Masonite International Corp (DOOR) 2007 Q3 法說會逐字稿

Welcome to the Masonite International third quarter 2007 earnings call for investors. (OPERATOR INSTRUCTIONS) After Management's prepared remarks, you are invited to participate in a question-and-answer session. This conference call is being recorded. The replay may be accessed until December 8, 2007 by dialing, toll-free, 1-800-695-0673, pass code 3626.

I will now introduce Chris Virostek, Corporate Controller and Chief Accounting Officer of Masonite International. Please go ahead, sir.

Thank you and good morning. Before we begin, let me remind you that this call contains forward-looking statements that are based on the beliefs of the management team regarding the operations and results of the operations of the Company, as well as general economic conditions. These beliefs and the related forward-looking statements are subject to substantial risks and uncertainties which are described in greater detail in the press release issued earlier today. Actual results may vary materially from those described in these forward-looking statements.

This morning, I am joined in our Tampa office by Fred Lynch, President and Chief Executive Officer of Masonite International, and Tony DiLucente, our recently appointed Chief Financial Officer. We will review Masonite's results for the third quarter and first nine months of 2007. We released summary results earlier this morning and this information is also available on our website through IntraLinks and other media. Complete unaudited quarterly financial statements will be filed with the SEC in the near future.

Finally, please note, we will not be providing specific future guidance or projections on expected revenues, earnings or cash flow for the remainder of the year.

Without further preliminaries, allow me to introduce Fred Lynch, President and Chief Executive Officer of Masonite International.

Great. Thank you, Chris, and good morning, everyone. Hopefully for those of you who were on the call last quarter we won't have any glitches and we will be able to stay online the whole time.

I would like to take a minute to introduce Tony DiLucente. Tony joins Masonite with 28 years of experience, most recently as Vice President of Finance for Johns Manville's Engineered Products Group. And prior to this role, Tony spent 11 years at Honeywell International, formally Allied Signal, in a variety of positions, including general management roles and eventually becoming Vice President and Chief Financial Officer of the Honeywell Nylon Group. Previously, he had spent 13 years with the DuPont Company, and Tony's leadership experience in finance and general management at leading manufacturing companies will add significant value to our global organization. So, welcome, Tony.

At the same time, I would also like to extend my thanks to Fred Arnold. As many of you know, prior to joining Masonite, Fred had previously served as the group chief administrative officer at Willis Group Holdings which, like Masonite, had been taken private by KKR, and where Fred played an important role in the turnaround and subsequent successful IPO that company. When Masonite found itself without a chief financial officer in early 2006, Fred agreed to step in and lead the finance organization to help build capabilities and develop talent throughout the team. Today, we have a finance organization with stronger values, more talent and better processes, thanks to Fred's leadership. Fred Arnold has been tireless in his efforts to drive improvements at Masonite and we thank him for his help, guidance and support.

Now, let us get to the task at hand and discuss our performance in the third quarter and what we are doing at Masonite to weather the storm in this extremely difficult North American housing market.

In spite of the tough conditions, I am pleased with Masonite's performance in the third quarter, especially when you consider that the third quarter represented a quarter that was largely devoid of any business- - of the business that The Home Depot transitioned to another supplier earlier this year, as a result of price increases that we put in place back in 2006. And I am particularly delighted that the hard work of everyone at Masonite contributed to our ability to maintain our profit margin in this quarter, despite significantly reduced sales volumes.

Without question, Masonite finds itself today in a challenging business environment. The North American housing market, our largest market, is not getting any better. And the turmoil in the subprime lending sector has only added fuel to the fire. The most recent U.S. Census Bureau housing statistics continue to track significantly below last year. September housing starts came in at an adjusted annual rate of 1.91 million, 30.8% below the September 2006 rate of 1.72 million starts.

The rate of new housing permits issued, an indicator of future business starts and an early predictor of Masonite's volume six to nine months from now, were also very weak in September, at just 1.226 million, according to the Census Bureau. That's more than 25% below the issuance rate in September of 2006. And we all know that 2006 was not a banner year.

If these comparisons are measured against 2005, housing starts are down 45% and permits are down 46% respectively. The National Association of Home Builders' forecast for housing starts over the next 18 months is not particularly encouraging, either. While back in January, NAHB predicted starts would rebound to 1.7 million in 2008, their most recent estimate is now only 1.2 million starts, 12% below the current 2000 (sic) estimate and more than 42% below the 2005 peak. Frankly, we believe that this is an aggressive outlook. Suffice it to say, the U.S. housing market continues to struggle and there is not a clear indication of when it will begin to recover.

