering session. And with that, let me turn the call over to Fred.

[Frederick J. Lynch:]

Thanks, Joanne and good morning everyone and welcome. I want to start today's call by thanking our 10,000 employees across the world for their dedication, hard work and focus on customer satisfaction. The impact of their efforts is evident in Masonite's solid 2015 financial results, with net sales increasing 7%, excluding the impact of foreign exchange, and adjusted EBITDA increasing 49% to $204 million. We're equally graceful to our many customers and channel partners for their confidence in our products and services, and their continued loyalty to Masonite. So thank you. We finished the year strong delivering our seventh consecutive quarter of adjusted EBITDA growth and marking the first fiscal year of returning to double-digit EBITDA margins since the housing downturn began. Before we get further into the details of Masonite's 2015 results, let's take just a few minutes to discuss the relevant market data for Masonite in North America. The U.S. residential construction indicators ended 2015 on a relatively solid note, with modest improvements in U.S. housing starts, completions and existing home sales. The overall pace of growth however, particularly in the single-family market, remained sluggish given the continued departure from the long-term mean. Total starts in the U.S. increased 11% in 2015 versus 2014, and year-to-date total U.S. housing completions were up 9.5%. Again, the growth was largely driven by multi-family completions which were up 21%, while single-family completion grew a more a modest 4.5%. And as we've discussed previously, this distinction is important because a multi-family unit has on average roughly half the number of doors as a single-family dwelling. Adjusting for this difference, the equivalent completions increased 7.5% in 2015. The Canadian housing market performance is even more mixed. Total housing starts increased 6%, but single-family or detached as they refer to them in Canada actually decreased 7%. Within Canada, there were also significant differences by region, as areas of Canada that are more oil dependant such as Alberta and the Prairies experienced steep declines. So, while acknowledging that the recent volatility in global financial markets may cause some potential buyers to defer home-buying decisions in the short-term, overall, we remain optimistic about the prospects for continued growth in the North American housing market. The U.S. housing market has experienced five consecutive years of steady growth and housing starts are still 25% below the 50-year average. So with that as a backdrop, let's take a closer look at Masonite's performance on slide five. 2015 was an important and very successful year for Masonite for a number of reasons. First, the modest growth in the U.S. housing market contributed to North American volume growth. Our purposeful focus on mix improvement, combined with 2014 and 2015 pricing actions, resulted in an 11th consecutive quarter of average unit price growth in the North American segment. Second, we transformed our European business through the disposition of our door business in France, and two strategic acquisitions in the UK; PDS and National Hickman. And as Russ will share with you shortly, the combination of these portfolio adjustments has had a very positive impact on our adjusted EBITDA margin in Europe, Asia and the Latin American segment. Third, a sale process has been initiated for our subsidiary in South Africa, which is expected to largely complete the disposition activities of our portfolio optimization efforts. Fourth, our debt restructuring in March had a positive impact on our capital structure and cash flow, as we reduced our overall leverage, upsized our ABL, and decreased our cash interest by approximately $15 million per year. These actions, combined with our ongoing focus on innovation, customer service, strategic acquisitions and a disciplined focus on margins across the business portfolio, drove strong results during our second full year as a public company. Net sales increased 7%, excluding the impact of foreign exchange, and currency headwinds continued to impact the results with an unfavorable $93 million or 5% negative sales headwinds for the year. Gross profit increased 32% and gross profit margin expanded by 430 basis points. Adjusted EBITDA increased 49% and adjusted EBITDA margin increased 340 basis points, and we've generated $153 million of free cash flow in 2015. So, slide six, we summarize the key initiatives that helped drive the great performance. First, our expansion in the UK. The UK