Masonite International Corp (DOOR) 2008 Q2 法說會逐字稿

Welcome to the Masonite International second 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 September 28, 2008, by dialing toll-free 1-866-357-4028, passcode 4662. 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 this call contains forward-looking statements that are based on the beliefs of the management team regarding the operations, results of operations, and liquidity 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 US Securities and Exchange Commission. Actual results may vary materially from those described in these forward-looking statements.

Also, reconciliations of non-GAAP financial measures, such as EBITDA and adjusted EBITDA, discussed during this conference call to the most directly comparable financial measure presented in accordance with GAAP, including the reasons we believe the non-GAAP financial measures provide useful supplemental information for investors, are available in the press release we issued today which is available on our website at www.masonite.com.

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 second quarter and first six months of 2008. We released summary results earlier this morning, and this information is also available on our website through IntraLinks 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, cash flow, or financial position for 2008 or commenting on the ongoing discussions regarding our senior secured credit facility. Without further preliminaries, allow me to introduce Fred Lynch, President and Chief Executive Officer of Masonite International.

Thank you, Chris, and good morning, everyone, and welcome to the Masonite second quarter earnings call.

As Chris mentioned this morning we released second quarter and first six months 2008 results. It was another difficult quarter with sales declining nearly 14% and adjusted EBITDA declining nearly 44%, when compared to the same period last year. Our second quarter results were negatively impacted by the persistent deterioration in the US housing market and the more recent declines in the UK housing environment. Lower operating volumes resulting from these market conditions combined with significant inflation in our raw material, energy, and transportation costs, led to roughly 600 basis points of gross margin compression in the second quarter.

While we continued to make traction in reducing our expenses with a 16% reduction in SG&A expenses in the second quarter versus the same period last year, the volume and the margin compression took a significant toll on our operating performance, which reinforced our recent actions to notify customers of price increases.

Tony will be taking you through a more detailed review of our financial results in a few minutes, but before he does that I would 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. Bluntly speaking, it is our belief that market conditions will deteriorate further in both the United States and the United Kingdom through the second half of 2008 and into 2009. Starting with the United States our largest market, a lot of this information you are already aware of, but housing starts for the second quarter averaged 1.23 million, which is a 30% decline from the same period last year, and a 3% decline from the prior quarter.

The most recent census bureau statistics have July housing starts falling below the one million level at a seasonally adjusted annual rate of just 965,000 starts. 11% below the June 2008 rate of roughly 1.1 million starts and 30% below the 1.371 million starts that we recorded in July 2007. The recently published forecast from the National Association of Home Builders which was released on August 13th predicts that housing starts in the US will be 945,000 this year. And further predicts that housing starts in 2009 will average only 838,000 units, another 11.3% decline for 2008.

To put this in perspective, there have only been three-quarters during which housing starts averaged less than 900,000 units in the last half century. The National Association of Home Builders economists are now predicting that we are going to have six quarters in a row below this level before we begin to see any recovery in 2010. In Europe and the rest of the world more stable market conditions in France provided modest gains for Masonite that unfortunately were more than offset by a significant weakening in the UK market.

As a whole our sales in western Europe were down approximately 6.7% excluding the impact of the significant stronger Euro during the second quarter. Let's focus on the UK market for a moment, which makes up a little bit more than a third of our European segment sales. Experian's latest construction forecast predicts that private housing starts in Great Britain will fall to110,000 in 2008 from an estimated 185,000 in 2007. With the further decline to a 100,000 in 2009.

Total housing completions are forecasted to fall from 207,000 in 2007 to 148,000 this year, and 142,000 in 2009. So we're clearly seeing a shift in the UK from private housing to the social housing market which will grow slightly. To put this in perspective, if these factors become a reality -- these forecasts become a reality, they will result in the lowest level of completions in the UK since 1924. The National House Building Council in the UK reported that private housing permits in the UK dropped 59.6% in the second quarter to just 21,000 units, which provides sobering credence to the aforementioned forecast.

On a brighter note, our emerging businesses in the Czech Republic and Poland performed fairly well in the second quarter and we had very strong performance in our South African operations, posting double-digit sales growth over the prior period. So in a nutshell, where the markets are doing well we are taking advantage of these growth opportunities and are expanding our business. Where market conditions are working against us, we continue to fighting aggressively for every customer and every dollar. And without any foreseeable short-term improvements in market conditions in the US or the United Kingdom, our focus at Masonite continues to be to apply every lever at our disposal to solidify the foundations of our business and drive improvements in areas that we can directly control.