Activity in our markets in Western Europe is also beginning to ebb somewhat. As you recall, the markets in the UK and France provided important strength to Masonite in the first half, and they still do. In the third quarter, they began to soften from the particularly strong performance we experienced in the first half. And, although we do not expect a major downturn in Europe, like we are experiencing in North America, these markets could be materially less robust in the last quarter of 2007 and into 2008.

On a brighter note, activity in our emerging business in Central and Eastern Europe actually accelerated in the third quarter and Masonite remains focused on further growth opportunities in these regions.

Starting in the fourth quarter last year, we began proactively addressing our cost structure in anticipation of the downturn in North America, and we continue to assess additional actions to ensure the appropriate balance of manufacturing capacity required to support anticipated cuts in demand around the world. In 2007, we have permanently closed five facilities dedicated to The Home Depot and interior door manufacturing plants in eastern Canada, and are nearing the completion of the consolidation of our manufacturing operations in Florida.

Shortly after the end of the third quarter, we implemented additional reduction in staffing levels across the Company and further tightened our focus on discretionary spending, particularly in fixed overhead and our SG&A accounts. Our global staffing level is down approximately 25% since mid-2006, with a substantially larger portion of that being driven in our North American operations and we do expect further flexing of our labor force in line with these market conditions.

All of these actions are a part of our ongoing plan to match capacity with demand and to minimize the impact on earnings caused by top-line weaknesses. And while we are taking all of these difficult actions to lower costs, balance capacity and reduce working capital, we are simultaneously focused on the necessary actions to protect and to grow our sales. We continue to improve customer service, accelerate new product launches, drive marketing and commercial excellence, promote our industry-leading value proposition, and aggressively focus on growing our business outside of the U.S.

I will return to all of these initiatives after Chris Virostek overviews the third quarter financial results.

Thank you, Fred. As Fred mentioned, North American weakness and our loss of business with The Home Depot were the two biggest challenges Masonite faced in the third quarter.

Revenues of $529 million were 15% below the $622 million achieved in the third quarter of 2006, and 17% below prior year period on a constant-currency basis. In our North American segment, where we felt the full impact of The Home Depot loss, revenues fell 24.5% on a constant-currency basis. The impact of the lost business contributed approximately $66 million, or 12.8% of the year-over-year decline in sales.

It may sound somewhat odd to make reference to constant currency, but as you are aware, many currencies continued to strengthen during the quarter which benefited our results positively. There can be no assurance that this trend will continue in the future periods.

Europe has become an increasing portion of our business as North America weakens, as our businesses in Europe gain traction, and as European currencies have strengthened relative to the U.S. dollar. Our Europe and Other segment now constitutes approximately 31% of our sales, up from 20% in 2005 and 23% in the third quarter of 2006.

In the quarter just ended, sales in our European and Other segment of $162.3 million were $20 million greater than sales of $142 million achieved in the third quarter of 2006, with just under half of this gain attributable to currency effect. This represents a 14% increase over the prior-year period, or 8% on a constant-currency basis. Said another way, of the $20 million of sales growth quarter over quarter in the Europe and Other segment, $11 million was due to organic growth and $10 million was due to currency.

Turning for a moment to EBITDA, operating EBITDA in the quarter decreased 22.6% to $70.8 million, from $91.5 million in the prior year period, while adjusted EBITDA declined to $80.1 million from $93.4 million. In light of the top line weakness in North America, we are pleased to have achieved adjusted EBITDA of $80.1 million, while enduring a very difficult market in North America.

Adjusted EBITDA margin in the third quarter improved to 15.1%, compared to a 15% adjusted EBITDA margin in the third quarter of 2006. By far, the main drivers of profitability at Masonite have been the aggressive actions we have taken in rightsizing our business, both in terms of people and plants, reducing controllable costs, such as labor, overhead and distribution in our manufacturing facilities, and more appropriately pricing our products.

Fred has mentioned on prior calls that we are taking tens of millions of dollars of costs out of the business in 2007 through manufacturing benchmarking and more efficient work processes, facilitated by the deployment of Lean Sigma. Finally, the U.S. dollar's weakness against the Canadian dollar, in particular, positively impacted margins in the quarter just ended. That being said, the 10 basis point increase in third quarter over third quarter is short of the 120 basis point increase we achieved in the second quarter versus the second quarter of 2006. Clearly, persistent volume weakness makes year-over-year margin improvement increasingly difficult to achieve.

