Masonite International Corporation
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Greetings and welcome to Masonite’s 2014 Fourth Quarter and Full Year 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. This conference call is being recorded. The replay can be accessed until March 11. To access the replay please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. Enter the conference ID 13599682. I will now introduce Joanne Freiberger, Masonite’s Vice President and Treasurer. Please go ahead.
- Joanne Freiberger:
- Thank you, Kevin and good morning everyone. I’m joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer and Mark Erceg, 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. The earnings release and the presentations made by our executives include forward-looking statements that are based on the beliefs of the management team regarding the results of operations of the company as well as industry and macroeconomic conditions. These beliefs and the related forward-looking statements 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 the investors tab of our website. Actual results may vary materially from those described in the forward-looking statements. Our management uses adjusted EBITDA to measure our operating performance. Accordingly we supplement our GAAP reporting with the non-GAAP financial measure of adjusted EBITDA. Our definition of adjusted EBITDA and our reconciliation to the GAAP measure of net income is provided in the appendix of today’s presentation which can also be found on our website. On today’s call, Fred will begin with a company and industry update, next Mark will provide a financial review of the fourth quarter and the full year results, after which Fred will summarize our prepared remarks before opening the call up to a question-and-answer session. With that, I’ll turn the call over to Fred.
- Fred Lynch:
- Thanks Joanne. Good morning and welcome everyone. 2014 was an important and a successful year for a number of reasons. First, U.S. housing market continued to recover, allowing Northern American unit volume to grow despite a very difficult first quarter for the fifth year in a row. Second, pricing actions we took late 2013 and throughout 2014 resulted in a seventh consecutive quarter of positive AUP growth within the North American segment. Third, we successfully acquired Door-Stop International in U.K. and innovative exterior fiberglass Door Company with the unique business model that has changed the game relative to manufacturing and delivering exterior doors in the United Kingdom. We remained very excited about Door-Stop’s prospects going forward and the results delivered in 2014. Finally, these items combined with ongoing strategic investments in product line leadership, sales and marketing excellence, electronic enablement and automation along with our ongoing focus on cost controls drove strong financial results during the first full year at the public company. Net sales increased 6.2% and adjusted EBITDA increased by 29.5% to a $137.1 million. In addition, adjusted EBITDA margin expanded 140 basis points while working capital as a percentage of sales decreased by 110 basis points. That said we also faced some headwinds, and frankly, there are several areas where we could have and in some instances should have performed better. So for example in our South African segment, an explosion at our Estcourt Mill during the second quarter caused significant interruption to the business. The team there has done a remarkable job caring for the impact on employees and their families while repairing the site. While there is still work to be done on the forensic accounting side, we continue to believe the full adjusted EBITDA impacted that incidence will be in a $6 million to $7 million range. In Israel, business fundamentals continue to deteriorate and in August, we permanently exited in the business, which, in retrospect, was a decision we should have made sooner. Meanwhile in France, the housing construction market had another difficult year with housing starts down by double-digits for the third consecutive year, which drove our decision to announce the closure one of our production side and take a non-cash impairment charge of $16.5 million in the fourth quarter. Finally, throughout the entire year, but more acutely during the third and fourth quarters, foreign exchange negatively impacted 2014 full year net sales and adjusted EBITDA by $23.6 million and $1.6 million respectively. Throughout the year, our five strategic focus areas remain unchanged, with a commitment to again product line leadership, sales and marketing excellence, electronic