As all of 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 US. These efforts encompass the entire company, across every region, and within every function of the business. We've made significant progress throughout 2007, and in light of the continuing market pressures we have continued these efforts through the first half of 2008, completing the closure of additional facilities in the US, Canada, and the UK, and we are currently in the process of evaluating the potential of disposing of more underperforming sites.

Last month we made the decision to temporarily idle one of our facing lines in our Laurel, Mississippi facility to better manage our capacity during this downturn. This line is our most flexible operating line, and we are considering options to make alternative building products on that line. Cumulatively since 2005 we have closed 16 manufacturing sites in North America and Europe.

As we have said in the past, in each of these cases we have retained much of the manufacturing equipment base and have redeployed assets into other manufacturing sites in anticipation of the eventual market recovery. We have planned these facility consolidations in a manner that will enhance our capacity in the long run by concentrating manufacturing capabilities and talents in the most appropriate locations and facilities.

Simply put, we are not reducing our long-term capabilities and, in fact, in many operations we are increasing our capacity and capabilities in a smaller manufacturing footprint through our lean Sigma efforts. By shutting facilities we have been able to keep most of our plants operating more than one shift on a full five-day work week. In closing these sites and consolidating our functions at Masonite we are taking advantage of the reduced demand through consolidate operations into a more effective and lower cost long-term operational platform and supply chain.

As we mentioned in our last call we also took the difficult step to reduce our salaried and overhead staff by an additional 10% in the first quarter. When it became clear that markets were declining faster than previously forecasted. We 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 as you would expect.

The result of these efforts were evident more than a 16% reduction in SG&A spending in the second quarter of 2008 when compared to the second quarter of 2007. All of these actions from the plant to SG&A are part of our ongoing plan to match current capacity with current demand and to minimize the impact on earnings caused by the ongoing top-line weakness. We expect to continue to take similar 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 continue to be focused on implementing measures to protect and to grow our share. While simultaneously implementing needed price increases to help defray the impact of the inflationary pressures in our input costs. A significantly greater portion of management time is focused on these opportunities to drive revenue generation. And while these efforts are being masked by the tough market environment I believe we are making good progress in this area.

We continue to focus our efforts on improving customer service, lead times, and fill rates, and on technology advancements such as the recent formation of Echelon Laser System, LP a joint venture between Masonite and TechnoLines LP. We continue to add new marketing and sales initiatives promoting our strong competitive value proposition, and we are winning new business in competitive bids as evident on our results -- and as evident in our results we are aggressively focusing on profitable growth in our business outside of the US.

Masonite remains committed to making the tough choices necessary to reduce costs, while simultaneously strengthening our core capabilities. As a result, I firmly believe we are becoming a better company every day, one that should be much better prepared to take advantage of the inevitable market rebound when it occurs. Before I turn it over to Tony to provide more color on second quarter results I want to address a topic that I'm sure is top of mind.

In response to our covenant of noncompliance we continue to work diligently with our lender group and lead agent bank to amend our credit facility in a manner acceptable to all parties. As part of this process we are currently engaged in discussions to obtain a forbearance agreement to facilitate these negotiations. As we indicated in our last call and my lawyers insist that I share with you today, there can be no guarantees that these negotiations will result in a forbearance agreement or an amendment. And that's all we're prepared to say on the subject at this point and we will not be further elaborating in the Q and A section later today.

So with that I will turn it the over to Tony.

Thank you, Fred. As Fred mentioned, continued weakness in the North American and UK markets, the impact of the loss of business with the Home Depot, higher inflation, and reduced operating rates all negatively affected our second quarter results.

Revenues of $507.8 million were 13.8% below the $588.9 million achieved in second quarter of 2007, and 17% below that prior year period on a constant currency basis. In our North American segment, where we felt the final carryover effect of the lost Home Depot markets, sales dropped 23% over the same period last year. 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 $51.9 million, or 53% of the year-over-year decline in sales.

Our Europe and other segment now constitutes approximately 36% of our sales, up from 28% in the second quarter of 2007. In the quarter just ended, sales in our Europe and other segment of $181.5 million were $17.3 million higher than sales of $164.2 million achieved in the second quarter of 2007. On a constant currency basis, sales in Q2 increased 1.8% versus the same period in 2007. Stronger performance in France, South Africa, Czech, and Poland was offset by significantly weaker market conditions in the UK, which Fred spoke about earlier.

Included in the cost of sales in the second quarter of 2008 are approximately $4 million of inventory write-downs in respect to raw materials no longer considered suitable for production, materials associated with product lines that have been discontinued, and inventory associated with a customer transition program. Also included in cost of sales in the second quarter is a charge of $1.7 million, associated with VAT no longer considered recoverable in one of the foreign jurisdictions in which we operate.

