Masonite International Corp (DOOR) 2007 Q4 法說會逐字稿

Welcome to the Masonite International Fourth Quarter 2007 earnings call for investors. (Operator Instructions.)

This conference call is being recorded. The replay may be accessed until April 11, 2008, by dialing toll-free 1-866-407-9260, with a pass code of 9245.

I would now like to introduce your host, Chris Virostek, Vice President and Chief Accounting Officer for Masonite International. Please begin, 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 the 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, as well as our periodic filings with the U.S. Securities and Exchange Commission. 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 Chief Financial Officer. We will review Masonite's results for the fourth quarter and year end 2007. We released summary results earlier this morning, and this information is also available on our website, through Intralinx, and other media.

Completed audited year-end 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 flows for 2008.

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

Thank you, Chris, and good morning, everyone. It's clear that we are in, have been in, and will continue to be in an extremely challenging market environment in the United States, which is our largest market at Masonite. I know this is no surprise to any of you on the phone today.

The most recent U.S. Census Bureau housing statistics showed January, 2008, at an adjusted annual rate of just over 1 million starts, which is 28% below the January, [2000], rate of 1.4 million starts. At the time, back in January, 2007, we thought that that was a pretty dismal rate.

The year 2007 ended at an estimated 1.35 million starts, a 25% drop from 2006, and a 35% drop from the recent peak in 2005. And it's not getting any better. While the December National Association of Homebuilders forecast predicted nearly 1.1 million starts in 2008, we now believe starts could average as low as 900,000 through the remainder of 2008.

And while we continue to make great progress at Masonite, it is clear from the results that we posted this morning that the continued downward pressure in the U.S. in both the new housing segment as well as the repair, remodeling, and renovation segments, is beginning to take its toll on our financial performance, in spite of the many accomplishments of our Masonite team.

The markets in the U.K. and France, which provided important strength to Masonite throughout 2007, began in the fourth quarter to soften from the particularly strong performance we had experienced a year earlier. And although we do not expect a major downturn in Western Europe like we are experiencing in North America, the continued credit liquidity issues are clearly being felt outside the United States. And we anticipate a somewhat tougher market environment in Western Europe in 2008.

Looking towards our emerging businesses in Central and Eastern Europe, growth is expected to continue this year, although at a more moderate level.

So with market conditions, particularly in the U.S., continuing to be rather uncooperative--for lack of a better term--our focus at Masonite is to ensure that we are applying every lever at our disposal to strengthen our business. We can leave no stone unturned.

As you are already well aware, starting in the fourth quarter of 2006, we began proactively and aggressively addressing our cost structure across the board in anticipation of the downturn in North America. Through 2007, we permanently closed five assembly facilities dedicated to The Home Depot, two interior manufacturing facilities--one in Canada and one in Florida--and a cut-stock operation in Alabama.

Just recently, in January of this year, we announced to our employees our plans to close an additional three sites in Canada as well as a fourth site in the UK, and we continue to assess additional actions to ensure that appropriate balance of manufacturing capacity required to support anticipated customer demand around the world.

In each of these cases, we have retained much of our manufacturing equipment base, and have redeployed these assets into other manufacturing sites, in anticipation of the market recovery. Simply put, we are not reducing our long-term capacity or capability. In fact, in certain operations like door facing, we have increased our capacity.

Instead, we are optimizing our manufacturing footprint and taking advantage of the reduced demand to consolidate operations into a more effective and lower-cost operational platform and supply chain.

During the fourth quarter of 2007 and early in 2008, we also made the difficult decision once again to reduce our salaried and overhead staff by an additional 10%, when it became clear that the markets were declining faster than previously forecasted. And we further tightened our focus on discretionary spending across the board. As a result of these combined actions, Masonite has reduced employment by roughly 30%, from a high of more than 15,000 in July of 2006 to just over 10,000 employees today, with a substantially larger portion of that reduction being driven in our North American operations.

All of these actions are part of our ongoing plans to match current capacity with current demand and minimize the impact on earnings caused by top-line weakness. And we will continue to flex our labor force in line with the market conditions, as required, going forward.

While we are taking all of these difficult actions to lower costs, to balance capacity, and reduce working capacity, we are simultaneously focused on the necessary actions to protect and to grow our share. In fact, I think we're making great progress in these areas. We continue to improve customer service and fill rates, we have accelerated new product launches and other technology advancements, we continue to add new marketing and sales initiatives promoting our strong, competitive value propositions, and we continue to aggressively focus on growing our business outside of the U.S.

So while 2007 was clearly an extremely difficult year for everyone in this industry, Masonite focused on taking tough actions to reduce costs while simultaneously strengthening our core capabilities. As a result, I firmly believe we are a much better company today than we started in 2007, and we are much better prepared to take advantage of the inevitable market rebound when it occurs.

I will return to provide more color on these initiatives after our Chief Financial Officer, Tony DiLucente, reviews the fourth quarter and full results.