At the same time, we recognize there is more work to do on the selling, general and administration front. In Q3 of 2007 our SG&A was relatively consistent with the prior-year period in absolute dollars. There are a number of elements factoring into this trend. First, volume-variable expenses, such as sales commissions and AR sales charges, did in fact decline in line with volume. As well, the prior-year benefited from a reversal of stock option expense, as we adjusted our estimate of the number of stock options expected to vest due to the departure of individuals from the Company.

In the current year, as we added new capabilities and talent, our spending on recruiting and relocation, as well as other employee transition charges, increased SG&A in the quarter. As Fred will address later, we have invested in capabilities such as Product Management and Lean Sigma, which have been key enablers to maintaining margins during the downturn.

Finally, the SG&A in the current year is higher due to foreign exchange, as our expenditure on SG&A in foreign sites translates into higher U.S. dollar equivalents. In light of the continued weak market, we have taken another look at SG&A spending and in early October we completed an additional reduction in salaried positions, principally affecting the SG&A spend in the Company and have instituted new actions to further curtail spending in these categories.

So, to summarize, while the total SG&A spend did not materially change from the prior year, the composition of the spend changed substantially and we are focusing on spending our SG&A dollars on those initiatives that will provide the most value for the Company.

In the third quarter, we took a total charge of $7.8 million as a result of the previously mentioned site closures and restructuring, $1.8 million of which is related to severance and $6 million is related to other items, such as lease terminations. These charges are recorded on the Other expense line in a summary income statement provided with a press release. As other expense is added back to net income in calculating both operating and adjusted EBITDA, there is no impact on either of these metrics as a result of these charges.

Our year-to-date restructuring charge for plant closures and restructuring now stands at $19.4 million.

Also included in Other expense in the third quarter is $3.6 million of asset impairment related to land and buildings held for sale and other surplus assets. This brings the year-to-date asset impairment charges to $6.2 million, resulting from our plant closures and consolidations.

Cash flow in the third quarter was good, as we reduced net debt by just over $41.8 million. As I mentioned last quarter, our interest payments on a subordinated tranche is now semi-annual in the second and fourth quarters, whereas last year it was quarterly. On a relative basis, this improves cash flow in the quarter and year-to-date comparisons by approximately $20.5 million.

Year-to-date, we have reduced net debt by $73.4 million, compared to a reduction of $88.9 million in the first nine months of 2006. Recognize that last year we had a cash inflow of $20.2 million from the disposal of excess assets and in the current year we have paid approximately $7 million on account of prior acquisitions.

In the first nine months of 2007 we have dispersed approximately $9 million of cash related to the restructuring charges for actions taken in 2006 and $8 million of cash for restructuring charges related to 2007 closures and consolidation. In all, there is approximately $14 million yet to be paid out with respect to changes we have made in the business over the last two years. This will fall out over the next few years, depending on how certain lease negotiations are concluded. This compares to only $6 million paid out in the first nine months of 2006.

With regard to cash inflows from an our restructuring activity, we expect to complete the sale of the closed interior door plant in Toronto during the fourth quarter and expect to conclude a sale of the closed Tampa facility sometime next year.

Our covenant positions remain relatively unchanged in the quarter and both calculations are included in the press release. We remain at comfortable levels compared to our covenant limits and our quarter-end liquidity was excellent, with our entire $350 million revolver undrawn.

Finally, a comment on the debt level shown on the balance sheet. We are required, pursuant to standards recently adopted by the Canadian Institute of Chartered Accountants, to reduce the debt balance shown on our balance sheet by any related unamortized deferred financing costs. Our September balance sheet includes $63.7 million of such costs. So, our debt as presented in this balance sheet is $63.7 million below the actual face amount of the debt. This is disclosed in detail in the notes to the financials which should be filed publicly in the next few weeks.

With that, let me turn it back to Fred Lynch.

Great. Thanks, Chris. So we had another [respectable] quarter, considering the market conditions. However, the severe headwinds continue. Now more than ever it is important that we stay focused on our strategic objectives and deliver on the goals outlined in our 2007 blueprint. We speak about this blueprint for success on every call, because it is critical. It is the road map we follow each and every day to effect change and drive improvements here at Masonite.

We have reviewed the blueprint in detail with you over the past few calls and, today, I will just provide a brief update on our Q3 performance. Our first strategic goal involves building capabilities and developing talent. It is critical to our vision of being the best supplier of door products in the eyes of our customers, employees and competitors. And we remain committed to this important investment in people.

