Masonite International Corp (DOOR) 2008 Q1 法說會逐字稿

Welcome to the Masonite International first quarter 2008 earnings call for investors. During the presentation all participants will be in a listen-only mode. After Management's prepared remarks investors are invited to participate in a question-and-answer session. This conference call is being recorded. The replay may be accessed until June 15, 2008 by dialing toll-free 1-800-945-0406, pass code 9245.

I will now introduce Chris Virostek, Vice President 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 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, who will review Masonite's results for the first quarter of 2008. We released summary results earlier this morning, and this information is also available on our website, through Intralinx and other media. Complete financial statements will be filed with the SEC in the near future.

Finally, please note we will not be providing specific guidance or projections on expected revenues, earnings, or cash flow for 2008.

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

Thank you, Chris. Good morning, everyone, and thank you for joining Masonite's first quarter earnings call. This morning we released first quarter 2008 results. It was a difficult quarter, with sales declining 18%, nearly 28% in North America alone, and adjusted EBITDA declining nearly 35% when compared to the same period last year. The continued downward pressure in the U.S. in both the new housing segment and the repair, remodeling, and renovation segment, combined with commodity inflation and increased shipping costs, driven by higher oil prices, are all taking their toll on our financial performance in spite of the many positive accomplishments of our Masonite team over the past few years.

Tony DiLucente will be taking you through a more detailed review of our financial results in a few moments, but before he does that I'd like to provide a quick synopsis of the market conditions in the regions where Masonite competes and an overview of the actions we are taking at Masonite in response to this increasingly challenging environment.

As some of you already know from our recent SEC filings, during the quarter we drew $100 million on our revolver to fund working capital requirements. And then subsequent to the quarter end we drew an additional $226 million (sic - see Press Release), representing the remaining availability on our revolver. And although we don't have any immediate needs for this liquidity, we drew down on the facility to provide ourselves with greater financial flexibility in light of current financial market conditions.

I also know many of you are going to have questions today about our future covenant compliance outlook and, while we certainly appreciate and understand your interest, we must say today, as we have consistently said in the past, that we will not be giving forward-looking information or guidance. That said, I am prepared to share this with you. We are monitoring the situation very carefully and we are managing the Company accordingly. And that's all we're going to say on the subject at this point, and we will not be elaborating any further in the Q&A session today.

Let's return back to market conditions. Starting with the United States, our largest market, the most recent Census Bureau statistics have March housing starts falling below the 1 million level for the first time at a seasonally adjusted annual rate of just 947,000 starts, which is 36.5% below the March 2000 rate of roughly 1.5 million starts. The recently published forecast from the National Association of Home Builders, which was released on May 5th, now predicts housing starts in the U.S. will be in the 925,000 range this year, and further predicts that there will be little or no improvement from this level in 2009. So more and more it appears we are in for a prolonged housing recession in the U.S., not dissimilar to what has occurred in the past three recessions.

Stable market conditions in France provided modest gains for Masonite that were unfortunately more than offset by significant weakening in the U.K. market. So as a whole, our sales in Western Europe were down approximately 5%, excluding the impact of the significantly stronger euro. On a brighter note, our emerging businesses in Poland, the Czech Republic, and Hungary posted high-single digit growth, excluding the impact of foreign exchange. In fact, in some of these regions we experienced strong double-digit growth as we continued to execute on our global growth strategy.

External sales of door facing components throughout Europe, the Middle East, and Asia was essentially flat with the prior year. And our hardboard business in South Africa continues to perform very well, posting double-digit sales growth over the period last year.

So in a nutshell, where markets are doing well we are taking advantage of these growth opportunities and are expanding our business. And where market conditions are working against us, we continue to fight aggressively for every customer and every dollar. Without any foreseeable short-term improvements in market conditions in the U.S., or now the U.K., our focus at Masonite is to ply every lever at our disposal to strengthen our business and drive improvements in areas that we can directly control.

As you are already aware, we began proactively and aggressively addressing our cost structure throughout Masonite starting in 2006 in anticipation of the market downturn in the U.S. These efforts encompass the entire Company, across every region and within every function. And we have made significant progress throughout 2007 implementing these efforts.

In light of the continuing market pressures we have continued these efforts through the first part of 2008, announcing the closure of five additional facilities in the U.S., Canada, and the U.K. Cumulatively since 2005 we have closed 16 manufacturing sites in North America and Europe. As I shared in our last call, 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 eventual market recovery. So simply put, we are not reducing our long-term capacity or capability. In fact, in certain operations like door facing, we are continuously working to increase capacity through our Lean Sigma efforts. In closing the sites that we are closing, 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.