business continues to exhibit solid fundamentals for the UK economy, which helped drive our decision to make additional investments in 2015. U.S. housing starts in the UK – or housing starts in the UK were up 8% in 2015, and the acquisitions of PDS and Hickman extended our capabilities with our UK business now covering both residential and commercial, public and private sectors and both interior and entry doors. We are pleased with the performance of the strengthened UK business and excited about the opportunity to capture further operational synergies as the integration continues. Second, in 2015 we had the largest launch of new products in nine years, including the Heritage series of interior doors, which includes one-, two- and three-panel shaker designs. Vista Grande, which is an exciting new line of modern fiberglass entry doors and multiple new decorative glasses on it. These new products from launched at higher average unit prices compared to similar existing products, helping to drive the positive mix shift experienced in 2015. We also drove higher unit average price through value-added services and providing more fully-finished product. Our most recent acquisition USA Wood Door provides the value-added services of resizing, machining and custom color matching for architectural doors. The doors are offered in smaller lots and with quick-ship options, which is important as speed wins in today's market, and we have found that customers recognize and willingly support the additional prices associated with those value-added services. Third, our relationships at retail continues to evolve. There is a visible shift underway in retail as we work with our customers to support an increased focus on style and aesthetics, supported by the strength and value of the Masonite brand. In fact, during the fourth quarter, we began transitioning Lowe's to Masonite branded products as part of the previously disclosed product line review win. Another popular new retail product in 2015 was the introduction of our Barn Door Kit exclusively at Home Depot. The kit provides the necessary tools and hardware for a consumer to install in their own home at an affordable price. We believe the value is recognized by the consumer and the price point is considerably higher than on standard Masonite doors. And finally, we continue to execute a pull-through strategy to reach influencers and end users to create demand. As an example, in 2015 we announced an exclusive relationship with Angie's List, the leading website to connect consumers with local businesses and installation services. Angie's List promotes Masonite products to its members and has a dedicated team assigned to the Masonite Preferred Remodelers Program, providing remodelers with Masonite product information and linking them to Masonite distributors. Tomorrow's consumers are expecting the same high-quality products, but with increased design options and aesthetics, more features and a more streamlined purchasing and installation process. Our goal is to lead this transformation, making the door category more relevant in the eyes of designers, builders, contractors and the end consumer. By making it easier and more attractive for consumers to undertake door renovations and upgrade projects, we believe that we can enable further share growth by increasing the overall size of the pot. At Masonite, we strive to be the indispensable door provider to our customers, and by doing so we build long-term sustainable value creation for you, our investors. This tenet underlies our product strategies, our channel strategies and our acquisition strategies, as we continue to invest in a higher value, more complete product and service offering to meet our customers' ever-expanding expectations. Not only is the effect of this strategy evident in our continued improvement in AUP, but we believe the success of this strategy on our overall profitability is fully apparent on this graph. Since 2010, our adjusted EBITDA has grown by more than $120 million, an increases of 153%, while sales have increased by 35%. And during that same period, our adjusted EBITDA margin increased by more than 500 basis points. Masonite is in the business of selling high-value products and services and delivering an unparalleled customer experience. We believe that complete door solutions, innovative products, superior service, and simplified purchasing enable premium pricing and will drive future growth and continued success over the long term. So with that, I'll now turn the call over to Russ to discuss our 2015 financial performance in more detail and our outlook for 2016 and beyond. Russ?