Over the past 12 months we have selectively added key new talent where it makes sense to strengthen our organization, while simultaneously shedding nearly 25% of our global staff. Our improved capabilities in finance, operations, product management, and other functions is enabling us to strengthen our profitability and to build a strong foundation for growth when the markets rebound.

In the third quarter we added a new Vice President of Human Resources, a new Director of Operations for the UK and a new Vice President of Retail Sales and Marketing for North America, as well as, of course, the addition of Tony DiLucente this month. Once again, the talent we are bringing to bear boasts pedigrees from top-notch companies like Procter & Gamble, GE, DuPont and Honeywell, to name a few.

We are further accelerating our Lean Sigma program, adding additional Black Belts between the third and fourth quarter, as we prepare to double the number of sites engaged in our program over the next 18 months. Our Lean Sigma initiative underlies many of the improvements in service levels, product quality, working capital improvements, and cost reductions.

In the third quarter, we rolled out our new performance management process for our top 400 leaders, which will enable our ongoing efforts to build a value-based, performance-focused meritocracy where we actively engage in developing our leaders to the benefit of all stakeholders -- employees, customers and investors alike. In markets like this we have to live with less resources, so we need to make sure we have the best.

Our second strategic goal is creating customer excitement. I said this in our last call and it bears repeating. Make no mistake about it, the Masonite leadership team understands that in the current business environment there is no margin for error, no second chance for companies that provide their customers with anything less than consistently excellent quality and service.

So, we continue to drive improvements in metrics such as fill rates, lead times and cost of quality. And while we are not perfect, this razor-sharp focus is becoming more intense every passing month. We have posted our best performance in recent months and are exceeding the targets we put in place internally at the outset of this year in almost every division in the Company, an impressive result when you consider the number of changes occurring within our manufacturing sites as a result of the many plant closures. Our goal through all of this has been to ensure these closures are seamless in the eyes of the customers, that they only see improvement and not degradation in service levels as we balance supply with demand.

We continue to focus our efforts on innovation, implementing new processes and adding additional Product Management resources to accelerate the introduction of new products. In the third quarter, we launched a number of new and innovative products, including the Riverside Five-Panel Mission Style Door, our new and improved hurricane impact glass and frame kit, and we have expanded our new foil designs in Europe. And our late Q2 launch of fiberglass doors with composite styles continues to expand in coastal markets.

In the fourth quarter, we are commissioning our brand-new, automated fiberglass door assembly plant in Dickson, Tennessee, the next step in our multimillion dollar exterior fiberglass investment plan, which also included the construction of a fully automated sheet molding compound plant in our Laurel, Mississippi mill last year. We recognize at Masonite that innovation is the lifeblood of every company and we are investing strategically in this down market to help our customers grow.

Our third strategic goal is driving exceptional improvements in manufacturing. Starting with safety, our total estimate rate in the first three quarters continues at 40% better than our average performance in 2006, a very significant result both in terms of our people's health and in terms of money.

We also continue to increase productivity, reduce waste and improve our overall competitiveness, so important when volumes are weak and cost inflation is very much still to be reckoned with. While we do not disclose these metrics publicly, we are on track to achieve the sort of year-over-year savings in the tens of millions of dollars that we have mentioned in earlier calls. And you can see it in our P&L through our improved gross margin.

To sum up, we are very pleased with the third-quarter, considering the business environment. Sales were down $93.1 million and adjusted EBITDA was down just over $13 million, but adjusted EBITDA margins remained strong, up 10 basis points year-over-year. We once again had solid cash flow and net debt continues to decline. The hard work for our people and employees around the world is paying off in solid financial results.

However, we are under no illusions. We understand we have even more work in front of us and, while we were able to offset much of the impact of the loss of business with The Home Depot through aggressive cost actions, the North American market continues to weaken and shows absolutely no near-term signs of improvement. And, as Chris said, quarter-over-quarter comparisons are becoming increasingly more difficult. We expect the market to continue to deteriorate and we are not counting on a quick return of North American new construction or the North American retail market.

Since September of last year we have aggressively matched capacity with reduced demand, always striving to stay ahead of the curve, and we continue to do so. It's required in this market. And whether North American markets remain depressed or should they return to more robust levels, we believe that the actions we are taking at Masonite will produce a far stronger, more resilient, more efficient, innovative, and more profitable company.

So, operator, with that, we are ready to ask for questions.

Thank you, Mr. Lynch. (OPERATOR INSTRUCTIONS) Our first question comes from [Mitton Dainy] from Lehman Brothers. Your line is open. You may ask a question.

Good morning.

Morning, Mitton.