Also, as we mentioned in the last call, we made the difficult decision to reduce our salaried and overhead staff by an additional 10% in quarter one, when it became clear that the markets were declining faster than previously forecasted. And we also further tightened our focus on discretionary spending across the board. As a result of these combined actions, Masonite has reduced employment by more than 35% from a high of more than 15,000 in July of 2006 to roughly 10,000 employees today, with a substantially larger portion of those reductions coming from our North American operations. The results of these efforts were evident in the more than 18% reduction in SG&A spending in the first quarter of 2008 when compared to the first quarter of 2007.

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

In addition to executing the difficult measures to lower costs, balance capacity, and reduce working capital, we are simultaneously focused on the necessary actions to protect and grow our share. A significantly greater portion of my time and our management's time is focused today on opportunities to drive revenue generation. And while these efforts are masked by the market environments we find ourselves in, I believe we are making great progress in these areas. We continue to focus our efforts on improving customer service, lead times 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 proposition. We are winning new business in competitive bids, and as evident in our results, we are aggressively focusing on growing our business outside of the U.S.

Masonite remains intent on making the tough choices necessary to reduce costs, while simultaneously strengthening our core capabilities. As a result, I firmly believe we are becoming a much better company every day, one that is much better prepared to take advantage of the inevitable market rebound when that occurs.

I will return to provide more details on these initiatives following Tony's review of the first quarter results. Tony?

Thank you, Fred. As Fred mentioned, continued weakness in the North American, and now U.K. markets, the full impact of the loss of business with The Home Depot, and reduced operating rates all negatively affected our first quarter results.

Revenues of $464 million were 18% below the $569 million achieved in the first quarter of 2007, and 22% below that period on a constant currency basis. In our North American segments, where we felt the full effects of the lost Home Depot market, revenues fell 28%. Excluding the lost Home Depot business and the favorable impact of exchange, sales declined 14% compared to the prior year period. The impact of the lost business contributed approximately $66 million, or 57%, of the year-over-year decline in sales.

Europe has become an increasing portion of our business, as North America weakened and as European currencies have shrank in relative to the U.S. dollars. Our Europe and Other segments now constitute approximately 38% of our sales, up from 30% in the first quarter of 2007. In the quarter just ended, sales in our Europe and Other segment of $170 million, were $12 million higher than sales of $158 million achieved in the first quarter of 2007. On a constant currency basis, sales in Q1 were actually down 1.3% versus the same period in '07, due to weak market conditions in the U.K. and also the timing of the Easter holidays in that they fell in the first quarter in 2008.

Also in the first quarter, we were affected by a more severe winter in Canada and portions of the U.S. Northeast as compared to what happened in the first quarter of 2007. Additionally, again, the fact that the Easter holidays fell in March this year as opposed to April in the prior year resulted in two fewer sales days in the first quarter of 2008 as compared to 2007.

Now turning for a moment to EBITDA, operating EBITDA in the quarter decreased 36.5% to $46.7 million from $73.5 million in the prior-year period, while adjusted EBITDA declined to $53.5 million from $81.9 million last year. Adjusted EBITDA margin in the first quarter was 11.5% compared to a 14.4% adjusted EBITDA margin in the first quarter of 2007. Clearly, persistent volume weakness is making it difficult to maintain our margins despite the aggressive actions we have taken on head count, discretionary spending, and facility rationalization.

In the first quarter of 2008, our SG&A was down $9.7 million, or 18% versus the same period last year. On a constant currency basis, SG&A was actually down almost $12 million, or 22%, versus the same period in 2007. SG&A as a percent of sales in Q1 2008 was 9.4%, which is flat versus the same period in 2007. We've made deep cuts and completed two separate actions to reduce our SG&A and overhead headcount, in October 2007 and then again in January 2008. Additionally, we've also reduced spending in other areas, such as travel and entertainment and outside professional services.

In the first quarter we took a total charge of $6.4 million as a result of site closures and restructurings 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. Cash payments made in the quarter in respect to restructuring activities were approximately $8 million. Also included in other expense in the first quarter is approximately $800,000 of asset impairment, related equipment and other surplus assets.

Cash flow in the quarter was influenced by payments made to acquire the remaining 25% of our businesses in the Czech Republic and Poland under the terms of a shareholder agreement. The total consideration was approximately $18.6 million, consisting of $13.7 million paid to the minority interest holder for its shares and the balance paid to it as repayment of advances.

Changes in working capital in Q1 2008 provided $10.3 million of cash flow and overall cash flow from operations provided $9.2 million of cash. Further actions to reduce inventory offset the seasonal increase in accounts receivable and the growth in payables was influenced by the accrual of semiannual interest payments on the senior notes. Capital expenditures declined $1.6 million from the prior year to $7.3 million in the current year.

Mainly driven by the acquisition of the remaining minority interests in Czech and Poland, net debt increased $22.5 million from December 31, 2007. In the prior year we reduced net debt by $22.5 million, with the main difference in the two years being the acquisition payment of $18.6 million and the lower cash flow from operations due to lower earnings.