[Russell E. Tiejema:]

Thanks, Fred and good morning everyone. As Fred previewed, overall we had an extremely strong fourth quarter on both the top- and bottom-line, beating our previous guidance and consensus due to a combination of strong market conditions and some specific fourth quarter items. In fact, this was the strongest fourth quarter we've had since 2009, the year we completed our restructuring. Reported net sales in Q4 were up 8% compared to the fourth quarter of 2014. Excluding foreign currency headwinds, net sales increased 13%. Volume on a dollar basis increased 8.5% and average unit price increased over 3%. The strong record net sales performance was fueled by a number of factors. First, overall volume increases from growth in the RRR market as well as the U.S. new housing market, which may have been supported by mild interest (12

[Frederick J. Lynch:]

Thank you, Russ. The strategies we're pursuing at Masonite are delivering strong financial performance. The fourth quarter of 2015 was the seventh consecutive quarter of adjusted EBITDA growth in excess of 25%. For the full year, net sales increased 7%, excluding foreign exchange. Gross profit increased 32% and gross margins expanded 430 basis points. Adjusted EBITDA increased 49% to $204 million and it was our first full year of returning to double-digit adjusted EBITDA margin since the housing downturn. The acquisitions of PDS and National Hickman and USA Wood Door broaden our product portfolio and expand our service capabilities across multiple channels. The disposition of our door business in France was another positive step in transforming our business to focus on improved financial performance. We continued to be an innovator in new product development, and in 2016, we have already released the Logan 2-Panel Door as part of the successful Heritage door series. Additional 1,000 options in our Vista Grande exterior line are planned to release later this year, as well as new opaque glass designs including Pearl and Quill. We are committed to driving operational efficiencies incorporating a lean enterprise operating system throughout our organization. We expect that these initiatives will translate to net sales growth of 6% to 8% in 2016, with an adjusted EBITDA pass-through rate in excess of 30%. And given our expectations for steady growth in the construction industry, we believe over the long-term, our net sales should grow at 7% to 10% CAGR and we should deliver adjusted EBITDA margins between 14% and 15% by 2018. We believe Masonite's strong balance sheet and expected cash flows will enable us to return value to shareholders through share repurchases, while at the same time allowing us to continue to invest in internal and external opportunities designed to further strengthen our business and drive long-term growth. And importantly, we believe the steps we have taken are transforming the business and will deliver an unparalleled customer experience for years to come. Again, I want to thank all of our hardworking employees for their dedication, hard work and continued focus on our customers. Together, we're committed to making Masonite the best provider of building products in the eyes of our customers, employees, shareholders, suppliers and in our communities. And so with that, I'll now turn the call back to the operator to open up the line for any questions that you might have.

[Operator:]

Thank you, Mr. Lynch. Our first question comes from the line of William Wong with JPMorgan. Please proceed with your question.

[William Wong:]

Hi, good morning guys. How are you?

[Frederick J. Lynch:]

Good morning.

[Russell E. Tiejema:]

Good morning.

[William Wong:]

My first question is with regards to your 2016 outlook for sales up 7% to 9% excluding FX. Can you just talk about what role you expect volume, price and mix to play within that sales growth? Do you expect it to be somewhat evenly driven or is one expected to be maybe a better component of that growth, and this is specific to North America?

[Frederick J. Lynch:]

So, it's obviously all of those tenets have a impact on how we drive our net sales. As I think about the business and as we think about where we are today, a lot of where we are today is a result of the action strategies that we developed two-years and three years ago. And so when we think about our business, we're constantly thinking about and the decisions we're making every day are about how do we drive our business for the long-term. And it's across a multiple of strategies that make that happen. And so when we think on a year-to-year basis, this is a just the first year, as Russ said, of our plan for a multiyear strategic framework, and so all of those aspects. It's about how do we drive new products. It's how do we take our products and deliver more fully finished products and additional services. We have normal price improvement that occurs in the business. Importantly, we also have normal -ongoing focus on our Lean Sigma and operating cost structure to make sure we're constantly improving that. So, that's how we look at the business. As far as giving specifics around what that's going to happen, those are all included in our outlook.

[William Wong:]

Okay. Fair enough. Now with regards to price improvement, historically, as you've had maybe one or two price increases every year. Within – including in your guidance or looking at your guidance, are you guys expecting price increases in 2016? And if so, what kind of gives you the confidence you'll be able to get that price increase if you decide going forward?

[Frederick J. Lynch:]

So, as we've always said in the past, we don't talk about price increases looking forward. We only talk about price increases in retrospect. Again, I'll tell you that price increases for like-for-like products will always be part of our strategy, because we always know we're going to have inflationary costs associated with the business. We have had some price increases that we have announced and have taken place in the first quarter, and those price increases are reflected in our guidance.

[William Wong:]

Okay. Great. And just last one if I could. Can you just talk about imports and if you're seeing any additional activity there?

[Frederick J. Lynch:]

For the most part, if you think about our product offering, as we all like to say, it's large and bulky. We do a fair amount of imports for raw materials. That's part of our strategy for the components of our products, but when it comes to the actual finished products, it's not something that we tend to see as a major concern in our business.

[William Wong:]

Great. Thank you, guys.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Bob Wetenhall with RBC. Please proceed with your question.