First, I missed this, I think, Chris, you mentioned, the FX in fact are 13.9. How much of that was in Europe and how much in North America?

North America was $4.2 million and Europe was $9.6 million.

And on the FX impact, although because of the way the segment flows, I'm a little unclear of the EBITDA impact of foreign exchange. I don't know if you could give some guidance on that.

I think the way to think about it is that the foreign exchange on the translation will flow through at about the same rate as the margins. It's just lifting it the same way it lifts the sales.

Okay. So, EBITDA would be constant margin, EBITDA in back of that.

Right.

On the cost side, Fred, you mentioned that the tens of millions of dollar number and I think on the last call I think that Arnold had given some idea of the costs and the savings expected from the plant closures. Just, on that, could you kind of give me a sense of what is the run rate savings that you are seeing right now and where your announced measures are going to take you?

As far as where it's going to take us, I think we want to be careful, Mit, because we're not giving forward-looking guidance at this point. And as far as specifics, I mean we are at the tens of millions of dollars. I think you can see it in the improved gross margin. It's coming across the multiple sites, as well as from our activities and supply chain, our activities in freight and logistics. I guess, just to leave it with, we're not done. We know we have more to do and we're going to continue on that path and make sure that- - that we stay ahead of the game by taking out costs as quickly as we can in light of the market's deterioration.

Fair enough. I mean, I think where I was trying to get a little more color, was obviously you closed the six plants in the third quarter and I would be surprised if you got like the full run rate savings during the third quarter. So, I was just trying to bracket what kind of savings run rate we should be seeing, based on already executed plans.

I think it's fair to assume that, for those plants we closed in the third quarter, we've achieved most of the savings in the third quarter and are at run rate.

I see. Okay. That's good. And then, how much were sales to Home Depot down during the third quarter?

The sales in the lost market in the third quarter were $66 million down. I don't have the number on the aggregate, but that will be in the public filing in a couple of weeks, or I can follow up with you on that one.

Okay. Fair enough. And did you have any residual pricing benefit from last year and during the quarter?

Not in this quarter.

Nothing at all?

I think you would say this quarter overall is probably- - assume it's about the same.

I see. Right. Awesome. Good. Thank you very much.

Thank you, Mit.

Thank you.

Our next question comes from Philip Volpicelli from Goldman Sachs. Your line is open. You may ask a question.

Thank you very much. Can you split out the, I guess, other parts of the business, not the North American? So, Western Europe versus I think you mentioned eastern Europe and other areas.

Well, we normally- - our segment reporting is in North America and Eastern- - I'm sorry, in Europe. Do you have a specific question, Phillip, that- -?

What I'm trying to figure out- - you've been very clear that Western Europe is starting to slow little bit, but the other areas outside of North America are accelerating. And in looking towards next year, I'm just trying to figure out is one much larger than the other- - I think that's the case- - and what the comparative sizes of those two businesses are.

Yes. I mean, Western Europe is bigger than the rest of the world sales. It's somewhere between- - let's say it's about two-thirds kind of range, compared to everything else. But the other pieces are growing quicker.

Okay.

But again, we don't go into specifics, Philip, beyond that, on our segmentation.

That's fine. In terms of the recruiting and relocation costs, I believe that you mentioned in the third quarter, can you quantify those? I mean, I'm assuming those will probably start to abate now that you've got the management team in place that you want.

The third quarter, it was about $1.5 million.

Okay, great. And then, in terms of the repair and remodel market, you've been very clear on what you think about the new housing market, what are you seeing in repair and remodel? How much is that going to decline in '08? I mean, is it 5 to 10%? Is it 10 to 15%?

No, I think the- - we're probably going with the rest of the pundits' forecast, which I think most people just don't know. So, I guess if we were looking at it from a planning perspective, we probably would want to believe it's more in than the 5 to 10% as opposed to the 10 to 15%. But I think the reality is that no one really knows yet. And we're going to plan to make sure that whatever it ends up being that we're going to do the right things in the business to protect our earnings.

Okay. Great. And in terms of the two facilities that you plan to sell, Toronto and Tampa, do you have a sense of- -? I think on the last call, you said something about $7 million to $8 million of proceeds there. Is that the right numbers?

Yes. Mississauga facility should close this quarter and the proceeds should be in the neighborhood of about $7.5 million. And then the Tampa plant will probably close in the first half of next year and we're just getting ready to list that property, probably in the range of $5 million to $6 million.

Great. And I'm assuming that the proceeds will be used to pay down debt?

Yes, sir.