These charges increased cost of sales and therefore decreased gross profits by $5.7 million for the quarter. Excluding these items, gross margin would have been approximately none -- 19% for the quarter. In the second quarter of 2008, our SG&A was down $8.6 million, or 16.2% versus the same period last year. On a constant currency basis, SG&A was down $11.7 million or 22% versus the same period in 2007.

SG&A as a percent of sales in Q2, 2008, was 8.8% which is 20 basis points better than the same period in 2007. We've made deep cuts and completed two separate actions to reduce our SG&A and overhead count in October 2007 and January 2008. Additionally, we also reduced non personnel related discretionary spending.

Turning to EBITDA, operating EBITDA in the quarter decreased 48% to $46.1 million from $88.7 million in the prior year period, while adjusted EBITDA declined $56 million from $99.1 million. Adjusted EBITDA margin in the second quarter was 11% compared to a 16.8% adjusted EBITDA margin in the second quarter of '07. Clearly, persistent volume weakness and the impact of much higher inflation is making it difficult to maintain our margins despite the aggressive actions we have taken on headcount, discretionary spending and facility rationalization.

In the second quarter we took a charge of $6.9 million as a result of site closures and restructurings, both pending and completed. These charges are recorded on the other expense line in the summary P&L provided with the press release. Cash payments in the quarter in respect to restructuring activities were approximately $8 million. Also included in other expense in the second quarter is $5.1 million of asset impairment related to equipment at sites scheduled for closure and other surplus assets.

As a result of the significantly worsening industry dynamics in North America, we were required under generally accepted accounting principals to perform an additional goodwill impairment test in the quarter. The result was the recognition of additional noncash goodwill and intangible impairment in the amount of $624.7 million in the quarter. Total interest expense in the quarter was $99.2 million versus $45 million in the prior year.

The second quarter of 2008 includes $56 million of deferred financing costs charged to expenses as a result of the current classification of the Company's debt facilities. Excluding this charge, interest expense would have been $43.2 million, just slightly down from the prior year, reflecting lower LIBOR rates in the Company's senior secured credit facility. Cash flow in the quarter was influenced by payments made to acquire an additional 25% of a door facings facility under the terms of the shareholders agreement. The total consideration was approximately $19.3 million, consisting of $16.8 million paid to the minority interest holder for its shares and the balance is repayment of advances.

Changes in working capital in the second quarter resulted in usage of $76.4 million of cash flow and the overall cash flow from operations for the second quarter of 2008 was an $81 million usage of cash. The single biggest factor affecting working capital and operating cash flow in the quarter was the repayment of $66.4 million of amounts outstanding under the Company's accounts receivable sales facility which was terminated on June 17, 2008. Also, volume weakness com weakness complicated efforts to reduce inventory in the quarter. Capital expenditure declined $1.1 million from the prior year to $6.2 million in the current year.

Net debt increased by $102.4 million during the second quarter which was driven by a combination of the acquisition and the termination of the AR sales facility which contributed on a combination basis to $85.7 million of the $102.4 million increase in net debt in the second quarter. Excluding the impact of these two unusual items, net debt increased by $16.7 million from March 31, 2008.

In the prior year we reduced net debt by $9.1 million with the main difference in the two years being the acquisition payments, the AR facility termination, and the lower cash flow from operations due to lower earnings. On a year-to-date basis, net debt increased by $124.9 million from $1.910 billion, to $2.035 billion. Cash flow from operations was a use of $71.8 million in the current year compared to a source of $52.8 million in the prior year. Again, the most significant factor was the impact of the termination of the AR facility.

Inventories were not reduced as much in the current year as in the prior year as the prior year reflected the inventory reductions associated with the lost business. Capital expenditures were $2.7 million lower than the prior year, and we disposed of a closed facility for proceeds of approximately $3.9 million. Year to date, the two acquisitions we have undertaken consumed in total $35.5 million of cash. Excluding the termination of the AR facility and the acquisition, net debt would have increased by $23 million, or approximately 1% on a year-to-date basis.

Because we were not in compliance with the credit agreement, we reclassified amounts due under the facility from long-term debt to current liabilities. Due to the current classification of our debt at June 30, 2008, we expensed all remaining unamortized deferred financing costs as interest expense in the quarter. Our June balance sheet therefore shows the debt at its face amount, while the December balance sheet shows the debt net of the $61 million of unamortized deferred financing costs. This is disclosed in detail in the notes to the financials which will be filed by the end of the week.