Thank you, Fred. As Fred mentioned, continued North American weakness, the full impact of the loss of the business with The Home Depot, and reduced operating rates to lower our inventory levels all negatively affected our fourth quarter results.

Revenues of $487 million were 16.8% below the $585 million achieved in the fourth quarter of 2006 and 21% below the prior year period on a constant currency basis.

In our North American segment, where we felt the full effect of the lost Home Depot market, revenues fell 28% on a constant currency basis. The impact of the lost business contributed approximately $71 million, or 63%, of the year-over-year decline in sales.

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 34% of our sales, up from 26% in the fourth quarter of 2006. In the quarter just ended, sales in Europe and Other segment of $164.1 million were $14.8 million higher than the sales of $149.3 million achieved in the fourth quarter of 2006. On a constant currency basis, sales in Q4 were actually flat versus the same period in 2006.

Turning for a moment to EBITDA, operating EBITDA in the quarter decreased 42.9% to $39.4 million, from $69 million in the prior year period, while adjusted EBITDA declined 24% to $57.6 million from $75.8 million.

Adjusted EBITDA margin in the fourth quarter was 11.8% compared to a 13% adjusted EBITDA margin in the fourth quarter of 2006. By far the main drivers of profitability in Masonite have been the aggressive actions we've taken to right-sizing 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 have taken tens of millions of dollars of costs out of the business through manufacturing benchmarking and more efficient work processes, facilitated by the deployment of Lean Sigma.

In the fourth quarter, we also curtailed production volumes below our ongoing sales level to right-size our inventory in line with declining volumes.

These actions resulted in a $35.3 million reduction in inventory, but negatively impacted fixed cost absorption and operating and adjusted EBITDA. Clearly, the persistent volume weakness makes year-over-year margin improvement increasingly difficult to achieve.

In the fourth quarter of 2007, our SG&A was down $3.2 million, or 6% versus the same period last year. On a constant currency basis, SG&A was down $5.9 million, or 11% versus the same period in 2006. In 2007, we added new capabilities and talent, which drove higher relocation and employee transition spending. If we factor out this spending and use constant dollars, SG&A spending in Q4 2007 actually declined $7.4 million, or 14%, on a run rate basis versus the same period of 2006.

Even still, given the impact of further declines in volume, we realized that we need to take even deeper cuts. As a result, we completed two separate actions to reduce our SG&A and overhead staffing in October 2007 and January 2008. Additionally, we reduced spending in other areas such as travel and entertainment and outside professional services.

So to summarize, the SG&A spending run rate did decline substantially in the fourth quarter of 2007, but we realized that we needed to take even more action in light of the additional declining volumes in the North American market. At the same time, we did not alter our plans to continue to upgrade and build capabilities. So we now go into 2008 with a lower-cost but more effective structure.

In the fourth quarter, we took a total charge of $8.6 million as a result of the previously mentioned site closures and restructuring, as well as those announced in early 2008. These charges are recorded on the Other Expense line in the summary P&L provided with the press release. As Other Expenses 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 $28 million.

Also included in Other Expense in the fourth quarter are $4.7 million of asset impairment relating to equipment and other surplus assets. For the full year, asset impairment charges resulting from our plant closures and consolidation totaled $11 million.

As a result of The Home Depot business loss in mid-2007 and the continuing weakness in the North American segment, the Company recorded a fourth quarter impairment charge of $303.8 million and a related tax benefit of $34 million. Accounting standards require the comparison of estimated fair values of intangible assets to carrying values on an annual basis or when events or conditions indicate that the intangible may be impaired. Of course, this is a non-cash charge and has no impact on operating or adjusted EBITDA.

Cash flow in the quarter was influenced by the semi-annual interest payment on the senior note and on higher capital spending for new products and productivity projects that will benefit 2008. As a result, net debt increased by $14.9 million from September 30. For the year, though, we reduced net debt by $58.5 million compared to a reduction of $89 million for 2006. It's important to note, however, that 2007 had significantly higher spending for restructuring and acquisitions and lower proceeds from asset sales when compared to 2006. 2007 restructuring spending was $22.5 million versus $10.5 million in 2006, and proceeds from asset sales in 2007 were $8.6 million versus $20.5 million in 2006. Additionally, we spent $5 million more in 2007 versus 2006 for acquisition of the remaining portions of minority interest.

On the other hand, we spent $18 million in 2006 on the bridge loan conversion fees. So if you factor out these one-time items, our underlying cash flow in 2007 is about $12 million lower than the underlying cash flow in 2006. Essentially, our inventory reduction effort, coupled with lower capital spending, enabled us to bridge most of the decline in EBITDA in 2007.

Our covenant positions remained in compliance with contract requirements in the fourth quarter, and both calculations are included in the press release. In addition, our entire $350 million revolver was undrawn at year end. Outstanding balance on the Company's accounts receivable to sales facility declined by $60.8 million from $112.9 million in the prior year to $52.1 million in the current year.