Great. And then, last question before I pass it on, the net leverage covenant starts to tighten as we go through next year. I believe it ends next year at 6.5 times. Any thoughts about when you might approach your banks? Do you need to approach your banks? Any kind of color you might get there?

Yes, I mean. As we look at this, Phillip, we have no plans to be approaching our banks. We want to continue to drive our business and do all the right things, with our Lean Sigma efforts, with how were growing the business. So, right now, it doesn't fall into our thought process.

That's great. Okay, good luck. Thank you.

Our next question comes from Robert [Manovitz] from RBS. Your line is open. You may ask your question.

Yes, hi. Good morning. I noticed your accounts receivable balance was up a little bit in the third quarter from the second quarter, which was a little bit contradictory to what I was projecting, and your days extended a little bit. I was wondering if you could speak to that. But then, secondly, I also noticed that you funded some of those receivables, most of those receivables, under, or on balance sheet, as opposed to under the accounts receivable facility, and I didn't know if there were some thoughts behind that.

Sure. There's a couple of important factors behind that. One, is with the continued strengthening of the foreign currencies, that has moved some of the foreign receivables up in terms of their face value on our balance sheet. The second item is, with the contraction in the business in North America, a large portion of the sales that went away in the third quarter were subject to the AR sales facility, so they were off balance sheet, so there would be no contraction in the AR for that corresponding contraction in sales. And the final issue is that, as our business expands outside North America in Europe, where the days are generally speaking longer and the terms are generally longer than they are in North America, that's going to push our days up and our balance up.

Great. And no problem in terms of bad debt expense from some of the smaller builders that may be struggling?

Nothing significant.

Great. Excellent. Good luck.

Thank you.

Our next question comes from Chris [Dougherty] from CIBC World Markets. Your line is open.

Hi Fred and Chris. Chris, just a couple of cleanup questions. In terms of EBITDA, can you break it out between North America and sort of the rest of the world, the Other segment?

That segmented breakout is in our full quarterly filing, which we'll be following up with in about a week. And I would say that the trend is probably consistent with what we've seen year-to-date with some continuing margin improvement in North America. And the margins in Europe, flat, slightly down.

And then, following up to Phil's question on sort of the covenants. Can you just confirmed that the definition- - because I know you've changed your accounting for debt to basically have it net of deferred financing costs. And if you look at the definition within your credit agreement, it appears that that is the way that you would calculate the covenant. Is that true? It would be net of the deferred costs?

The debt for covenant purposes is calculated at the gross amount, excluding the deferred financing costs.

So, it's at the gross. All right. And then, Fred, can you just talk about sort of the strategy to grow the interior door business? I mean, if I look at the interior door business, which is about two-thirds of your business, compared to entry doors, really, that's a two-player market, and clearly you've lost some of that business to the other competitor, in particular The Home Depot business. And what's the strategy there to grow that business and sort of gain market share?

Yes, I mean there's really three things I think we have to do. One is to make sure we continue to have great service levels and great quality of our product, which we think we do and we're continuing to improve that through our Lean Sigma program.

The other piece is to stay ahead of the game coming out with new designs. And that is part of our new product and our innovation strategy, that our designs, not only are they- - are we coming out with more and new designs, but we believe from a fashion perspective that our designs are superior and we're going to continue to drive that.

And then the third piece is also- - is taking advantage of the opportunities outside of the U.S. I mean, the market in the U.S. is not going to be a market that is going to turn around in the short-term. And so a lot of our focus today has been switching to markets where the growth rates are significantly higher.

And then, Chris, just a couple of other cleanup questions. What was the revolver balance at the end of the quarter?

The revolver balance was undrawn at the end of the quarter, so the $350 million revolver, there was about $339 million available, after considering the- - there is about $11 million of letters of credit against it.

And then also, I know you sort of talked about the $14 million that accrued for restructuring that's still sitting on the books. Is it- - and part of it is relates to leases and whether you can sort of sublease those and stuff. I mean, are there any big dollar amounts that come out for other things in the next quarter or two?

I think that the run rate will probably slow down in the fourth quarter, but, as I mentioned, most of those are more sort of long-term items that are going to run off over the next couple of years.

All right. So, maybe a million or two a quarter rundowns, is that what you're thinking?

At this point that's probably reasonable, yes.

All right. All right. Thank you.

Thank you.

Our next question comes from Andrew Kim with Levine Leichtman Capital. Your line is open.

Morning. I know that you guys recently lost a portion of your Home Depot business. How do you guys as a management team get comfortable that you're not going to lose additional business going forward?