We remained in compliance with all applicable financial covenants as of the end of the first quarter of 2008, and the calculation of these financial metrics are included in the press release. During the quarter we drew $100 million on our revolver to fund working capital requirements, and subsequent to the quarter end we drew an additional $226 million (sic - see Press Release), representing the remaining availability in the revolver. Although we don't have any immediate needs for the liquidity, in light of the current financial market conditions, we drew on the facility to provide us with greater financial flexibility.

At March 31, 2008 the outstanding balance on the Company's accounts receivable sales facility was $66.4 million. Subsequent to quarter end, the counter party to this facility provided the requisite 60 days of notice to terminate the program.

Finally, a comment on debt levels 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 sheet by any related unamortized deferred financing costs. Our March balance sheet included $58.5 million of such costs, so our debt is described in this balance sheet as $58.5 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.

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

Great. Hey, thanks, Tony. You know, while many market factors are outside of our control, how we respond to proactively influence our business results is clearly very much within our control. And at Masonite we remain focused on our 2008 blueprint, living and demonstrating the Masonite values and driving the critical actions embodied in our strategic goals -- building capabilities and developing talent, creating customer excitement, and driving exceptional improvement in manufacturing. Our laser focus on the Masonite blueprint has enabled significant progress in these areas over the past few years, in spite of the many challenges. And we will seek to continue to do so in 2008.

(Inaudible) achieve the goals, to build capabilities and develop talent, we continue to strengthen our talent base throughout the world, recently adding a new commercial leader for our business in central Eastern Europe and the Middle East, and a director of internal audit, as well as a number of upgrades in key functions around the world in human resources, supply chain and customer service, as we build a more integrated and effective cost structure. Though we continue the difficult but necessary actions to downsize our staff, as demonstrated in the first quarter reduction in force and our lower SG&A spending, we are constantly cognizant that adding critical talent in key positions is paramount to our long-term success, especially in those markets that have significant current growth opportunities. But regardless of location, 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 sites being added to the program this year. Lean Sigma has been the engine behind our process improvement efforts at Masonite. Masonite is now fully self sufficient in Lean Sigma for our ongoing training and our large project efforts, and Lean Sigma and continuous improvement are part of the new Masonite's DNA.

We're also increasing our focus on operator and first-line supervisor training in 2008, which we believe is a critical and a necessary investment in our employees and in our company's future.

When it comes to creating customer excitement, our second strategic goal, we have set the bar even higher in 2008. Building upon our improved fill rate performance in 2007 is critical to exciting our customers and driving and growing our share in 2008. Our customers have now come to expect extremely high fill rating and even shorter lead time. 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 have created tremendous customer excitement through the introduction of our new website, www.masonite.com, which allows customers to more easily browse and choose from our wide selection of doors. The powerful interactive door configurator allows customers to design an 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 their choice.

Our 2008 aggressive new product launch plan is on track and we are delivering good initial results. Our new fibreglass door with our proprietary Avant-Garde finish, which digitally produces a realistic wood finish, was launched in late April and is receiving tremendous attention from our customers. The first Avant-Garde series was introduced with a Spanish cedar finish that shows off the beautiful contrast that you could previously only get with a high-end real wood door. Our new line of foil doors in the U.K. market is also grabbing customer attention and we are in the process of expanding our capacity for these products.

In addition, Masonite is taking a leadership position in defining 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 construction methods. For those needing to meet LEED and other certifications, we are offering the Safe 'N Sound Emerald door. This door adds some additional features, such as no added [DUF] and FSC certification.

And in addition to the several new interior and exterior door offerings, we are also adding new glass designs, as well as an exquisite mahogany grain finish for our Belleville and Barrington fibreglass door lines. And this also is receiving tremendous feedback from our customers. I encourage you to see for yourself the full breadth of our new product offerings in the product catalog that is available at masonite.com. It will help you to better understand the focus we are putting on innovation and how we are creating tremendous customer excitement at Masonite in 2008.

Our third strategic goal is to drive exceptional improvements in manufacturing. And it starts with the discipline of running safe operations. In the first quarter of 2008 we reduced recordable injury total incident rates by 28% and since 2006 we have reduced our injury rate at Masonite by 60%. Our employees understand that safety comes first and they appreciate that.

We also apply the same discipline in our efforts to increase productivity, to streamline our processes, reduce waste and improve our overall competitiveness. 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. This is a critically important effort for Masonite, recognizing the negative fixed cost absorption impact resulting from weaker volume, as well as the inflationary impact from commodities and oil-related transportation costs, both of which are negatively squeezing our manufacturing margins. Thankfully, we have the talent and the processes in place to drive these improvements.

So to sum up, the first quarter was difficult but not unexpected considering the business environment. Sales were down $105 million and adjusted EBITDA was down $28 million, with adjusted EBITDA margins slipping 290 basis points. Our SG&A spending was reduced 18% over the prior year as the actions we have put in place on cost containment continue to take hold.