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 December balance sheet includes $61 million of such costs, so our debt is described in this balance sheet as $61 million below the actual face amount of the debt. This is disclosed in detail in the notes to the financials, which should be filed probably in the next few weeks.

So with that, let me turn it back to Fred Lynch.

Great. Thanks, Tony. Before I continue, I do want to make a clarification to a point I made before. The plant in Alabama that we shut down was actually a prefinishing plant that was co-located with our cut-stock plant, and we actually moved that plant from Alabama and consolidated it into our Laurel, Mississippi, facility. Just in case any of our employees are listening on the phone, I don't want to get the wrong message out there.

So if we look back, the fourth quarter was a tough quarter for Masonite, and there clearly are no signs that the headwinds we are facing will let up any time soon. While market factors are outside of our control, how we respond at Masonite to proactively influence our business results is very much within our control, and it starts with our blueprint.

I have shared our blueprint with you on every call, because at Masonite we use this as our roadmap to success. By living and demonstrating the Masonite values and by focusing on our three strategic goals, we have made great progress in spite of all the challenges, and we will continue to do so in 2008.

Our first strategic goal is to build capabilities and develop talent. We continue to strengthen our talent base throughout the world, recently adding a new Operations Leader for our businesses in France, a new Director for Western Asia, and a new Treasurer. And while we continue the difficult but necessary actions to downsize our staff, we're cognizant that adding critical talent in key positions is paramount to our long-term success, and we expect each of these added positions to be more than self-funding.

Our Lean Sigma program continues to grow with an additional dozen or so types being added to the program this year. Masonite will be fully self-sufficient in Lean Sigma by the end of this year--by the end of this first quarter--and for ongoing training and large project efforts. And once again, I want to thank our consultants from AIC who worked diligently throughout 2006 and 2007 to help make Lean Sigma and continuous improvement part of the new Masonite DNA.

With fewer resources, we also recognize the need to have better training processes and better performance management processes in place. That's why we are implementing new computer-based operator screening modules in certain plants that our employees have the best tools possible to succeed at their jobs.

The first quarter is a critical time for the execution of our new standardized performance management process, Improve. And more than 400 leaders within Masonite are currently using Improve to provide candid feedback and to build development plans for their employees as we build a performance-based meritocracy at Masonite for the benefit of all stakeholders--employees, customers, and investors alike.

When it comes to creating customer excitement, we're setting the bar even higher in 2008. Building upon our improved fill rate performance in 2007 is critical to exciting our customers and growing our share. Our customers have now come to expect extremely high fill rates and shorter lead times. Our operations team has been working hard putting additional focus on these metrics, adding new measurement systems and improved processes so we can continue to create additional competitive advantages at Masonite.

We're also creating tremendous customer excitement through the introduction of our new website, www.masonite.com. Our new website allows you to more easily browse and choose from our wide selection of doors. The powerful, interactive door configurator allows you to design any entry door specifically for your home, and the Where-to-Buy feature provides consumers with a wide selection of dealers and retail outlets that carry our products. along with detailed maps and directions to the store of your choice.

I had a chance to participate in several demonstrations of the website with our customers recently at the International Builders Show that was in Orlando last month. And I can tell you from personal experience, our customers are thrilled with the new website and are convinced it will help generate more business for them, for their customers, and ultimately for Masonite.

The International Builders Show also provided the opportunity for Masonite to showcase a plethora of new products of 2008. There are few things that excite our customers as much as new products. A real hit of the show was our new fiberglass door with our proprietary AvantGuard finish that digitally produces a realistic wood finish. AvantGuard is being introduced with a Spanish cedar finish to show off the beautiful contrast that you can only get with a high-end, real wood door, and now with the durable AvantGuard fiberglass door that only Masonite can offer.

We also received rave reviews on our new green introduction. Masonite is taking a bold step forward to define what "green" means in interior doors. We are making very specific, difficult-to-meet claims on all of our Safe 'N Sound doors based on our proprietary door core and constructions methods.

For those of you who need to meet lead specifications, we are offering the Safe 'N Sound Emerald Door. This door adds some additional features, such as no added urea formaldehyde and SST certification. In addition to several new interior and exterior door offerings, we are adding new glass designs, as well as a new and exquisite mahogany grain finish for our Belleville and Barrington fiberglass door lines. You can see all of these for yourself and the breadth of our new product offerings in the new product catalogue that is available on our new website. So a lot of news there. And it will help you to better understand how we are creating customer excitement at Masonite.

Our third strategic goal is to drive exceptional improvement in manufacturing. It starts with the discipline of running safe operations. In 2007, we exceeded our goals and reduced recordable injury total incident rates by 44%. Our employees understand that safety comes first, and they appreciate that. We also find that same discipline to increase productivity, to lean out our processes, reduce waste, and improve our overall competitiveness. This is critically important when volumes are weak and cost inflation is a constant threat. In 2007, we reduced our controllable manufacturing costs by tens of millions of dollars as planned, and our goal for 2008 is even more aggressive.