You know, you have to earn your business every day. Our relationship with The Home Depot, from my perspective, continues to improve. We just came out of a marketing meeting with The Home Depot just a week ago. I think it was a very successful marketing meeting. We have been very aggressive in making sure, as The Home Depot transitioned the business, that we did everything appropriate in that relationship to be as professional as possible and to offer them service when they needed it. So, I would say today that we have great respect for The Home Depot and we believe they have great respect for us and I can only see our business growing going forward. (Inaudible.)

And have you guys seen any of that lost business return? Have you guys been winning any of that business back?

In those specific markets, no. But we are, we have certain programs -- recently we've won some additional business back with The Home Depot and we will continue- - we expect to continue to do that.

Okay. And of your kind of remaining plants, what kind of capacity utilization are they running at right now?

We don't measure capacity utilization specifically. I would tell you that most of our plants have significant capacity upsides, because of the facts, the way we run our shifts. So we have additional shifts available at the plants. Through Lean Sigma, we've actually been able to increase the capacity- - let me answer the question this way. With all of the site consolidations that we've done, we believe that we would have the capacity to be able to run back at 2005 levels when the market comes back, because of the way that we've driven the change, the fact that we have kept most of the machine capacity, and the fact that, through our Lean Sigma efforts, we're increasing capacity through process improvements every day. Is that the question you're getting at?

Yes. That's exactly right, thanks. And so you- - so, currently $14 million is in restructuring reserves and do you anticipate any other restructuring charges going forward?

Well, as we continue to look at the marketplace and if we determine as we go forward that additional costs need to come out, we will, as we have in the past, we will take those actions and they will have restructuring costs associated with them. So, were looking at that every day.

Okay. But currently, is there anything in sight right now?

Nothing that we are ready to disclose. As always, if we determine that we need to reduce, to eliminate a site or to take a reduction in force, the first people we're going to communicate that with is the employees who are going to be affected.

The fourth quarter will be impacted by the remaining actions to close the Tampa facility, as we mentioned, and for the reduction in the salaried personnel that we mentioned in the- - during the prepared remarks, as well. So there will be some charges coming through in the fourth quarter as well, in recognition of those measures that we have taken already during the fourth quarter.

Okay, great. Thank you.

The next question is from Ryan Watson, Stone Tower Capital.

Hi. You guys spoke about the SG&A earlier in the call and how the composition has changed. But do you have a target SG&A, as either an absolute number or a percentage of sales, that you are kind of targeting over the next 12 to 18 months?

No, we wouldn't be prepared to share that. As we said, we're not giving guidance and we're going through our process of preparing our 2008 budget as we speak.

Okay. Well, if I'm going to look next year at this time at your results, would, internally, would you be disappointed if SG&A as a percentage of sales was flat?

Well you don't want me to give guidance, but you want me to give guidance. No, I think we can say that it's clearly an area that we continue to look at and we recognize that- - and I think we've said this in the past- - we think about every cost in this company as variable. And then we have to make decisions about what costs and where we want to add costs to improve capabilities that might end up taking costs out of other places.

So, for instance, we put a lot of costs this year into the Lean Sigma activity in order to do training and bring in new Black Belts, et cetera. That has costs associated with it that falls out in our overhead and SG&A line. But we had substantial savings in our material costs and material usage programs and our direct labor, as a result of those activities.

So, yes, we know it's a focal area for us, but we're going to do the right things and the smart things with figuring out where we're going to spend money in order to save money in the Company that's going to provide the greatest value back.

Okay. And where, as far as your $10 million to $20 million of cost savings- - I don't recall if you mention this today- - where do you lie as far as- - I mean, how much have you recouped as far as cost savings? Or recognized, I'm sorry.

We never said we had $10 million to $20 million. We said that we had tens of millions of dollars of savings planned for this year. And, I mean, you can just do the math if you look at the gross margins. Again, we don't publicly, specifically talk about the program, but I think it's reflected in our improvement in gross margins year-to-date.

Okay. What's the term loan balance, gross of deferred financing fees?

$1.145 billion.

Okay. Great. Thank you.

Thank you.

Next question from Seth Harvey, UBS.

Good morning.

Morning, Seth.

Just wanted to know if you have the time to talk about kind of the competitive landscape in the North American market? You've basically maintained your share in North America and are you seeing any pressure on pricing from some of your competitors?

I would say that the environment is a very tough environment, as you would expect. It's an interesting environment because, while we are seeing a lot of pressure from our customers with respect to price, we're also seeing $98-a-barrel oil. And commodity prices, because of the weakening dollar and inflation from products we're bringing in from other parts of the world, go up. So there is some compression going on and that has to, obviously, be taken into account, not only by us, but also by our competition.