[Robert Wetenhall:]

Hey, Fred, congrats on a really very strong year. You guys did a great job particularly in Europe, and the outlook is very encouraging. I was hoping, Russell, maybe you could just walk us through how we get from 2015 EBITDA to 2016. What are your assumptions around that EBITDA guidance?

[Russell E. Tiejema:]

Thanks for the question, Bob. But we're not going to be walking through a specific framework of puts and takes that take us from 2015 to 2016 today. You know what I would say is that we gather with the analysts generally once a year and we give you a little bit deeper look at the business and we're putting together our plans for an Investor Day sometime in 2016. And it's probably fair that we talk in little bit more detail about some of the drivers in the business that we see driving toward that guidance number for 2016 at that time. But I would just go back and reiterate the points that Fred made a moment ago, that as we think about the multi-year plan for our business, we think about this around three legs of a stool. One is obviously getting the additional operational leverage that we should see in our business as the top line grows, based on continued recovery in the U.S. and North American housing markets. We're obviously still continued – continue our focus on our product development efforts and you're starting to see that improvement in mix and average unit price this year from a multi-year effort in investment in new product programs; we're going to continue that pace. And as we've said before, we think we're still in relatively early innings of experiencing continued tailwinds in mix and average unit price from those product investments. And then thirdly, we're still very focused on maintaining productivity and cost reductions across our manufacturing facilities and in our material costs wherever possible. So, we look at all three branches of the business or legs of the stool if you will, and all three of them sit underneath the guidance that we've provided today for 2016.

[Robert Wetenhall:]

That's helpful. And just to kind of try to get a little bit more granular, Fred, I think you said that the current guidance does include the announced price increases that came out in the first quarter of 2016 for 3% to 5%. And I was just looking for confirmation that is in your guidance. And I was also trying to understand is that, also what are you assuming through your mid-cycle long-term targets? Does that also include pricing?

[Frederick J. Lynch:]

Yeah, so the way that we think about the business, again, Bob is, if you think about that 2018 framework that we laid out, in order to achieve those numbers, we need to deliver somewhere between $40 million and $55 million a year of additional EBITDA over those next three years in order hit kind of the midpoint of that range. And we think, again, this as the year-one of achieving that plan, because the decisions we make on a day-to-day basis, whether it has to do with price for like-for-like, whether it has to do with new products driving our mix, are all associated with that longer-term plan. So, you know, as we look at – we didn't have price increases as we mentioned in the first quarter across many of our products. We don't provide specifics on what the amount of that price increase is for competitive reasons, but that's part of the guidance for us as we drive through our long-term multi-year plan.

[Robert Wetenhall:]

Okay. It's helpful. And just one final housekeeping question. I think Russell you said 4% of the growth was due to the addition of an extra week, and if you strip that out and wanted to get a view on underlying trends from a price-volume standpoint in 4Q year-over-year, how would have they – they have performed if you exclude that week and if you exclude acquisitions? Thanks and good luck.

[Frederick J. Lynch:]

Thank you, Bob.

[Russell E. Tiejema:]

Thanks, Bob. Well, what I would say is that we recognized on the order of about $19 million of additional revenue in that 53rd week.

[Robert Wetenhall:]

I understand that. But I was saying excluding the week, would you have had in the fourth quarter on a like-for-like basis, growth in both price and volume?

[Russell E. Tiejema:]

Yes. Okay, understand the question. Yes, we saw performance improvements from a volume perspective and a price perspective largely across the board. I would tell you that we're particularly pleased with the performance that we saw in our interior door business and even in the (35

[Robert Wetenhall:]

Terrific guys, good luck.

[Frederick J. Lynch:]

The way I would just reinforce that Bob, we had it in all components. We had volume growth. We had AUP growth. We had like-for-like price improvement. So, it was across the board. And the fourth week was the third of the total growth on an FX adjusted basis.

[Russell E. Tiejema:]

That's right.

[Robert Wetenhall:]

Thanks.

[Operator:]

Thank you. Our next question comes from the line of Mike Wood with Macquarie. Please proceed with your questions.