enablement, automation and portfolio optimization regarding our approach. We believe that strong execution across these five strategic platforms will help us grow share and expand margins beyond the macro with the broader macroeconomic environment. We talked about product line leadership, you can see on slide number six, we’re referring to Masonite’s commitment to provide our channel partners and end customers with a full range of products, with the most innovative options, newest design, highest quality and best service in the industry. For those of you who were at the international builders show in Las Vegas in January and had a chance to visit our booth, you would have seen and heard that in 2015. We are planning our biggest product launch in nine years, including the heritage series of interior resource, which include one, two and three panel shaker design. Vista Grande, which is an exciting new line of modern fiberglass entry doors and multiple new decorator glass designs. At the same time, we are investing in product line leadership we’re driving sales and marketing excellence. Sales and marketing excellence means we’re taking consider effort to look down channel in order to influence key decision maker and educate consumers in order to create pull through demand for high quality product and services. For example, working directly with architect and builders helps ensure consumers get products designed to bed suit this specific needs. We also believe that increase customer education with helps improve customer satisfaction and facilitate important product trade up. Electronic enablement another key part of our balance growth strategy. In order to ensure we have rapid access to data and highly efficient and controlled processes, we will be migrating all acquired and legacy businesses within Masonite’s Architectural door business onto a common ERP system. This multiyear, a multimillion dollar project with help connects in a line our sales, operations, supply chain and customer needs onto a single unified platform. And of course, we continue to invest behind our proprietary Max Configurator. The Masonite Xpress Configurator continues to grow on use and acceptance as and our most recent version Max 3.0, it expected to drive industry adoption rates across our dealer network even faster, when was released later this year. Turning to slide number eight, we continue to pursue automation in the formal robotics, scanning RFID technologies, which scans for and locate materials and finished products for improved efficiency and integrated PLCs which allows us computer systems in robotics to be operated more intuitively. In order to increase safety and lower healthcare costs by reducing the amount of manual manipulation required from manufacture of door, improved quality, consistency and reduced handling defects by having a consistent repeatable process and unable fast response time to changes in consumer preferences in market demand. Finally in 2014, we remain focused on portfolio optimization, as we discussed previously, we acquired Door-Stop International in United Kingdom in February of 2014 and more recently we made a very small acquisition in Canada, which approaches to Harring Doors, which operates in the wood stile and rail category. Under this position size, we continue to exit non-strategic markets like Poland and Israel, which redefine is markets having a poor macroeconomic outlook, outdated facilities and equipment and poor cash conversion metrics. Turning to slide nine, if housing and construction markets continue to improve and we are able to successfully monetize the strategic investments we’re making in product line leadership, sales and marketing excellence, electronic enablement, automation and portfolio optimization while we continue to capture price that is more reflective of a high quality products and services we provide. We should be able to expand margins in increased earnings in the years ahead. Consistent with this approach during 2015, we expect continue to recognize benefits from our 2014 pricing actions as well as from a pending wholesale pricing action across interior and exterior products in the United States and Canada scheduled to be effective on orders placed beginning in March. As these additional pricing benefits begin to hit our P&L during the second quarter, they should provide us an additional flexibility and make the mid to long-term investments required to be the best provider of building products in the eyes of our customers, employees, shareholders, suppliers, and communities in the years ahead. So with that, I’ll turn the call over to Mark to review our financial results. Mark?