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

Thank you, Tony. To sum up, the second quarter was difficult but not unexpected considering the business macro environment that we're in today. Sales were down $81.8 million, adjusted EBITDA was down $43.1 million. With adjusted EBITDA margin slipping 581 basis points.

Our SG&A spending was reduced 16% over the prior year as the actions we have put in place on cost containments take hold. While net debt increased by $102.4 million, this was heavily influenced by contractually required acquisitions and the termination of the AR sales facility. On a year-to-date basis, excluding the impact of acquisitions and termination of that facility, net debt increased $23 million or approximately 1% from year end.

Other than in the event of a demand for repayment of our debt due to covenant noncompliance mentioned earlier, we expect our current cash balance, plus cash flows from operations, be sufficient to fund near term working capital and other investment needs.

As I mentioned on the last call, 2008 and 2009 are going to be a very challenging period for Masonite. But I am convinced that our continued focus on our three strategic goals, building capability 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.

With that operator, we're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Michael Kim. Sir, your line is open.

Hi, good morning. This is Michael Kim from RBS Just wondering if could you talk about the conditions in the UK and maybe discuss who your competitors are there and if you're actually gaining share?

Yes, this is Fred. In the UK, there's really two large competitors. It's ourselves and Jeldwen in the door space. With regards to share, I would say that the UK market has dropped extremely fast compared to even what happened in the US.

I mean to put it in perspective the drop that we have seen in housing starts in the UK over the last four months relatively speaking took 12 to 16 months in the US to drop at that time same level. So pretty dramatic change. At this point in time, I would say that we do not believe we have lost any share. We think the share is kind of in the same position.

In all the price increases, is that also applicable to all of your European operations as well?

In the second quarter, we announced a number of price increases that were specific to different regions of the world. They were specific to the different product categories, obviously depending on how the raw material input costs affected those different product categories. So I would say it was a pretty -- we've taken a pretty broad approach to price increasing, at least the notification of price increases in the second quarter.

I see. Is there any way could you provide like a range of those price increases across the European geography?

I don't think it would be appropriate to discuss that at this point in time. We're still in the process of negotiating some of those. Not all of them have fully taken place so I'd really rather not do that at this point in time.

Okay. Fair enough. Quickly, do you have an update on a new potential AR facility? Have you guys gotten any feedback or have you started that -- the negotiations for replacing the old facility?

Yes, we are working on a couple of different options in that regard. We're making progress but we don't have it completed yet at this point in time. And we're going to continue to strive to get one done in the near future.

IN the near future. Okay. And also, do you have any requirements, like future requirements to buy out additional shareholder interest, like other contractual obligations similar to the acquisition of [Sacophan]?

Yes, there are others out there, but we don't think they're going to exercise that right at this time.

Okay. And just real quick, capacity utilization. Do you have an estimate of where you guys are running today?

Yes, just broadly speaking, in our facing operations, which is the -- obviously where we have the largest capital infrastructure in the plant, sorry, in the company, we're probably operating in the 60 to 70% utilization rate. We've actually increased capacity over the last two years through a lot of our lean Sigma efforts.

The opportunity to take advantage of the slowdown in the marketplace actually allowed us to go back and look at things like change-over times and other initiatives. So I would say that's kind of the level we're at in that part. It's a little bit harder to describe capacity utilization in our door facilities and our assembly facilities.

They have a much lower capital intensity. They're much more scalable than our larger facilities, and what we try to do is we try to make sure we have the right number of sites, and so far we've been pushing hard to make sure that we're keeping as many sites as possible operating on a full five-day work schedule and in many cases more than one shift --

I see and is that consistent across North America and Europe, or is there a difference between the two or would you say --

Outside of the UK our sites in Europe are running -- are all running at I would say pretty high capacity utilization. The one site that's not running at high capacity utilization would be our site in the UK, because of the recent downturn. So we've been scaling that operation back as well.

Okay. And that would be -- would you say that's lower than the 60 to 70%?

Again, that's an assembly plant, assembly manufacturing plant. We're operating that on a shift and a half probably right now versus -- where it has the capacity to run on three shifts.

Okay. Great. Thank you very much. Appreciate it.

Our next question comes from Mary Gilbert. Ma'am, your line is open.

Yes, I wondered if you could give us an idea of the magnitude of cost savings that you are implementing, and you're constantly implementing. If you can kind of help us model out that impact, that benefit.

Yes. If we go backwards, it's hard for us to do that going forward, obviously, because we're not providing information, but if you look backward, in 2007, between our SG&A, plant controllable costs, and our supply chain activities, we saved on a flex basis about $90 million.