[Mike Wood:]

Hi, congratulations on a continued good job on mixing up. Question is, how does the number of product launches in 2016 and 2017 compare to what you released in 2015? And the benefit from new product launches typically accrue to you right away or does it take time for customers to adopt and transition to those new products?

[Frederick J. Lynch:]

Yeah. So I would say, as you mentioned, we had the largest launch of new products in 2015 in the last nine years. Most of those launches occurred mid- to late-year, so the impact of those launches – we'll see obviously continued impact from those launches on a year-over-year basis going into 2016 as well. And of course, as you mentioned we also have a number of new product plan – launch plans for 2016. So we have been investing more money in our R&D for the last several years. Actually we started this investment in new products back in 2012 and 2013 in driving additional SG&A into our organization and we've continued to increase that every single year since. And so part of that 6% to 7% growth or – sorry, the over the long – that longer – sorry – not 6% to 7% – 7% to 10% growth over the longer period is based on that new product strategy being part of that growth. So, I am not sure if I am answering your question, Mike, but I think that's what you're trying to get at.

[Mike Wood:]

Yeah. And I understand what you're saying about the second-half loaded nature of the product launches, but just typically when you do launch a new product, is that typically going at its full run rate right away or you know...

[Frederick J. Lynch:]

Okay.

[Mike Wood:]

...does it kind of build gradually?

[Frederick J. Lynch:]

We normally – we talk about it, what we call the product peak period typically being around three years from launch. That's when it kind of either hits its peak and starts to plateau.

[Mike Wood:]

Okay. Understood. And I am less familiar with the competitive pricing dynamic in the UK and European region. Could you just give us some color in terms of how much of the average unit price increase there is mix versus like-for-like price and what the competitive environment there is like compared to the U.S.?

[Frederick J. Lynch:]

Yeah, I don't know that we have the specifics on mix or prepared to provide specifics on mix versus like-for-like pricing. Listen, it's a competitive environment, just like it's a very competitive environment here in the U.S. We focus, again, on the capabilities that we bring to market. We recognize that our customers are always looking for ultimately value. We think price is part of that value, but there's so many other aspects of that value that they're willing to pay for, it's economic utility, right? And it's about service. It's about delivery. It's about quality. It's about the professionalism of our people that are going with it. It's about our investments in new products and willingness to get out in front with technology and how we interface with our customers from a digital aspect. So we think it's across the board and that's why we have so many of these strategies – so many of these attributes that we're working in our strategy all the time to make sure that we give a full value product and service offering to our customers. So I'd say, listen it's competitive. We do really well in that market, because our team there does a great job from a quality, product, delivery perspective there and we have excellent relationships with our customers and day-in and day-out we tend to win business because of what we bring to the marketplace.

[Mike Wood:]

Great, thank you.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Alex Rygiel with FBR & Company. Please proceed with your question.

[Alex J. Rygiel:]

Thanks. Good morning, gentlemen. Very nice quarter.

[Russell E. Tiejema:]

Thank you.

[Alex J. Rygiel:]

Fred, if you could touch upon a little bit about or just give us an update on your acquisitions in Europe over the last sort of 12 months, Hickman and Door-Stop and how that's integrating? And it's a little bit hard to tell from the results other than looking at the margin and the margins are outstanding, but if you could talk a little bit about price, volume and integration and all that, I'd appreciate it?

[Frederick J. Lynch:]

Yeah, so it's relatively early days for the Hickman and PDS integrations. What I can tell you is, both of those businesses had very good margin profiles when we purchased them. We believe it will take us 12 months to 18 months to start to really begin to benefit from the synergies that we think those businesses will bring us. I think importantly what that's done for us in the UK is positions us with the full product offering across all of the channels, and again, makes us a very powerful supplier to those customers who are looking for someone who can meet all of their needs. And so we're excited about the ability for us to be able to bring that to the customer base in the UK. I can give you maybe more specifics on DSI, because DSI we've had for about two years. I think the last time we spoke in the quarter, we mentioned that DSI had grown 35% over the first 18 months that we owned it. We're really excited about that growth potential. Again, it's a business based on a unique service offering as well as unique product offering. Very innovative business and innovation and investment innovation continues to be an important part of that business. So, we like the business profile that we have in the UK right now. Again, that makes up about two-thirds of three quarters of that segment – that reported segment as we reported today, and likewise the profitability of that segment is being driven by that change. So we have lot of work to do on getting the integration right, but we think there is only upside to the performance of that business as we continue to integrate it.