- Mark Erceg:
- Thanks, Fred and good morning everybody. 2014 full year volume increased from 31.6 million to 32.7 million doors, which represents a fairly modest increase of 3.5%. However, purposeful pricing actions, continued cost focus, and the acquisition of Door-Stop allowed us to post solid net sales growth and strong adjusted EBITDA growth. Specifically, net sales increased from $1.7 billion to $1.8 million or 6.2% and adjusted EBITDA increased from $105.9 million to $137.1 million or nearly 30% year-over-year. Excluding foreign exchange headwinds, which became more pronounced during the second half of the year, net sales increased 7.5% and adjusted EBITDA increased 31%. On slide 12, we present a summary income statement of our full year results. Beyond the net sales and adjusted EBITDA numbers already cited, it warrants mentioning that gross profit increased almost 18%, the $265.4 million or 14.4% of net sales, an increase of 140 basis points versus year ago. Moreover, while we continue to invest the new capabilities, SG&A growth on an operational basis was tightly constrained. For example, personnel costs were actually down $4.2 million year-over-year. However, that was more than offset by among other things, a $7.4 million increase due to the Door-Stop acquisition, $5.7 million of non-cash losses on disposals of property, plant and equipment and a $3.1 million increase in professional fees driven primarily by cost associated with complying with the Sarbanes-Oxley Act as a first year filer. The combination of higher gross profit with only slightly higher SG&A as a percent of net sales also resulted in a 140 basis point expansion in our adjusted EBITDA margin from 6.1% to 7.5%. Turning to slide 13, we examined the change in net sales for each of our three reportable business segments and the primary drivers of the year-over-year changes. Net sales in our North America segment increased 5.6% or $74.4 million. This increase was driven by higher unit volumes, which added $37.8 million and a $65.6 million increase in average unit price, driven in large part by our previously communicated pricing actions. Partly offsetting the increase in net sales was $7.3 million of lower component sales and a $21.7 million negative impact due to foreign exchange. Net sales in our Europe, Asia and Latin American segment increased 13.3% or $45.2 million compared to 2013. Higher unit volume increased net sales by $17.8 million as approximately $42.5 million of net sales from the Door-Stop acquisition was partly offset by lower unit volumes in France and our exits from Poland and Israel. Targeted price increases predominately in United Kingdom and positive mix increased average unit price and net sales by $20.6 million. Foreign exchange in component sales added $6.8 million in 2014 to our Europe, Asia and Latin American segment. Net sales in our South Africa segment decreased 18.7% or $13 million due primarily to an explosion at our Estcourt Mill and the devaluation of the Rand, which was only partially offset by $17.1 million from higher average unit prices. On slide 14, we present a summary income statement of our fourth quarter 2014 results, which shows net sales increased 6.8% while gross profit increased 31.3% behind the 290 basis points expansion in gross profit margin, the 15.1% of net sales. Adjusted EBITDA grew at an even faster rate, more than doubling versus year ago, increasing from $17.8 million to $37.7 million, which is an increase of nearly 112%. Adjusted EBITDA margin also doubled expanding 420 basis points from 4.2% in the fourth quarter of 2013 to 8.4% in the fourth quarter of 2014. The full magnitude of the year-over-year increase in fourth quarter adjusted EBITDA can be seen on slide 15, which shows adjusted EBITDA growth in 2014 versus 2013 by quarter. Aside from an unusually weak 2014 first quarter which was down 25% versus year ago due to unseasonably harsh winter conditions and residual impacts from the 2012 Lowe’s business loss. Our balance approach which combines pricing actions, discipline cost control and investment across our five key focus areas as translated into strong growth rates. With adjusted EBITDA up approximately 30% in the second quarter, 25% in the third quarter and overall 110% in the fourth quarter of 2014 versus the comparable 2013 periods. As we reflect on our strong 2014 results and look ahead to 2015, we are struck by a number of similarities and a number of differences in the environment which we are operating. As an example, we expect to once again see modest unit volume growth overall and steady improvements in average unit price driven by our targeted pricing actions and positive mix as consumers continue to trade up the higher value offerings. We expect material inputs such as wood, metals, chemicals and glass to be slightly higher and we expected tightening labor market and higher healthcare costs may put additional pressure on overall people related expenditures. Finally, negative business trends in France and volatile foreign exchange rates add additional uncertainty. For example, within the North American segment roughly 20% of total production comes from plants based in Canada. As a result we wants the U.S. dollar, Canadian dollar exchange rate very closely and the sharp drop, we seen in the Canadian dollar versus the U.S. dollar since started this year is something we expect to negatively impact North