Our continued laser focus on our three strategic goals--building capabilities and developing talent, creating customer excitement, and driving exceptional improvement in manufacturing--will help Masonite emerge from this market downturn a stronger, more capable, more innovative, and more competitive company. I firmly believe that.

To sum up, the fourth quarter was difficult but not unexpected, considering the business environment. Sales were down $98.4 million and adjusted EBITDA was down $18.2 million, with adjusted EBITDA margins slipping 120 basis points. Our cash flow was respectable, with only a slight increase in net debt, remembering that there are large interest payments in the second and fourth quarters. The hard work of our people around the world is paying off.

2007 was a tough year in this industry, but at Masonite we have aggressively matched capacity with reduced demand, always striving to stay ahead of the curve, and we have made Masonite a better company. While sales were down 11.8%, adjusted EBITDA was down only 4%, and adjusted EBITDA margin increased by 120 basis points.

2008 will be even more challenging, but I am convinced that by sticking to the Masonite blueprint and continuing to execute our growth strategy, we will be well positioned to perform well in our markets.

Operator, we're ready for questions.

Thank you, Mr. Lynch. (Operator Instructions.) Our first question comes from Nitin Dahiya with Lehman Brothers.

Good morning.

Good morning, Nitin.

Fred, I think you mentioned the margin for the year was up, but when you look at the fourth quarter EBITDA margin, I mean, it was down probably 150 basis points. How much of that would you say was from lower volume, was margin compression from higher input costs and any other aspects?

Well, first off, in the fourth quarter, as I had mentioned, we took inventory down significantly, and that had an impact on the margins. Obviously, volume was one of the bigger drivers as well, the sales volume itself and taking inventory down. And we did see continuing cost inflation as well that hurt our margins. Also, we had some one-time items with respect to the inventory write-offs related to some of our plant closures that we talked about in the fourth quarter. So Nitin, I think there was a number of items that all contributed to a large amount to that decline.

I see. Now, (inaudible)don't even talk of cost inflation. Is it an order of magnitude, say, $10 million or something, or $5 million that you would quantify in terms of how much that is?

I think, Nitin, if we look at it from a cost perspective, we look at last year as a company, our total inflation, when you look at materials, wage inflation, et cetera, probably in the range of $50 million across the Company.

For the full year?

For the full year, yes. And so it's one of those things that continues to move pretty quickly. It's not only inflation, but it's the, when you look at issues like freight, you have the factor that while oil prices are going up, freight costs are getting higher, you're also losing some of the efficiencies as a result of shipping in less-than-truckload quantities. So I think there's a number of dynamics that are affecting us from both a CPV perspective but also from a utilization perspective when we look at raw materials. And it's something that we continue to be cognizant of.

I see. Fair enough. Maybe I can follow up later. Switching gears to currencies, what was the, the EBITDA impact in the fourth quarter and full year from currency? I think in the last call, if I remember, I think Fred had mentioned that the EBITDA flow-through is pretty consistent with the overall margin. Would you say that is still true?

That's still true as far as the flow-through. Our full-year impact to sales on the currency is roughly $50 million.

So probably $5 million to $6 million in terms of EBITDA, or $7 million?

Right. And maybe I, let me correct that. I'd say our sales impact on FX was probably more like $60 million for the full year. And so you could take the margins, as I said, and do the math, and you'll get your number.

Okay. Fair enough. And is there any hedging or anything else that you put in place now, obviously, with currency moving as much?

No, we don't do any hedging at this point in time.

Yes, I didn't think so, so okay. On CapEx, I think there is a, in the fourth quarter, CapEx was over $20 million number, which was probably a tad high versus what we're looking at. Could you just shed some more light into that and also what we should be looking for in '08?

Well, we had a number of site consolidations in the fourth quarter, which drove capital spending higher. Additionally, Fred talked about all the new products that we introduced in the recent show. They had some impact on the capital spending in the fourth quarter. And last and certainly not least, we're focusing hard on productivity and cost, and so we did a number of capital projects in the fourth quarter that will drive productivity benefits in 2008. So those three items really drove the higher capital spending in the fourth quarter.

For '08, what kind of numbers should we be looking at?

Well, as we said, we don't want to give any future guidance on this call.

Fair enough. Thank you very much.

Yes, thanks, Nitin.

Philip Volpicelli with Goldman Sachs, you may ask your question.

Yes, hi. Essentially [Jason Arpin] for Phil.

Good morning, Jason.

Just a couple of questions. On the new build side, obviously, a lot of that is single-family. What kind of contribution do you guys get from multi-family and hotel, office, those kind of projects?

As far as our sales?

Yes.

We have a commercial business in the U.S. When we look at our commercial business, it's probably about 4% of our sales in North America.

Okay. And is that--?