[Alex J. Rygiel:]

And I am not going to ask you specifically about price and volume, but from a geographic standpoint, if my assumptions in the U.S. are for price of X and volume of Y, is there any reason that my assumption for price and volume to be any different in the UK? And if so, why?

[Russell E. Tiejema:]

Other than the UK has slightly different macroeconomic housing drivers, but the reality is for 2016, they're about the same as they are in – we believe in North America. So I guess the answer is that I wouldn't – again, I don't want to get into helping you build your model, that's your job. But I don't see a big difference.

[Alex J. Rygiel:]

That's helpful. And then Russ, any chance you could quantify the cost benefits in 2016 or go into a little bit more detail on it?

[Russell E. Tiejema:]

Cost benefit for which Alex?

[Alex J. Rygiel:]

Input cost.

[Russell E. Tiejema:]

Material cost?

[Alex J. Rygiel:]

Material cost. Yeah.

[Russell E. Tiejema:]

What I would say is that we did experience some – as I mentioned during the prepared remarks, we did experience some cost tailwinds on the commodity side. And so, when we look at our overall input cost, you know, as you know or as I think we've disclosed in the past, our material cost represent about half – a little over half of our total cost of goods sold. And we would estimate that we probably picked up about a percentage point of cost tailwind there relating to materials cost, and lot of that happened in the second half.

[Alex J. Rygiel:]

Very helpful. Thank you very much. Great quarter.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Al Kaschalk with Wedbush Securities. Please proceed with the question.

[Al Kaschalk:]

Great. Good morning, everybody. Most of the questions have been hammered away, I guess on price and volume. But I want to just focus a little bit on the UK, if I recall right, the two acquisitions, Hickman and PDS, were early 2015. So how much of the growth benefit there is the rollover effect of those acquisitions?

[Frederick J. Lynch:]

So, actually they were late 2015. So – and I wouldn't say they were early 2015, those acquisitions. But we can talk quickly, Russ, if you want to give some feedback on that?

[Russell E. Tiejema:]

Well, I think we're clearly seeing some margin benefit from those business as they roll-on, but as Fred mentioned a moment ago, we got to continue to see some integration before we really see kind of the glide path for those businesses. I won't quote specific margin numbers for you now, but I would say that on a pro forma basis, we're seeing adjusted EBITDA margin there that are very encouraging and slightly ahead of what you saw for the reported numbers in the quarter.

[Al Kaschalk:]

Okay. And then just a – talking a step back about the market, I believe there's some tax laws that are changing on the housing front. And to what extent, and this is UK related, from April, do you see any pull forward of activity? I know you gave a – I think 10% or 11% type completions rate of growth for the UK, but have you any – have any thoughts around that potential?

[Frederick J. Lynch:]

You know the one thing I would tell you in the UK is the same situation that we're seeing here in the U.S. that, well, I think there is an underlying latent demand for more housing. There are issues that are obstructing the ability for the housing to grow faster. And even if the tax law changes would drive people to want to buy sooner, the ability to construct homes sooner is just as difficult in the UK that is in the U.S., right? So you have material input constraints and you have considerable labor constraints. The UK economy kind of continue to do well in the European landscape overall. Unemployment is low. And so we hear the same exact issues from builders in the UK that we hear in the U.S.; hard to find labor, hard to find qualified labor, tightness on input supplies. I mean for a period there last year, you couldn't get bricks for building home. So, we think the underlying demand is there, whether or not that can be accelerated because of these other constraints holding it back is a question yet to be resolved.

[Al Kaschalk:]

Okay. Great. And then my follow-up would be on the SG&A front. Obviously, growth requires some investment in personnel. Would you characterize if those major investments are now made and you should start to then see those rewards in 2016 and 2017 or more consistent with the plan that you've laid out for the mid-term?