American segment net sales and adjusted EBITDA throughout the year, assuming current rates hold. Against this backdrop, we are committed to making the necessary investments across our key focus areas to protect and strengthen Masonite’s future. Specifically, we are increasing the number of material scientists on staff and bolstering our product management capabilities to ensure we maintain product line leadership. We are hiring and investing in down channel initiatives that are focused on influence in key decision makers and consumers in order to create pull through demand for a high quality products and services as part our efforts to deliver sales and marketing excellence. We are making a major investment in people and capital to install new ERP system across Masonite’s architectural tool business in order to connect and align our sales, operations, supply chain and customer needs onto a single unified platform and we continue to invest in our proprietary Max Configurator is part of our efforts to electronically enable everything we and our channel partners do across the entire value chain. And finally, we are hiring more mechanical and process engineering and quality control experts to further drive our automation efforts. Looking at all these elements holistically, we expect net sales and adjusted EBITDA growth in 2015 to be very similar to 2014. A year in which we grew net sales and mid-single digits and increased adjusted EBITDA by approximately 30%. While we expect similar levels of top-line growth and comparable adjusted EBITDA growth, we expect capital spending in 2015 to be higher than 2015. Historically, we are targeted capital spending to be 3% or less of net sales. But could see 2015, capital spending as a percentage of net sales in the 3.0% to 3.3% range were approximately $60 million to $65 million in order support our investments in new products, electronic enablement tools, including a new ERP system for architectural business and our automation programs. Finally, turning to liquidity cash flow and balance sheet metrics, available liquidity at December 28, 2014, including unrestricted cash and undrawn EBL in an accounts receivable purchase agreement, totaled $327.7 million or approximately 18% of Masonite’s trailing 12 month net sales. You may recall that our target is to have a liquidity cushion which represents approximately 15% of net sales. So we are ending the year admittedly with bit more cash than we feel is needed to operate the business. Total debt and net debt to trailing 12 month adjusted EBITDA stood at 3.7 and 2.3 times respectively. Our trailing 12 month adjusted EBITDA interest covered ratio was 3.3 times and our trailing 12 month fixed charge covered ratio was 2.1 times. Cash flow from operations with $77.4 million in 2014 compared to $47.5 million last year. The increase in cash flow from operations was driven primarily by the improved North American housing market and higher average unit prices for our high quality products and services. And with that, I’ll now turn the call back to Fred to summarize today’s discussion.
- Fred Lynch:
- Great, thanks, Mark. So in summary, we experienced some positive momentum in the U.S. housing market towards the end of 2014, which helps overcome a difficult first quarter and increased average unit pricing throughout the entire year, which allowed us to post strong full year results with net sales increasing 6.2%, adjusted EBITDA increasing 29.5% and adjusted EBITDA margin expanding to 7.5% which is a 140 basis points over the prior year. For the fourth quarter, net sales increased 6.8%, adjusted EBITDA increased roughly 112% and adjusted EBITDA margin doubled 8.4% on a 420 basis point increase over the comparable quarter. Going forward, we remain focused on executing against our five key strategic platforms to deliver above market performance, product line leadership, sales and marketing excellence, electronic enablement, automation, and portfolio optimization via strategic acquisitions as well as market exits or disposition. We believe that these five focus areas and the key commitment and dedication of our talented employees will allow us to deliver another strong year in 2015, which importantly balances our expectation for modest unit volume growth and average higher unit prices against anticipated inflation pressure and the uncertainty of macroeconomic conditions in France and global exchange rates with the strategic investments we’re making to protect and strengthen Masonite’s future as we strive to become the best provider of building products in the eyes of our customers, employees, shareholders, suppliers, and communities. So with that, I’ll now turn the call back to Kevin to open the line for questions.
- Operator:
- Thank you, Mr. Lynch. [Operator Instructions] Our first question today is coming from Scott Levine from Imperial Capital. Please proceed with your question.
- Scott Levine:
- Hey, good morning guys.
- FredLynch:
- Good morning, Scott.
- Scott Levine:
- So I did see a pretty decent sized step-up in average unit price actually in Europe, Asia and Latin America. You mentioned the UK as an area of strength. I was hoping for a little bit more color there and maybe a little bit more color regarding the demand outlook overseas, your mix in markets. In general, are you becoming any more optimistic for the entire category either from a price or from a volume standpoint?