As I mentioned in the last call, 2008 will be a very challenging year. But I am convinced that our continued 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.

And with that, operator, we're ready for questions.

Thank you, Mr. Lynch. (OPERATOR INSTRUCTIONS.) The first question comes from Philip Volpicelli of Goldman Sachs.

Good morning. I was just wondering, on the cash flow statement I see there is the acquisitions of $13.7 million and then there's the distribution to minority shareholders of $6 million. That's the other half of buying the minority interests in the Czech and Polish facility?

Yes. Of that $6 million, $4.8 million of it is that and then there is $1.2 million of distributions to other minority interests.

And can you give us more color on what that other $1.2 million is?

Certain of our other -- of our partners in some of the foreign jurisdictions we fund equally into the Company and when those foreign sites generate cash we distribute it a portion to ourselves and a portion to the other parties.

Understood. Okay, thank you. And then with regards to the A/R securitization, so there's 60 days for that to wind down. Based on your analysis, are you going to have to inject more cash into that or are the receivables over the next 60 days simply going to pay down the amount borrowed there? Can you give us a sense of what's going to happen?

The facility will be paid down by the end of the second quarter. And we have plenty of liquidity to go forward from there. We are investigating other potential facilities as well, but that's essentially the situation.

Okay. So do we think that we're going to have to borrow on the revolver to satisfy any of that, or is it just simply the cash as you collect those receivables will allow it to be a cash neutral event to you?

Well, I think the first issue is we have, as you know, Philip, we have fully drawn down the revolver, so we have that cash to utilize.

Okay. Then in terms of the cost savings from the five plant closures, any more clarity on how much you think you'll be able to save beyond the tens of millions of dollars?

No, Philip, as you know, we're not giving forward-looking information specifically on those cost activities. We have had a very aggressive program in place. I think you can see that in our numbers over the last year. And we're going to continue to look at those opportunities. I think again we can say that last year we saved tens of millions of dollars. Our plan for this year is even more aggressive than last year's.

Okay. And capital spending -- I think historically you guys have given some color on about $35 million to $40 million. Any clarity -- are you bringing that number down?

No, no more clarity around that. We expect the capital spending to stay relatively constant and beyond that we're not giving any forward-looking guidance.

I would say we clearly recognize that capital is an important part of our cash flow factors. Since the change in management at Masonite over the last several years, we have been very diligent in managing our capital process and our capital structure. Clearly there are opportunities for cost savings. Where we see those opportunities for cost savings that have short payback times, we aggressively go after those. We are going to continue to fund new products with our capital requirements. We also have certain capital requirements related to customer displays and as we bring new products on line. And so those will continue.

And of course, we have obligations with regards to EH&S that we need to meet, and we'll make sure we spend capital on that. But what I will say is that overall we monitor capital very closely and we think today we have a much better process in place. And we're going to spend capital where we think it's going to help the Company.

And many of our capital projects pay back extremely fast, sometimes in a year. So we're really looking at those projects closely.

Okay. I'm going to try this question. You may not answer it. But have you had any discussions with your banks and are you aware of the transaction that [Nortem] just did and the proposed amendment that [Ply Gem] is offering to its bank group? Have you started those discussions or thoughts of what you plan to do in case you do break your covenants?

Well, we're aware in general terms of what's going on in the outside market, but quite frankly, we have to stay very focused on running the business in these difficult times. As far as the banks are concerned, we periodically meet with our banks from time to time. And that's an ongoing process and we'll continue to do so.

Okay. So it sounds like you have not begun any kind of amendment process with them. You'll wait until there comes a reason to do that?

As we said, we're not going to provide forward-looking information and we don't think it's really appropriate to share in a public setting conversations that we have with our banks that are private and privileged.

Okay. Thank you very much. Good luck.

Your next question comes from Nitin Dahiya of Lehman Brothers.

Good morning. Could you comment on the competitive environment right now and also how capacity utilization is for you and the industry?

I think the bottom line on competitive environment, there's more doors today than there are openings. It's been that way for a while. It's an interesting competitive environment and, as you know, the market in general continues to get tougher. It's an unusual environment that we're seeing a lot of inflationary pressure on our commodities and raw materials. We know our competition is seeing the same. We're seeing a lot of competitive pressure as a result of transportation costs, but we also recognize that the same consumers who are buying doors, whether it's in the RRR market or the homebuilders -- they have their whole issue -- are also having to deal with inflationary pressures and having to make choices on how they spend their money.

So I would say this is about as competitive an environment -- from when I talk to our commercial team -- this is as about as competitive as they have seen it in the last 30 years in the door industry today.

And I suppose all of it is translating into price pressure?