I will say, Jason, it's one of the things you want to be careful about, because most of that is really focused on, I would say, areas like your domestic hotels, entertainment, schools, et cetera. When you start to get into the arena of multi-family, particularly apartments and condos, that gets real mixed, because our distribution channels tend to compete with each other on that, and so it's hard for us to really be able to pinpoint what portion of our sales go into that component of the market.

Okay. But it's fair to say that there is some of that in the non-commercial part?

Yes.

Okay. And is that similar to kind of 4%, or is it, I mean, just ballpark?

I wouldn't, to be honest with you, we wouldn't be able to answer that question accurately. It really depends on how our customers approach the different markets. And with the decline that we've recently experienced in the residential market, for a period of time there, I think a lot of our customer base was looking at how to expand their business, and there was a lot more, I would say, overlap that occurs in those channels than would have normally existed in a more stable market.

Okay. And then so it's probably like large projects in Las Vegas, would those things all be in the commercial piece?

Yes. If it's a hotel, they're going to use a very different specification of door. The fire-rated doors, the size of the doors are considerably different, the type of door that's manufactured. They would typically fall in our 4% of our commercial business.

Okay, great. And just switching gears. As far as headcount, obviously you guys have done a very good job of cutting headcount, 20% to 30%, I guess, year to date. How much of that has been realized already in the 2007 numbers, and how much kind of incrementally can we expect? Obviously, you don't give it to us for the guidance, just kind of directionally?

Well, I think we can answer your question. We ended the year at about 10,700 employees. As we mentioned earlier, we took some additional RIF actions and some additional downsizing earlier this year, so we would anticipate in the first quarter alone that we'd probably be in the range of another 500 folks, 500 full-time equivalents being reduced. And a lot of that is also the carryover from some of the closures that have already been announced and are in process.

Jason Arpin; Okay. So when you said 10%, an additional 10%, obviously, on 10,000, that's closer to 1,000.

Well, the 10% was in our salaried staff.

Okay. And just--.

And that's a much smaller number. That number is less, that number is in the--salaried staff in the Company is around the 3,000 range.

Okay. And just ballpark, I mean, how does that kind of translate into cost savings for the Company?

I think, you know, again, I don't want to cross the line of giving guidance. You can kind of just figure out from, do your math on those kind of numbers and what that would mean.

Okay, fair enough. And then just as far as Home Depot, obviously, you guys had mentioned previously that the relationship was still holding in very well. You guys still feel confident in the remaining Home Depot business and you guys have been having conversations with them?

Yes, we continue to have conversations with Home Depot every day, as we do with all of our customers. Home Depot is a very important customer of ours. We continue to work closely with them. In fact, I spent the afternoon yesterday at their Innovation Exchange that they have every year in Atlanta. But like all customers, our goal is to continue to earn their business every day--I've said this before--by providing the right products with the right quality with the right value and by continually selling our value proposition with regards to innovative new products. We think we can continue to win and gain business at every customer, and that's what we're going to do.

Okay. And the last question. Just looking at the covenants, obviously, (inaudible), you have some cushion on the interest coverage and leverage covenant. There's, I guess, both get somewhat tighter towards the end of this year. How should we think about Masonite's ability to meet those, and what would the potential scenario look like if one was tripped?

Fred, do you want to front that one?

Yes, I'll take that one. As we stated in our introductory remarks, we're not going to give any forward-looking guidance. But with that said, we're really focusing on driving our business results and improving our cash position as well. And like any good management team in this environment, we're reviewing our debt and cash position daily. So we're driving the fundamental actions of the business, both from a cash flow perspective and a productivity perspective, and that's what the focus will continue to be.

Okay. So you guys still haven't had any sort of conversations with the bank or anything like that?

No, we have not.

Okay, great. All right. Thanks and good luck.

Thanks, Philip. Or Jason, rather. Sorry. I'm sick.

Seth Harvey with RBS, you may ask your question.

Good morning.

Morning.

Actually, it's UBS, but--just want to kind of go back to what you had mentioned earlier about your plant closings. I kind of feel like you're, kind of have a footprint that should we see some pickup in demand, let's say, probably not this year, but out in the future, are you kind of, are you making any kind of statement in terms of what business you have and you're happy with that and in terms of kind of (inaudible) share, you're kind of happy with the existing mix of business that you have at this point?

Yes, I wouldn't infer that from our comments. The comments were basically related to the fact that as we've gone through and looked at our operating footprint and looked at what it would take to service the market today as well as in the future, we saw some opportunities to really shrink our footprint, but without shrinking our overall ability to service the market in an overall capacity. You know, a combination of Lean Sigma and looking at our operations running more effectively, we believe will allow us not only to operate efficiently in this current market, but be able to effectively grow our business when the market returns.

And again, as you look at the different types of operations we have in our supply chain, you go from a door facing operation--we've talked about this before--which is heavily capital-intensive, all the way up to an assembly plant, which is relatively easy to either shut down or start up, depending on the need, and it's relatively low capital. So I think when we look at our business, we think it's a very scalable business, and we think we've been doing a very good job of scaling it down. And we'll be prepared to scale it back up again quickly when the market opportunities come to fruition.