- FredLynch:
- Yes, I’ll just speak to our larger markets in Europe to start with maybe Mark and talk a little bit about Africa following that. We like what we’re seeing in the UK. Our position is strong in the UK, the acquisition of Door-Stop, we think has bolstered our position even further, not only are we seeing improved volumes, but we continue to believe we will see an improved pricing and market conditions quite frankly are positive. France is probably on the opposite side of the equation. Market conditions continue to be extremely poor while we believe they are starting to flatten out a little bit, the degradation in the markets over the last three years has made it very difficult on the industry. I think a France being in the position that North America was in back of 2009, is how I would kind of make that analogy. So we don’t have very high expectations for France and our focus on at least for the French market and our focus on France right now was strictly around cost control and making sure that we’re right sizing that business in connection with what we expect to see with the demand in that market and Mark you might want to talk about Africa?
- MarkErceg:
- Yeah, South Africa obviously had a challenged 2014 with the incident that occurred. As we sit here today the site has been fully remediated and we would expect unit volumes to progress going forward. Although year-over-year taking the incident aside, there hasn’t been a lot of unit volume progression coming out of the mill. The mill is largely running at Max capacity rates. You will have seen in the commentary we provided earlier, we did increase average unit price about $17 million in South Africa this past year. So we are taking pricing, but that’s largely simply offsetting the evaluation in the Rand and so we’re not really making a lot of U.S. dollar progression as it relates to it. Now during the third quarter, we made commentary to the effect that we received about $800,000 is a partial payment on the business interruption insurance claim. We also did receive in the fourth quarter an additional $2.7 million. We said we would keep you guys apprised of the remittances that we received. So for the full year, it was up $3.5 million recovered as part of the partial payment on the BI claim.
- Scott Levine:
- Got it. Thank you. And then as a follow-up, I think, Mark, you indicated that you had a little bit of excess cash from a liquidity standpoint due to the end of the year. Today an acquisition in Canada in the fourth quarter maybe a little bit of elaboration regarding your thoughts on capital deployment as a focus here, acquisitions, a little bit more focused now, or is the focus internally and then any thought on capital returns program at any point in time?
- Mark Erceg:
- Yes, we have talked openly about our investment priorities as relates to our cash balances. We have said first and foremost we need to support business growth through working capital expansion. You will see that in the print that we just had for the full year we executed very nice job with respect networking capital and actually reduced that in the absolute, so that area is one that we will continue to focus on and we will make sure that we obviously support the business first and foremost. Second, we said that we want to continue to support our strategic acquisition program, including Herring which was only about a $4 million acquisition which we effected in December and we’ve now done 13 acquisitions since 2010. We do believe that there are additional targets that are out there are of interest to us and we will pursue those as we deem appropriate. Beyond that we have talked about the fact that we don’t believe a special dividend or reoccurring dividend is a logical thing for us, because we are in a cyclical industry, but obviously since the listing event of September 9, 2013, we probably do have the opportunity to explore, as approximately potential cash deployment through some types of share repurchase. Our financial policy has been consistent in that we look to keep total debt not to exceed four times and as you see the end of the year and pretty good regard as it relates to that.
- Scott Levine:
- Okay, thank you.
- Operator:
- Thank you. [Operator Instructions] Our next question is coming from Robert Wetenhall from RBC Capital Markets. Please proceed with your question.
- Unidentified Analyst:
- Hi, this is actually [indiscernible] on for Bob, thanks for taking my question. I’m just wondering if you could provide some additional color on the first quarter wholesale pricing action, so specifically if you could give out the size of the price increase, range, and how you would expect that flow to EBITDA.
- Fred Lynch:
- So as we’ve talk about in the past, we typically don’t talk about price actions and price increases until they’re retrospective. However, based on the close timing of the impending price action, we did feel it was prudent to acknowledge that we do have a later out there that will begin impact prices in the second quarter. Mark, you might want to talk a little bit about what we believe that impact could be obviously it will be determined in retrospect when we talk about it at the end of next quarter.