Yes, there's obviously continued price pressure. I think clearly there's -- we are aware of pricing actions by our competition in both directions. I do think the pressures on the commodities have become greater over the last several weeks that have led to actions. I don't think it's appropriate to discuss how we would respond to that, but we are obviously keeping our ear very close to the ground with respect to what's happening. And we're trying to make sure that we continue to get paid the right value for our products on an ongoing basis.

You know, we've talked about this in the past. We don't sell on price at Masonite. We go out there and we sell on our total value. We continue to believe we bring great value in our value proposition, in our selling tools, in our brand name, in our new products and the multiple designs that we have, and we're going to continue to use those aspects to try to drive a greater share of market.

And then that's the U.S. piece. And obviously when we look overseas, it's really very different in each market, depending on what's happening.

And outside of the U.K., your commentary seemed to suggest that most of the other markets are much more reasonable?

Yes, the U.K. -- I would say that if we look outside of North America, the only market that we're really seeing what I would say is real difficulties right now would be the U.K. And I don't think that's a surprise to anyone on the phone. It's been in the news for some time. We're seeing continued nice strength in France. And in Eastern Europe those markets continue to do well. I think the macroeconomic environment there is significantly different than what we've had to deal with in the U.S., where housing prices I guess supposedly went up too fast and now are going down pretty quickly. So as we look to the rest of the world, we're spending a lot of time focusing on those areas as growth opportunities for us. I think, again, we're seeing that in our revenue numbers.

Fair enough. In terms of acquisitions, obviously you kind of bought out the minority partners there, but do you think there might be other opportunities internationally where you could, for example, go out and buy an existing -- say in India or China or something, which might give you greater international [leverage]? Is that something that you're looking at?

We first of all think there's a lot of organic growth for us in those areas. Obviously we will consider both. But in many of the markets we have a pretty nice footprint. In some cases it's just a matter of setting up a distribution channel, not necessarily the manufacturing footprint. So we're looking at all alternatives with regards to how do we grow our business more effectively outside of North America.

And the most important way we've done that, Nitin, at this point in time is we really have been focusing on bolstering our talent capability in that part of the world. It was interesting. Last year, if you went through our process at Masonite, we made a lot of changes to management. We brought in new talent, upgraded existing talent, promoted some really high capable individuals internally, but I would say 80% of our focus last year was around North America. In the first quarter of this year 80% of our focus has been bolstering and building our core capabilities with our talent outside of North America.

I see. In moving on to the raw materials, could you quantity how much your commodity inflate -- what your add was during the quarter, either in terms of percent or dollars?

I don't know that we have those exact numbers. What we can share is that with the indexes that we look at for products that we're purchasing, in the first quarter on an annualized rate, they vary from 7 to 12% inflation levels. The big --

On a blended basis 7 to 12%?

High single-digit levels. Now we didn't necessarily incur those types of costs, but those are the types of pressures that we're being faced with and that the indexes are showing. So it's an ongoing process. Again, fortunately in 2007 we centralized all of our procurement and purchasing on a global basis. Again, we brought in some new talent. We brought in folks from companies that actually worked in those industries. So we have steel buyers that worked at Ford. We have chemical buyers that worked at BASF. And we took that type of approach in our business and as a result of that I think we're still finding opportunities to do a better job of buying. We're working hard on reducing the number of suppliers that we deal with. And so, as a result of that, we're doing whatever we can to try to offset those inflationary costs.

Fair enough. And on the receivable facility, I mean obviously it got terminated in the second quarter. Now my understanding is that if you do not enter into a new facility for credit agreement purposes obviously you [put them] on balance sheet, so your debt goes up but EBITDA remains unchanged? Is that correct?

For the A/R facility fees are recorded in SG&A, so it would be sort of a flip from SG&A down into interest for the incremental amount.

But is it not already added back for EBITDA purposes?

That's absolutely correct. The A/R fees are added back, so it really doesn't have any impact on adjusted EBITDA.

Okay. So basically net debt does increase if you don't enter into a new facility?

Correct.

I see. And then I suppose, without mentioning the C word, you would want to do it for credit agreement reasons (inaudible) look at a new facility just because it's (inaudible) ratios?

Well, we like A/R securitization because it's a good way to finance working capital needs. It provides low-cost funding for that purpose. And they're excellent facilities and we're going to continue to explore them.

Thank you.

And we have had, Nitin, a significant amount of interest from parties contacting us asking to talk to us about new facilities.

Oh, you have? So if I were to assume that you would be able to roll that without too much trouble, that would not be unfair assumption?

That would be out intent.

Okay. Thank you.

The next question comes from [Pat Ramanafin] of Credit Suisse.

Hi. It's actually Larry Taylor with Credit Suisse. I was wondering if you could tell us, give us just a little more background, as to why the receivable facility was pulled by the counter party?

Well, we're wondering that as well, too. You may want to talk to them about that.