But just kind of help me, how would you respond, let's say, if the market had a quick turnaround? Would you need to lean more on your distributors, or--I mean, you've taken a pretty good chunk of capacity out of your footprint, and how do you kind of turn around and say, "Okay, look. Market conditions have dramatically improved. Ergo, I can now serve that new market."

Yes, and again, we haven't taken the capacity out. We've actually reduced our capacity--our operating capacity--on a temporary basis. The simple answer is, a large number of shifts--of plants--were only operating one shift. All of our plants have the capability to run four shifts. So it's a pretty scalable operation from where we need it today. So we are not concerned about our ability to be able to meet market demand if the market recovers quickly. The biggest challenge there will be making sure we have the labor in place and we're putting good systems in place in order to be able to meet that demand.

Okay. And if possible, I think on the last conference call you had mentioned that you (inaudible) cash flows you were expecting from plant sales. Have those been received, or do you have some that you're waiting on?

We have, we did execute one sale in the fourth quarter, and there's one that's still pending at this point.

Can you give us a number on that?

The Mississauga plant, Chris? The Mississauga plant in the fourth quarter yielded cash proceeds of about $7.6 million.

And then the other's under contract and you guys are waiting for that to close?

Yes, we're not going to--that one we're not prepared to give an answer for. We're still in negotiation.

And in terms of, in terms of your Canadian exposure, one, can you give us any type of indication on how much of your North American business that is, and then two, kind of performance-wise, how is that business holding up relative to the other North American business?

We don't break our segments down below North America, so we wouldn't be prepared to do that today. I will say, though, from a market perspective, Canada from a market perspective is clearly doing better today than the U.S. As is Mexico, when you look at North America. That's from a market perspective.

Okay. And then a couple of housekeeping things. Could you give the term loan balance?

Debt outstanding on the term loan at the end of the year was $1,145,000,000.

$1,145,000,000? And then I know you do, given your filings, your statement EBITDA by North America's national, do you have that available?

We don't have that available now, but that will be presented in the 20-F, which we'll be filing shortly.

Thank you.

Okay. Thank you.

[Marion Tadeo with Broadpoint Capital.]

Good morning.

Good morning.

You've already touched on most of my questions. One last one. In your press release, you talked about a $12 million add-back to your adjusted EBITDA that you were eligible for but didn't take it previously. One, if you could just kind of give us a breakout of what those were by quarter just to tie up the numbers? And two, just, was there, is there a change in definition why those weren't added back in the past or what were those? Can you just give a little color there?

Well, we're simply reading the credit agreement and taking the adjustments to EBITDA that are contractually permitted. We're constantly mindful of the covenants and we're always working to ensure we're in compliance. And really, I'm not in the position, really, to give you any detail on first, second, or third quarter right now, but you'll be able to see that in the 20 after we file shortly.

Okay. So that detail will be in there?

Yes.

Okay, that's all I had. Thank you very much.

Okay. Thank you.

Nitin Dahiya with Lehman Brothers.

Yes, a couple of follow-ups. In terms of competitors' activity, I recall that your big competitor was starting up a new plant that they were constructing, and if there's any update on that and how the competitive environment looks right now?

Well, I guess there are two questions there. One, Nitin, as far as the start-up with the new plant, that is, we have not heard specifically that that plant is in operation yet. So if you hear something, let us know. With regards to the competitive market, this is, obviously, it's a very competitive market and will continue to be a very competitive market. Whenever you have a downturn like this, I think you always get a lot more competitive forces, and we're reacting by pushing, making sure we're pulling all levers to deal with that.

Would you characterize it as competitive or sometimes (inaudible) irrational in terms of pricing?

I would, I don't know that, and that's all objective, right?

Of course.

On how you look at this. I think that clearly it gets tougher at times like this. Unfortunately, we're not seeing a lot of relief on the commodities that we purchase, so we're seeing actually probably more price pressure on the commodities side. But again, Nitin, the way I like to look at it is price is only one factor here. The product, the quality attributes of our product, our service offerings and capabilities, the trust in the Masonite brand, all these are part of the customers' decisions, and we continue to work on all aspects of these to make sure we're differentiating Masonite in the eyes of our customers.

Well, of course, and in looking at the new products, I mean, I think they look very good, but in terms of customer uptake, are you seeing an improvement in mix as it flows through your numbers?

Yes. I mean, we clearly are seeing a better mix of product as we bring new products off. With regards to the new products that we're putting out there, many of those are actually being launched through this year, so we introduced them at the IBS show, but they're not actually, we won't actually see the uptakes on those until the actual launch dates. And if you go online and pull down our new product brochure, the actual launch date for each of those products throughout the year is listed on it by product.

I see. So we, okay. So we haven't really seen it through the numbers as to how they're doing yet. Okay. Now, the, on a related one with channel inventory. And I think, Tony, you mentioned that part of the margin decline was because you took inventory down pretty effectively?