- Mark Erceg:
- Right, as Fred indicated, this is the pricing action across wholesale interior and exterior products U.S. and Canada. We will start to realize benefits from that or at least we expect to start realizing benefits from that with Q2 release. Somewhat Q3, ‘14 pricing action which we said was about $5 million per quarter on a net basis, we would estimate that this pricing action would be somewhat similar to that.
- Unidentified Analyst:
- Great, that’s very helpful, thank you. And then just on the ERP implementation, I’m wondering if you could just elaborate a little bit on that and if you could quantify some of the spending that you expect on that implementation and how you would expect that to flow by quarter. Thank you.
- Fred Lynch:
- Okay, I’ll talk a little bit about the overall process around ERP and market capital spending through our acquisitions of Mohawk, I’m sorry, Marshfield, Algoma, Baillargeon, Birchwood over the last several years, as we bought those companies together we felt that the opportunity to put them on a ERP system would make that supply chain work considerably more effectively and really broaden our flexibility with responding to customer needs, as well as the opportunity to continue to invest in next generation configuration. So all of those aspects are being handled through this ERP migration and we’re pretty excited about what this will do for the business. With regards to spending, what I would say with most ERP systems, what you try and do is capitalize is much of it as is practical and as much as accounting guidelines will allow. So really I think you’ll see the manifestation of higher CapEx spending in ‘15 as opposed to necessarily direct pressure on SG&A. As we think about the number we provided of $60 million to $65 million in CapEx, I would expect to see a burn rate of a $2 million per quarter related directly to the capitalization of the ERP efforts. There will be some pressure on SG&A because as you can imagine with an ERP system implementation, a lot of our best folks across the organization are the folks that we have earmarked to go and work against that incremental project and so we have had to backfill some of those positions as we go through this process. But I would expect to see it come through principally in the CapEx arena.
- Unidentified Analyst:
- It’s very helpful. Thank you and good luck.
- Fred Lynch:
- Thank you.
- Operator:
- Thank you. The next question today is coming from Jim Barrett from CL King. Please proceed with your question.
- JimBarrett:
- Good morning everyone.
- Fred Lynch:
- Good morning.
- JimBarrett:
- When we look out three-plus years, can you talk about the relative importance of pricing versus mix and improving your profitability in North America if you execute on your plans?
- Fred Lynch:
- The three-plus year is a long-time out. I would tell you that where we’re today. We continue to be that the pricing that and the value that we’re getting paid for a product even in today’s market is not reflect the investment nor the value – the investment that we have made in manufacturing in the company, nor the value that we offer to our customer. So we believe that pricing will continue to be part of our strategy moving forward. We believe that as we continue to deploy the strategic initiatives, the customers that we work with and deal with everyday are seeing how that value redeployed and reinvested back into sales marketing excellent, product line leadership, electronic enablement will actually help them grow their business and solidify their business position. And importantly, we believe those tools will allow us to continue to see mixed upgrades. So, I’ll tell you that both mixed upgrade and pricing are things that we expect to benefit greatly from the strategic initiatives that we’re deploying.
- JimBarrett:
- And then on a separate topic, could you give us your outlook for your commercial business in ’15 in terms of both volume and pricing.
- Mark Erceg:
- Yeah, so we don’t specifically designate – what I will tell you is that the commercial business overall had a pretty difficult environment 2014, not unexpected given what was happening in the marketplace. We’re encouraged as we come into the early parts of 2015 as the market data is coming in and as a forecast from the various pundits are coming to fruition. We’re seeing a pretty substantial improvement in at least the quoting activity. We have a pretty long lead time or lag time in the commercial industry from the time that projects are originally conceived to the time that doors are installed. They could be anywhere from 18 to 24 months, from the time they are actually started to the time they’re – we install doors is probably more typically closer to 12 to 18 months. So we have a prognosis for that business. We think is good. We believe that getting our ERP systems and our house in order through this year is going to be very helpful in putting us in a great position as we get to the end of 2015 and in 2016 where we expect those – that segment of the market to continue to improve.
- JimBarrett:
- Thank you very much.