Okay.

We were surprised.

Working capital -- is there the potential to kind of manage working capital more effectively and, if so, do you have some sense of the order of magnitude?

Absolutely. Managing working capital is a real top priority for Masonite. We've made wonderful progress already. Take a look at the inventories. In 2006 the levels were $382 million. We're down around $285 million right now. And with our Lean Sigma efforts we're really working on reducing cycle time, which will provide another layer of reductions, we believe, over time.

Probably the newer opportunity for us has been on the receivables side, focusing on better collections, lowering our past dues, and then working with our sales teams on terms, reducing those terms when we can. So we've seen some levels improvement in the first quarter, but we expect much more in receivables going forward. And so absolutely, that's important. We think we've made some improvement, but there's much more to do.

Any sense of the order of magnitude, what the opportunity might be?

It would be hard for me to speculate on that right at this time, but I think it's a good opportunity. I'll say that.

Okay. And are there other partnership interests out there that over time may be purchased out and, if so, what sort of size are they?

(Inaudible) you're referring to?

No, I'm sorry -- entities like the Czech and Poland..

Oh, okay. Yes, there's probably one that's going to close in the third quarter and it's in North America. And, again, we expect that to occur in the third quarter.

Can you give us a sense of the size of that?

In terms of the purchase price?

Yes.

I think it's disclosed in the 20-F, between $14.5 million and $21 million.

Great. Thank you very much.

It's already fully consolidated in the results.

Okay. Thanks.

Your next question comes from [Robert Manowitz of RBS].

Hi. Good morning. Just to follow up on the last question about working capital. Your A/R days extended and seemed to come in a little bit higher than I would have expected, particularly given that the Home Depot business rolled off. And I think that probably had some longer terms. Are you extending credit to customers? Is that part of the package to your success in new wins?

I think the reason for the buildup in the receivables -- remember our sales were 30% in Europe last year. This year they're more like 38%. So there's definitely been a shift to more sales in Europe. So that has some impact on increasing days. Number two, we had less sales to The Home Depot that was under the A/R securitization facility. And then the third factor is that we end the year in December at very low seasonal volumes and then in March we're starting to get toward the high point. And so receivables are always higher in March than they are in December.

There's also an impact to some extent on currency as well, too. We translate the balance sheets of our European subsidiaries into U.S. dollars, and you know what's happened to the euro. I think that alone has added about $8 million to the accounts receivable balance in the first quarter.

Right. And what are the terms typically in Europe?

Well, they range. Some of them are quite long, but in some areas they're quite similar to the U.S. It really is a range of different types of terms, but in general I'd have to say they're longer, on average, than they are in the U.S.

Okay. And on the last question regarding the termination of the facility you suggested we talk to the provider of the facility. Who was the provider, and was there a trigger that they were able to point to? Or was the agreement that you had with them at any point -- at their desire they could just decide to terminate the --

The agreement was at their discretion. They can terminate it at any time that they so chose. I guess as far as the provider, the provider of the facility is SunTrust.

Okay. And what was the advance rate under that facility?

The interest rate on the facility or the --

No. I assume that they didn't give you 100 cents on the dollar for receivables. It was probably something --

The advance rate was 100%.

I'm sorry?

The advance rate was 100%.

Oh, it was 100%. Okay. Great. And my last question -- as we think about your tax payments for '08, I don't suppose you'd give us an idea of the total burden because that might be too forward looking. But would you care to help us understand the sort of minimum state and local taxes that you'd expect to pay?

Well, what you'll see in the filing that's going to come out shortly is that cash taxes in the first quarter of this year were about $2.3 million, because as we've mentioned on previous calls, our cash tax burden in North America is pretty low. That's just the way that the debt is funded into the North American operation. So most of the cash tax burden comes from the jurisdictions outside North America.

So is that $2.3 million a good run rate, I guess if adjusted for the seasonality of your earnings?

That's probably a reasonable assumption. The cash taxes are disclosed there in the quarterly statements each quarter and you can probably interpolate a run rate from there.

Okay. Thank you and good luck.

The next question comes from Chris Daugherty, Oppenheimer and Company.

Good morning, Fred and Tony. Tony, just in terms of the working capital -- I know that you've consolidated the A/P and the accrued liabilities. Could you just tell us what the A/P balance was at the end of the quarter?

Yes, just give us a quick second here.

Okay. And Tony, while you're working on that -- Fred, can you just talk about sort of volume and selling prices and maybe mix. Do you see consumers basically going down and maybe buying lower quality or lower priced stores versus higher priced stores?

Boy, that's a good question. I would say that it really depends on the types of homes that are being built by the different customer base. And this is really more of a focus in the U.S. regionally. So I'd say in regions where the market has shifted towards more multi-family, you're going to tend to go to a lower mix product. Although at the same time -- it's mostly lower mix product, but you're going to have some higher mix because you need certain fire-rated doors in that operation. So net-net you'll probably be okay.