So, it's a tough environment. We think that our products, because of our quality, our service, our breadth of product line, our number of designs, our customers that need us- - we need them. And we will continue to do what is necessary from a pricing perspective to protect and grow our share. But it's tougher than it was a year ago.

But has your share changed relative- -? I mean, kind of excluding the business impact of losing The Home Depot business, you kind of had to look on an apples-to-apples basis. I know that's kind of tough, but do you think that your share has changed appreciably this time now versus this time last year?

I mean we don't talk specifically about shares in our marketplace. We're doing everything to make sure that we are growing our share and that customers are, where possible, are converting their business to us. I mean, I think the one thing you can look at is our North American sales were down 23%, I think we mentioned in the script. And more than half of that was related to The Home Depot. So you can do the math on the other half. It's in the 10 to 11% range, I guess, loss in volume. And then the question is, is what's really happening in the marketplace?

And in terms of- -in terms of your, kind of inventory position, how do you feel, I guess, in terms of both your distributors -- where- - kind of what do you think the inventory position is out there in the market right now? Do you're more kind of running at the lowest possible rate or you think (inaudible) just overhang, sitting around in the channel?

I think that's a tough question for us, because a lot depends on what the forward-looking markets are going to end up being. We have a very clear view of what our inventory is in the retail channels, but it's very difficult to figure that out. I'd say that, if you have the opportunity, ask our customers when you're on their calls. Because we'd like to know that answer, as well.

Right. Will do. Thanks.

Our next question from Jackson Craig from DDJ Capital Management. Your line is open.

A follow-up on the last question. In light of the volume declines that the whole industry is seeing, have you seen any predatory or really sharp price decreases from your competitors to try to offset the revenue and volume declines that they are seeing the same is you guys?

Yes, you know, I would say on the answer on that is I don't want to talk about our competitors' pricing strategy. I think you need to ask them. I mean, our pricing strategy is that we want to make sure we get paid for the value that we offer. This is not a just about price discussion with our customers. We talk a lot, I mean, we have a significant product line from a breadth perspective in interior doors and exterior doors. We have molded. We have style and rail. So, there are very few competitors that have been breadth of product line that we have. And from a service aspect, there is a lot that goes into the total cost of ownership. So, our take on that is, right now, is we're going to sell that value proposition and make sure we're getting paid the right value. And just because a competitor throws a low price, doesn't mean we go and match that. In fact, we often don't.

Our next question is from Chris Jones from Morgan Asset Management.

Hey, I have a follow-up on The Home Depot question from earlier. When you initially announced losing The Home Depot business, I think that you had mentioned that most of the business that you were losing was very low- - had very low profitability, if any at all. And then you just mentioned earlier that you were, had won some of the business back. So, I was just curious as to how much of this business you're trying to win back and the profitability of what you're winning back? Are you making price concessions? And, kind of, can you touch on the difference in profitability between the businesses that you kept to what you lost?

Okay. Well, first of all, a number of the comments that you made I don't think were accurate. We've never talked about profitability or specific pricing about customers. We've said that, last year we raised the price of our business at The Home Depot because we thought it appropriately reflected the value that we provided to them in product.

And as far as talking about price of specific profitability around a specific customer, we just don't do that.

Well, I'm not really asking for, you know, specifics, just kind of an in general level. But I was, I'm pretty sure that you, maybe didn't mention specifics on The Home Depot profitability, but you gave a general level as far as high, low, medium.

No, we just said that it was, didn't meet the profitability metrics that we thought were appropriate.

But, as regard- - let me just answer the question this way. We continue to offer a lot of innovative new solutions and service opportunities to The Home Depot and that's how we're going to win the business back.

Okay.

Our next question from Andrew Kim with Levine Leichtman Capital. Your line is open.

Hi. I just have one follow-up question. You- - I mean, the outlook for new home construction is pretty bleak and I just wanted to get a sense of how much of a lag is there between kind of new construction stats to Masonite top-line revenue?

We use about a six-month lag typically on average, plus or minus.

Six months. Okay, great. Thank you.

Are there any more questions, operator?

At this time there are no further questions.

Okay, great. Well, thanks very much and we'll see you again next quarter.

Thank you for joining the Masonite International update call for investors. This conference call has been recorded. The replay may be accessed until December 8th of 2007 by calling 1-800-695-0673. International is 1-402-220-0304 with a pass code of 3626. Today's call is concluded. All parties may disconnect.