- Fred Lynch:
- You’re welcome.
- Operator:
- Thank you. Our next question today is coming from Alex Rygiel from FBR. Please proceed with your question.
- AlexRygiel:
- Good morning. Congratulations on a nice year.
- Fred Lynch:
- Thank you, Alex.
- AlexRygiel:
- First question, Fred. Can you talk a little bit about sort of the new product successes to-date and how important that is to sort of your guidance and your view towards 2015?
- Fred Lynch:
- Yes, so if you think about the where we’ve been with new products in the industry in general, I will tell you that during the housing recession and the downturn, we did not see great acceptance of new products from our customer base as people are trying to survive. We made a decision a year and a half ago, to begin increasing our investments in R&D and a new product development. I think if you read our release, you’ll see in the detail that we increase spending in R&D by $2 million in 2014. We think that $2 million will be – is well spent and we really start to deliver results in ’15, ’16 and beyond. So the new products that we mentioned today on the call are products that were just releasing now. So we don’t have data to tell you how well they’re performing. What I can tell you is that the customer excitement around those products was exceeded our expectations and so we’re very hopeful that those will deliver great result in 2015, but to be perfectly honest, we’re just releasing them now so it’s a little too early to tell.
- AlexRygiel:
- Thanks, very helpful. And then Mark, just for clarification purposes, as it relates to sort of the EBITDA directional guidance for 2015, to the directional guidance include the price actions in 2Q that you think preliminarily could incrementally add $5 million per quarter to EBITDA.
- Mark Erceg:
- Good day I would say in that regard, if you think about 2014 excuse me, we saw our adjusted EBITDA grow about 30% and that was partly driven by the fact that. We have been able to start restoring a more normalized pricing environment. We took two broad-based pricing actions in 2013, we took two broad-based pricing actions in 2014. As we think today we have obviously announced that we will be a wholesale pricing action that will start to benefit us in Q2, ’15. We also sitting here in an environment that actually has I think a fair bit more uncertainty associated with it. If you think about what’s been happening with the Canadian dollar versus the U.S. dollar, you would have seen that from start of the year it went from 1.86 down and 1.81 that was a very sizeable moment. I had in my prepared remarks to comment that 20% of our North American production actually comes from Canada. So the Canadian dollar situation is something that will be – will watching very closely throughout the year, it could be a fairly sizeable, strength on net sales growth. The other thing I would simply point out is last year in 2014, unit volume growth and as you saw on our slides was about 3.5%. Fred talked about inbound courting activity on the commercial business starting to pick-up, but that won’t necessarily equate into additional unit volume shipments. If it does until very late in 2015, that we do have ongoing pressures in places like France, so at the end of the day we think 2015, we’ll look fairly similar to what we saw in 2014, maybe a little bit more inflation on the commodity side because inflation was still relatively benign in 2014. I would expect another point or so in ’15 and then obviously with the Canadian dollar situation, we think that what we provided makes a lot of sense.
- Fred Lynch:
- I’m trying to sort of create a bridge from 2014 EBITDA of $137 million to sort of the 30% growth which is, let’s round being $40 million. And I believe you’ve got about $25 million of positive 2014 price actions that should rollover and help EBITDA growth this coming year and the 2Q price action seemed to add another possible $15 million in volume probably at $15 million and you probably have a year-over-year pickup from South Africa of $7 million or so. So I guess the offset I’m missing is foreign currency and labor and cost inflation. Any chance you could help us to quantified us?
- Mark Erceg:
- What I would say, if you look at our P&L, roughly half the P&L in totality is consumed by costs of goods sold, a lot of that is wood, a lot of that is steel , a lot of that chemical, a lot of that in glass. Our purchase basket for 2015 is probably in the $900 million range roughly, even one extra point of inflation against that equates to roughly $10 million of inflationary pressure. If you look at across the SG&A lines, Fred talked about a lot of areas that we want to invest in, so the mid and long-term future of Masonite is secure. There’s also healthcare inflation and other things coming into play. So you put very small percentages against fairly large purchase – personnel costs or commodities and I think you’ll find that the bridge largely will square.