Outside of the U.S. we're actually seeing a push in a lot of the regions to higher value doors, which obviously we like when that happens. So I guess it's really -- I think that the mix outside the U.S. is probably higher. Within the U.S. it's really a ratio depending on whether it's single family or multi-family. And that's depending on what builders we're ultimately selling through. I don't think the mix has changed much in retail at all. But the builders obviously are under a fair amount of pressure, so they're having to make decisions on whether or not -- what the right offering for them is. And I will tell you that some builders try to continue to add -- the higher end builders will continue to add more value and try to up-sell. And then you have the folks that are just trying to figure out a way to reduce costs.

And then, were there any price increases during the quarter?

Well, outside of the U.S. the answer is yes. I won't go into specifics. Within the U.S., other than we have a couple of certain product lines, I think that -- specifically products we're bringing in from outside the U.S. -- we did make some changes. But I probably don't want to go in more specifics than that on the phone call today.

To get back to your question on trade payables, the balance as of 3/31/08 is $146 million compared to $135 million at the end of December.

And then, Tony, also, I know you add back an amount to get to an adjusted debt number. I think it was $19 million. Was some of that part of the A/R securitization? I know there's sort of some exempt, but other than that, the A/R securitization figure does get added back to debt.

No, it does not. The add back to debt that we have in there is the mark-to-market on our interest rate swap. We also add back I think -- is there something else we add back?

There's just a small amount for a note payable of $1.5 million, but the largest add-back that doesn't appear in the discrete debt lines on the financial statement is just, Tony mentioned, the mark-to-market on the interest rate swap.

All right. So basically all that $64 million of A/R securitization was to Home Depot or Lowe's? They were exempt?

Correct.

Right.

All right. That's it. Thank you.

The next question comes from Philip Volpicelli, Goldman Sachs.

Thanks. Sorry about that. Just wondering if you guys would comment -- do you plan to be free cash flow positive at the end of the year, or do you expect to use cash during the year?

Well, first off, we're not going to give any forward-looking guidance on today's call. You can take a look at our cash flow generation over the last 12 months, last couple years in fact. And it's been positive. We intend to focus hard on our business to keep it that way. We can't really give you any specific forward-looking guidance.

Okay. Thought I'd try. Thank you.

Good try, Philip.

The next question comes from Brian Taddeo, Broadpoint Capital.

Good morning. Couple things -- can you just give us an update sort of the status what you're seeing in the remodel market right now? Does it continue to deteriorate faster than you thought or is it -- just kind of where that stands at this point?

In the retail sector, which is predominantly remodeling, renovation and repair -- very, very slow January. We weren't sure what happened there in January. And then it started to progressively get better through February and March. But it's still well below last year. I think what you've heard in the most recent announcements from The Home Depot and Lowe's with regard to how they see their markets going through the rest of the year, that's how we're kind of setting ourselves up. And we think that that's what's going to happen. So probably the high single digits kind of drop versus last year.

Got you. And what's the percentage of the business that's tied into remodel?

In the U.S.?

Mm hmm.

You could probably say about a third. I mean, you think about our business. In very broad -- it's actually gotten easier now because of the shift and what's happened, but we're probably a third related to North American housing, a third related to North American retail. These are give or take, you know, 5% -- and a third related to outside the U.S.

Got you. And then just generally in the market, are you seeing any of the smaller players -- are you seeing anyone drop out of the market at this point?

From a door manufacturing?

Yes.

We've seen some very small players, local [pre-hangers], smaller distributors, but nothing major beyond that.

Nothing of real size?

Nothing of real size at this point.

Finally, just to kind of follow up your relationship with The Home Depot, has anything there changed from the past quarter or so, anything better, worse?

I think -- I tend to continue to believe that our business with The Home Depot continues to get better. Our relationship continues to improve. We have regular meetings with them. We continue to work on new programs. We have, in fact, over the last six months since we lost that business, recovered nice chunks of business in some new products in excess of -- I'll give you a number -- in excess of $10 million of new business that we've been able to recover from The Home Depot in different products. So we continue to take advantage of the fact that our service levels and some of our new products we think are continuing to be really interesting to The Home Depot. So I hope to continue to win more business with The Home Depot as we go forward.

Okay, great. Thank you very much.

Your next question comes from Samuel [Valestro] of SunTrust Bank.

This is Samuel [Delasteros]. I've got a couple of questions. One of them is asking a question of management about their budget for '08. How confident do you feel you can get there?

Well, we already have said we're not going to provide any forward-looking guidance on this call. We talked about it being a difficult market condition. But we've also taken actions since then to really work it as hard as we can, but beyond that we really can't give any forward-looking information.