Right.

How does that impact channel inventory? I mean, do you think the channel is a little bit more stuck now, or a little more full now than at the end of the previous quarter or the current one, too?

Well, we're still maintaining our lead times. I don't really have any visibility to the channels themselves, but I just can tell you what we're doing. We're satisfied with where our inventory position is. We can do better, and we'll continue to work on it, but I really can't say what's going on in the channels beyond this.

Okay. Thank you.

Brett James with GE Capital, you may ask your question.

Hi. Could you guys comment on your current capacity utilization, just a ballpark number?

Yes, again, we've talked about this in the past. There's not really, again, a fair definition of capacity utilization when you look at an assembly business like ours. Our business is very scalable. We have many plants that are running at one shift. We have a few plants that continue to run at 24/7. But on a, with actually, we actually shut it down for maybe a week at a time in a certain period, depending on the customer demand. So I guess the best way to answer this is we have, we believe today we have sufficient capacity that we need, and we're scaling down wherever we can to reduce costs and make sure our capacity as we utilize it today is as efficient as possible. But this isn't a big chemical operation, you know. A lot of our operations are assembly.

Many of your competitors are private companies, so this is more what you think or what your opinion is as opposed to probably pure fact, but I'm curious. What's your opinion related to where you guys are at in terms of capacity versus your competitors?

We choose not to speculate on what our competitors are doing, so I know you're not going to get the information either, but I suggest you'd have to go ask them.

That's fair enough. Next question relates back to Home Depot. You lost part of that business to [Gelled Wind]. Just if you could comment, I know someone mentioned or had talked about this earlier, but if you guys could also just comment on just if you believe your relationship with Home Depot now is stable, is a fair statement?

It's stable?

Yes, I mean, what's--what I'm trying to, I know you guys don't want to do forward-looking statements here, but at the same time, you still have some business with Home Depot, and I have to institutionally here, I have to make a determination, well, what's the likelihood of losing the rest of that business? And so I need to get my head around that.

Yes. Well, again, I think the answer, we haven't lost any additional business since the business that we announced back in, I guess in the first quarter of last year. And we continue to work very hard every day to make sure that we are a great supplier to The Home Depot. They still are our largest customer, they're an important customer to us, but I keep coming back to it, whether it's Home Depot or Lowe's or Builders First Course, or (inaudible), our job at Masonite is to make sure we are doing everything we can every day to earn their business. And we won't get complacent with that, and we're going to continue to make sure that we differentiate ourselves and that they have, that those customers need to be associated with us to help grow their business.

The next question relates to sales in Europe. Obviously, Europe/Other has grown, as you had mentioned. I was curious at the extent of your operations in certain countries, say, U.K. versus France versus Germany. Have you got something that could give me a better feel for that?

We normally don't break down, and we won't on this break down our specific businesses in those countries. I will talk again about markets. If we talk about the markets in general, the Western European markets, we believe, will moderate some. If you read the newspapers, and obviously we see that the credit issues in the U.K. seem to be greater right now than in other countries. With regards to Eastern Europe, we continue to see pretty strong growth in the Eastern European countries. But again, we're, we believe that the liquidity issues could have an effect on those in 2008. So we're going to monitor those very carefully.

And lastly, this is also an opinion kind of question. What are you guys thinking, and it's obviously very difficult to answer, but I'm curious about your opinion about this, the length of the downturn in the North American market--one year, two years, et cetera?

You know, I wish we could predict that. Right now, we believe, based on, if you look at past markets, it's going to be a difficult market throughout 2008. And I think beyond that, I wish I had a crystal ball, but I really think beyond that, it's anyone's guess at this point in time.

Okay, so, and you'd rather not say what you--I'm assuming you'd at least have some sort of preliminary opinion about that, though?

I just don't think it's worth speculating on that, because every opinion I've heard so far from every pundit who's probably even more focused than I am has been wrong. So I'd rather just recognize that we people are going to have a tough year ahead of us.

Fair enough. Fair enough. That's all I have. Thanks, guys.

Thank you.

Chris Daugherty with Oppenheimer and Company.

Hi, Fred. Just sort of going on that question and just also relating it to your capacity, what do you think sort of the ongoing run rate when the market does come back would be in terms of new housing starts?

Well, that's a good question. I think if you look back over the last 40 years, the market has averaged, has incrementally gone from about a 1.3 million starts up to about a 1.6 million starts. Masonite participates in the joint study, the Joint Council for Housing study that the group between the NAHB and Harvard University, who in the past has said that they believe the long-term housing market could be as high as 1.9 million. My guess is the number is somewhere in between. It's somewhere between 1.5 million and 1.9 million housing starts, but we don't know exactly where that will actually come out to over the next five or six years and when that will happen. But I kind of think of it, that helps frame it. That's how I think about it.

Yes, I know. That is good. Thank you. And then, Tony, in terms of you recognized a big tax benefit, mostly for the impairment write-down, and I looked at your cash flow, and it actually looked like it was (inaudible) the income tax payable in the cash flow statement, it was a negative 12.9. Can you tell us what the deferred tax portion of that change is for the quarter?