[Russell E. Tiejema:]

Yeah, Alex, it's Russ. The way I think about it is that you should view 2015 and 2016 both as years of investment for the company on the SG&A side. I think we're going to continue to see some head count growth to support some of the growth initiatives that we have in place. You'll continue to see some investments in some of the IT systems that we use as we integrate some of our businesses and improve our ERP system platforms; we talked about that in the past. So you're still going to see probably some leverage in SG&A going into 2016, just as a result of revenue growth, but it's still largely a year of investment for us on the administrative side of the business as well.

[Al Kaschalk:]

That's great. Thank you and thanks for the mid-term framework. Appreciate that.

[Russell E. Tiejema:]

Thank you.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Trey Grooms with Stephens Inc. Please proceed with your question.

[Trey H. Grooms:]

Good morning. And yes, congrats on a really nice quarter.

[Frederick J. Lynch:]

Thank you.

[Russell E. Tiejema:]

Thanks, Trey.

[Trey H. Grooms:]

So I dropped off the call for just a minute during Q&A, so forgive me if this has already been addressed. But Fred, you talked about your outlook for kind of new res and R&R for 2016. Can you guys talk about what you're seeing or expecting for the commercial side of your business or the non-res side of your business? And then just an update on kind of what that is – that non-res mix is for you guys now?

[Frederick J. Lynch:]

Yeah, so, our non-res mix, I'll start with that first, right now that's about 20% of our business in North America. As far as the markets that we serve or the categories that we serve, whether it's hospitality, building, office building, government building, school, we are pretty well aligned with the general market, because of our product offerings being so broad, we pretty much are able to equally contribute to each of those segments. You know, right now, as we look at the North American commercial market, we're forecasting that for the door side of that business to be in the mid-single digits in our 2016 outlook. And just as a reminder, there is a significantly longer lag in that business as compared with the residential business. So oftentimes when we're working on a construction start on a major office building, it could be two years before the doors are finally put into the building. So that lag is reflected in our outlook of mid-single digits.

[Trey H. Grooms:]

Okay. That's helpful. And then, mix has been a nice positive for you guys on the res side. Has that been also playing a role on your non-res business as well? And as far as like new products and things like that, are you also targeting that side of your business?

[Frederick J. Lynch:]

It hasn't been to the same extent. It's an area that we are beginning to invest in or have been investing in, I should say. So we are adding additional costs into that business, particularly in the new product development side, to try to replicate the same focus that we've had in the resi side. I will tell you, though, that we started that focus on the resi side several years ago, and we're seeing the benefits coming forward today. What you're seeing in the non-resi business will be an investment in that today versus actually getting the results of that. We'll be seeing the results of that in 2017 and 2018. And I think that the way we think about the business all the time and I've said this to investors on a number of occasions, we're always asked about what we're going to do next quarter and this year. And every time I was thinking about a decision or making a business decision with our teams about investments, we're always thinking about the impact on it three years from now. So there's always that interesting disconnect.

[Trey H. Grooms:]

Got you. And then last from me and again forgive me if this has been addressed, but now with this buyback in place, can you guys talk about the priorities of use of cash, kind of how you balance M&A and buybacks now with this in place?

[Russell E. Tiejema:]

Yeah, Trey, it's Russ. I would characterize it as being consistent with how we discussed it before and really consistent with how we outlined the priorities on the slide in our earnings deck, is first and foremost, we're going to be investing in the business itself. We want to make sure that we have the right platform to continue that underlying revenue growth that we project over the next three years. So that means some thoughtful investments on the working capital side where we think that there is a good return for that investment in working capital and inventory. Second priority is going to be on the capital investment side. We think we still have a lot of opportunity to invest in our manufacturing capabilities, our IT and distribution capabilities and clearly on the product side, including the entire product portfolio to include architectural, as Fred just mentioned. Third in priority, we're still going to be looking for those opportunities to tuck in strategic acquisitions, businesses that we think align well just from a product perspective, from a distribution perspective and that help us better serve our customer base with product and value-added services. And then after that, we get to the priority of repurchasing shares on an opportunistic basis. Now that being the priority list, we're still very positive on the fact that the EBITDA trajectory that we see for the business and the cash flow generation that we see for the business, we believe that we can successfully execute on all four of those cash priorities, however, simultaneously.