So I think what you're saying is no, that you have confidence but probably you won't get there and probably you'll be in default so --

I didn't think I said that. I don't think I said that.

So that being the case, is that one of the reasons you drew fully on the revolver?

I think we answered the question why we drew fully on the revolver already.

Then what was the answer to the question?

Pardon?

What was the answer to the question why you fully drew on the revolver?

We drew our revolver to provide greater flexibility and ongoing liquidity in light of current financial market conditions.

That's an answer?

I believe it is. Operator, are there any additional questions?

The next question comes from Mary Gilbert of Imperial Capital.

Yes, good morning. I wondered if you could talk about one, the $10 million of business that you won with Home Depot, what it is comprised of? And also if you could talk about any new distribution that you were able to gain anywhere, either domestically or overseas? And if you're able to expand with existing customers in terms of getting a broader geographic presence?

Yes, Mary. As far as The Home Depot, we don't want to go into the details on that. I think the reason we wanted to respond to specifically what's happening with The Home Depot is I know it's been of great interest on these calls over the last five quarters and people continue to be concerned about our relationship there. And I wanted to provide some anecdotal information that shared with you that things -- I believe things continue to develop there.

With regard to new customers, we constantly focus on trying to bring new dealers into our business fold and help our distributors win more business. One of the things that we changed in 2007 in our business model was to take the majority of our sales force and focus them on pulling product through our distribution chain. So we spend more time with the builders doing builder deals and more time with the dealers, the local dealers, in prospecting business through our new sales tools, and actually pulling product through so that those dealers switch their alliance to our distributors. And we think that is the greatest opportunity for us to grow our business. And we continue to make progress there every day. We also lose some once in a while, but I think net-net we continue to make progress.

Okay. So you feel that you are picking up some share?

Well, we're working on it as hard as we can.

Okay. All right. Thank you.

The next question comes from Jim [Persico] with GE.

Hey, guys. How are you? Just wanted to know if you would tell us, as of the most recent date you can, what was your cash balance?

Cash balance as of March 31, 2008 is $110.6 million.

Okay. I was hoping that you'd be able to tell us what you're running with currently.

That would be providing forward-looking information, so we're not prepared to do that today.

Okay. And then on the expense side -- we know that the sales side is suffering. You've indicated that that's where you're seeing the most pressure. From a cost-cutting standpoint, have you engaged any assistance from any third parties and do you have plans laid out that you feel confident in meeting? I know you don't want to talk about the specific numbers, but I just wanted to see if you've gone through the exercise, you've laid out cost, and do you think that those costs that you're laying out are achievable?

You know, Jim, we go through a very, very detailed annual operating plan process. We go through a very detailed monthly operating review with every single one of our businesses and every single one of our plants. Every single plant and business has specific goals with respect to cost requirements from direct labor, efficiencies, admin cost per unit, overhead cost per unit, looking at cost of quality, looking at our usage factors. When we made management changes in 2007, we brought in talent into the organization from companies that knew how to make tough decisions on cost, recognizing where we were going with the industry. So cost is a big, important factor of how we run our business.

It's not the only factor. I think we've demonstrated and it's shown in our margins that we know how to drive costs out of our business. But again, it's only one factor. We're equally focused on making sure we do what's necessary to drive revenue and fight for every customer dollar.

Understood. And as you look at the cost environment where you guys are operating in today, versus when you've looked at in order in formulating where you think '08 was going to go, what was the -- because we all know costs have moved -- what's been the biggest impact, the biggest change from where you are today versus where you were before? Is it from the raw material costing side, the labor costing side? Any things have changed that you give us some insight into?

I think it's all of the above. And we've attacked every single -- we've said that time and time again. As a company we attack every single lever that we can go after. And I think if you look at our SG&A costs is a good example. We've reduced SG&A costs -- we said in the fourth quarter that we were going to attack SG&A costs aggressively and we reduced SG&A costs between the first quarter this year and the first quarter last year by 18% in the first quarter, as we said we were going to do.

And I think the key point there is our SG&A as a percent of sales is flat in spite of the significantly lower volumes. And so we have to variablize the cost [basis] in these kinds of conditions. We do our best to head towards that.

And last question I have for you is the competitive environment. Have you seen any irrational behavior from the competitors out there today?

Yes. I don't think it's appropriate to respond on this call whether the competitors are rational or irrational. We respect our competitors. We compete with them effectively. Our focus is making sure that we're rational at Masonite.

Okay. I think we're going to have to end the call. It's 12 o'clock. So we appreciate -- I'm sorry, it's 10 o'clock. We appreciate everyone being on the call today. We appreciate your questions. And we'll see you again next quarter. Operator, please close out the call.

Thank you for joining the Masonite International update call for investors. This conference call has been recorded. The replay may be accessed until June 15, 2008 by calling 800-945-0406 domestically, or 203-369-3977 internationally, with the pass code of 9245.