Yes. The tax benefit associated with the impairment charge is just a deferred tax accounting item, has no cash implication. In the quarter, if you're looking at the cash flow and referring to the drawdown in the taxes payable, that is the cash tax payable number. Now, what's important to note about that is during the fourth quarter, we had a favorable resolution on some tax contingencies that actually didn't require a cash outflow on our part. So our taxes payable have declined, but looking on the face of the balance sheet and the cash flow, but it didn't actually require an outflow of actual cash dollars to settle those because those contingencies which we had previously provided for appropriately under accounting standards have been resolved in our favor now.

Then can you just tell us what, and I don't know if it's in your press release, but the next impact on taxes was for the write-downs, just so we can get at sort of a normalized number?

For the impairment? It's $34 million.

Okay, that's it. Thank you.

Operator, we can probably take one more question.

Mary Gilbert with Imperial Capital.

Good morning. I wonder if, could you tell us what maintenance CapEx is and how we should look at that on a sustainable basis going forward?

Well, maintenance capital is simply the ongoing replacement of major portions of capital assets. And in any business, you're going to have a certain amount of maintenance capital year in and year out. And that's what--.

We're not prepared on the phone call to tell you what portion of our CapEx spending that is, and that varies from time to time based on timing.

Okay. So when we look at the $43 million, we can't say, "Well, $30 million of it represents sort of the maintenance spending op that you really need to spend annually"?

No. That wouldn't be an accurate way to look at it. That spending includes our new product spending, it includes productivity spending, it includes regulatory spending for safety and environmental, and it would include maintenance and repair spending. But again, we're not going to break down the specifics of that spending and how we spend those dollars. We obviously prioritize them to maximize the enterprise value of the Company.

Okay. And how should we look at your fixed cost structure with the initiatives that you've put in place? So when we look at your cost of goods sold, what percent of that represents through the fixed cost component?

Again, we don't think that sharing that information is a smart competitive move for us, because we know other folks look at it, so we don't share the breakdown of fixed and variable costs in our costs of business. And we haven't in the past, and we won't in the future.

Okay. Kind of going back to The Home Depot business, my impression is that that decision to exit the business that you exited was your decision. And sort of looking at the platform that you have now, are there opportunities to expand The Home Depot business, not necessarily related to getting back into the business that you were doing before, because it seemed like that was marginally profitable and not really where you wanted to go. But just in general, do you see opportunities for growth in terms of new types of products with Home Depot?

Yes, absolutely. First, I'd just like to clarify the comment that you made to start with. It was our decision to raise prices to The Home Depot. It was The Home Depot's decision to reduce their purchases from us. So each party did what they thought was in their best interest at the time. But you're absolutely right. We believe that new products, our service initiatives, our lead times, all of those are going to help us drive additional business with Home Depot, with Lowe's, and with the rest of our customers, and that's what we're focused on.

Okay. And then also, cash taxes? How much did you pay or any tax refunds that you received in '07? And are you planning, are you receiving anything or how should we look at cash taxes in 2008?

Cash taxes in 2007, which you'll see in the 20-F, was around $9 million. And as far as 2008, we're not prepared to give any guidance on what the cash tax number would be for 2008.

Okay. And I'm sorry, I do have one last question with regard to working capital. It looks like you generate cash from working capital this year. One, I wanted to find out, have you sort of optimized working capital efficiency? In other words, you've kind of gotten to an optimal level so there's no further improvement other than how the business is impacted by the market environment? In other words, kind of looking out to '08 and the weak climate, I would expect working capital to decline, offset in part by any increases in raw material costs?

You know, again, I don't think we want to provide any specific guidance, but I will say in any company that has a continuous improvement culture, we're going to continue to look for opportunities to be able to reduce our working capital while continuing to drive our fill rates and lead times to our customers. So it's always an area of opportunity, and any good business team should be looking at that on an ongoing, constant basis.

And then--I keep coming up with--cash restructuring costs? How did we end the year in terms of where that number is? I'm trying to look at what that impact would be in '08?

Cash payments made on account of restructuring activities, and that's all the restructuring that started as far back as 2006, was $22.5 million, and you'll see that disclosed in the 20-F.

Okay. So what would be the balance at the end of '07?

It's about $18 million.

And will all of that get paid in '08?

No.

Okay. And then is the 20-F going to be filed today?

No.

Well, you're asking a lot from our group, but that would be a little tough.

I'm sorry.

I think we're going to have to end the call, because we have to run onto the next line. I just want to thank everyone again for their participation today, and we look forward to seeing you again next quarter. Thanks very much. Operator?

Thank you for joining the Masonite International update call for investors. This conference call has been recorded. The replay may be accessed until April 11, 2008, by calling 866-407-9260 domestic, or 1-203-369-0614 international, with the passcode of 9245. Thank you.