[Trey H. Grooms:]

Great. That's it from me. Thanks a lot.

[Frederick J. Lynch:]

Thank you.

[Russell E. Tiejema:]

Thank you.

[Operator:]

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

[Nicholas Andrew Coppola:]

Hi. Good morning.

[Frederick J. Lynch:]

Good morning.

[Russell E. Tiejema:]

Good morning.

[Nicholas Andrew Coppola:]

So, a high level question, you talked about a mix shift between single-family and multi-family and how that impacts you. Are you looking for a shift back for single family this year and how are you thinking about that in your forecast?

[Frederick J. Lynch:]

Yeah, I think as we think about this year, the way that we've thought through it is that it's going to be very similar to 2015. I mean, it's not something that we had any more insight into than anyone else that's out there trying to figure this out. And so when we do our analysis, we assume it's going to be similar.

[Nicholas Andrew Coppola:]

Okay. That's fair. And then can you just talk about the sale of the Africa business? I think in the past you've discussed that as more of a real estate play, so what's your thinking there?

[Frederick J. Lynch:]

Yeah, I think that's right. I mean we've always said that product -that plant made hardboard which is a product that really is not used nearly as much in other parts of the world. Our market there is largely – or our products are largely sold into that market. We've always been investing on improving the value of the forestry assets and that's been the focus for the last several years, following – and in part knowing that over time, the value of the product that was coming out of the plant was being challenged. And so, as we look forward, we look at this as an opportunity to maximize our investment.

[Nicholas Andrew Coppola:]

Okay. Understood. And then my last question here, you've been pretty active in terms of M&A, so any color on what deal flow looks like or where you'd be interested in adding geographically or by product category? Anything you want to share there?

[Frederick J. Lynch:]

Sorry, can you repeat the question?

[Nicholas Andrew Coppola:]

What you're looking at in terms of M&A?

[Frederick J. Lynch:]

I don't think our M&A strategy has changed whatsoever. It's along the same exact lines as we've been doing so far.

[Nicholas Andrew Coppola:]

Okay. Thanks for taking my questions.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jim Barrett with C.L. King. Please proceed with your question.

[Jim R. Barrett:]

Good morning everyone. Fred, given the company's expectations for 7% to 10% growth over the next three years on the top line, under that scenario, would you expect to expand your automation investments beyond the Denmark plant?

[Frederick J. Lynch:]

Yeah, well, I'd say that we continue to invest in automation across the entire system. So when we think about our operating strategy, we really have two major focuses in that strategy, one is continue to drive the – what we call our (56

[Jim R. Barrett:]

Okay. And broadly speaking, are automation initiatives such as what you just described, is that a critical part of achieving the 14% to 15% EBITDA targets you have for 2018?

[Russell E. Tiejema:]

I would say it's just one part. It's no more critical than anything else we're doing.

[Jim R. Barrett:]

Okay.

[Russell E. Tiejema:]

It's combination of our, we call it our holistic strategy.

[Jim R. Barrett:]

Okay. Well, thank you very much.

[Frederick J. Lynch:]

Thank you.

[Operator:]

Thank you. Thank you, ladies and gentlemen...

[Frederick J. Lynch:]

And operator. Okay. Sorry, go ahead.

[Operator:]

We have come to the end of our time allowed for questions. I'll now turn the floor back to Mr. Lynch for final remarks.

[Frederick J. Lynch:]

Great. Thank you very much. We appreciate all your questions today and your support of Masonite and we look forward to speaking to you again next quarter. Thank you.

[Operator:]

Thank you. Thank you for joining the Masonite International fourth quarter and year-end earnings call. This conference call has been recorded. The replay may be accessed until March 10. To access the replay, please dial 877-660-6853 within the U.S. or 201-612-7415 outside the U.S. Enter the conference ID number 13628426. Once again, this concludes today's call. Thank you for your participation.