- AlexRygiel:
- Thank you.
- Operator:
- Thank you. Our next question today’s coming from Al Kaschalk with Wedbush Securities. Please proceed with your question.
- Al Kaschalk:
- Good morning, guys and congrats on the first year through the process. Fred, I want to focus – on just on the volume comments that you made, in particular modest volume growth. And then secondly, if you could talk to any updates, particular, home center reviews that you may want to share. But I was struck the comment of modest unit volume growth despite the backdrop in the marketplace.
- Fred Lynch:
- I think from a unit growth perspective in the marketplace, it’s early in the year, every year since the down turn you coming to the year with expectations of things being very robust. Mark mentioned we are at 3.5% last year on volume growth, we spoke about the fact that we think this year will be similar the last year, so we are not at this point in time anticipating a very robust recovery in 2015. To the extent that happens, we’ll be ready for us that will be great. With regards to the retail line reviews, I think we start from the past at the – about the Lowe’s line review that we participated in towards the end of last year. At this point in time, we had not received a final answer on that line review, although we anticipate that answer will becoming for relatively shortly and we hope we will be able to talk about that with you in the next quarterly update.
- Al Kaschalk:
- That’s great and I appreciate it. Just the clarify the unit volume growth though, don’t read that has an expectations decelerating…
- Mark Erceg:
- No, not at all, not at all.
- Al Kaschalk:
- Excellent.
- Mark Erceg:
- Last year, we did 3.5% all in year-over-year, as Fred indicated every year, the industry has seemed to get ahead of itself and we’ve been I think appropriately cost as relates to it in our ’15 thinking.
- Fred Lynch:
- I think it’s important that we continue to believe that our focus on capturing value for products is the focus.
- Al Kaschalk:
- Great, okay, I appreciate that, guys, good luck.
- Fred Lynch:
- Thank you.
- Operator:
- Thank you. [Operator Instructions] Our next question today’s coming from Robert Wetenhall from RBC Capital Markets. Please proceed with your question.
- Unidentified Analyst:
- Hi, it’s [indiscernible] again. Just a question on – again on the volume in North America, you have that 2% growth or so in the quarter. I’m just wondering if you could slice that up a different way just if you could elaborate onto how that broke out between the different channels and retail wholesale and then what you saw on the commercial side?
- Mark Erceg:
- Yeah, let me just give you just some macro backdrop and we talk about the North American segment, that’s obviously Canada, U.S. and Mexico. I think if you look at the housing environment in Canada over 2014, you’re seeing that it more or less moved sideways, effectively. The non-residential business, the architectural business which is now over 20% of our consolidated sales on a global basis and within the North American segment, a slightly higher percentage, we’ve talked about the fact there hasn’t been a lot of unit volume progression as of yet. We think that is market that will come on strong, but we think that’s probably a later 2015, early 2016 story. So if you take Canada out and you take out the architectural business in Mexico really hasn’t done a whole lot recently, there has been a limited subset that is growing reasonably nicely, but within the segment confines, obviously the overall rate is diluted for those reasons. We continue to believe that our wholesale business and our retail business are phasing well versus U.S. housing completions on an equivalent basis and with triple our spending in growth within that.
- Unidentified Analyst:
- Okay, thank you.
- Mark Erceg:
- Thank you.
- Operator:
- Thank you. We’ve reached the end of our question-and-answer session. Let’s turn the floor back over to Mr. Lynch.
- Fred Lynch:
- Great. Thank you again everyone for participating in our update call and we look forward to seeing you at the end of our next quarter call. Operator?
- Operator:
- Thank you for joining the Masonite International fourth quarter earnings call. This conference call has been recorded. The replay can be accessed until March 11. To access the replay please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. Enter the conference ID number 13599682. Once again, that’s 13599682. 1That does conclude today’s teleconference. You may disconnect your lines this time and have a wonderful day.
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