Through the first half of this year, through the first six months, we're less than half of that level, but relatively close to that level. And at this point it's hard for us to determine -- I shouldn't say that. We're not in a position to tell you going forward what we think those numbers are going to be, but you can at least get an understanding of what we've been able to do so far.

Okay and so when you're speaking about these savings does that incorporate the additional initiatives that you're taking or is that incremental? In other words, the recent plant closures and the line that you've taken down temporarily. Would that be incremental to what has been saved already, the 90 million?

Yes, obviously we're continuing to address those costs but obviously recognize as we're taking those costs down the impact of volume as you can tell from our results has been greater than our ability to take those costs out.

Just to clarify, the $90 million that Fred alluded to is what we actually saved in productivity on a year over year basis in 2007. And then essentially we're running close that same rate so far year to date 2008. So those are actual historical results.

Okay. So, in other words, can we also infer that once conditions do improve, perhaps in 2010, that you will have -- you have lowered your cost structure such that the margin should be much higher, and you will get the benefit of operating leverage as we get a recovery?

Obviously without giving forward-looking information, we'd like to believe that's the case because we spent an awful lot of time and a lot of energy and a lot of thought and sweat in making these happen, building a foundation of a company that we think can be, as I said, much stronger, much more competitive going forward.

We think we're well positioned for success.

Also, could you talk about -- you were sort of discussing your view and what the outlook is. Obviously very negative for the second half of '08 and going into '09. Do you kind of anticipate, based on what you're seeing domestically, and in the UK that we'll see like a weaker year-over-year first half in '09? And do you expect, as we gradually move through '09 that we'll see an improvement, or how are you looking at that currently?

Yes, I guess there's -- right now what we've done, we've looked really hard at what the different forecasts are, and quite frankly, I don't think anyone has a real crystal ball. A lot depends on what happens with regards to government intervention with regards to supporting housing, et cetera. But if we were to just take the forecasts that are out there today, and really take an average of what we're hearing from the pundents and the experts in the US, we would expect that from a market perspective, the first half of '09 will be down, and the second half of '09 will be flat to the second half of '08.

But also, we need to take into account our business. We would assume there's anywhere from a one to six-month lag depending on the product line that we sell, from the time that a house is started until the time that someone actually purchases the door to put in those openings. So we would expect the impact on Masonite to extend several months beyond whatever the recovery is in the marketplace.

Okay. That makes sense. That's very helpful. Then one other thing. With regard to the price increases, and I understand you don't want to disclose the magnitude of those increase, given that you're still in negotiations. But I wanted to find out, is it going to be enough to offset the inflation that you've experienced on the cost side, and also, what about the timing of when these price increases will actually take effect?

I'll answer both of those questions. The answer to the first question is, when we started announcing these price increases back in the second quarter, we did not have a full view to the impact of how difficult the inflation was going to be. So in many cases, the price increases that have been announced and that we have informed customers of to date are not enough to overcome the total impact of inflation, and our customers are aware of that. That with regards to timing, as I said, we will expect to see some of that impact obviously in the third quarter since we announced those in the second quarter.

Okay. So you get some benefit in the third quarter, more in the fourth quarter, but even so, it's not enough to offset the inflation that you've experienced on the cost side. As a result are you planning additional increases, and what about the timing of those?

That second question I can't answer, but obviously -- but your first point was accurate, it was not enough to address the inflation that we've experienced to date.

Is it like half? Is it like two-thirds?

Again, I think that's about as far as we want to go today.

Okay. And then one final thing. When you talked about having sufficient liquidity, assuming that you get what you want in the negotiations with the lenders. Would the liquidity that you have, given the cash position, and again, assuming the banks are on board and they're not going to sort of push the company toward a bankruptcy or something like that. Would that be enough for you to be able to manage your cash requirements going through 2009?

Yes.

Okay. Great. Thank you very much.

Our next question comes from Nitin Dahiya. Sir, your line is open.

Thanks. Good morning.

Good morning, Nitin.

Fred, just on the Europe weakness, I thought you said UK is down 6.7% during the quarter, or did I get that wrong?

Yes.

I think obviously the US is a much more known quantity, but with UK weakening, I think I'm just trying to get a better sense of how much of this weakness, if you like, is -- you think can be offset by eastern Europe and rest of the world, and how France and other markets are holding up?

Nitin, first, I just want to make sure I correct that. Western Europe, which includes both our French and UK operations, was down 6.7%, excluding the impact of -- of FX. So the UK was actually down further. We don't go to the level of breaking out every country specifically.

Also, if you think about the fact that, just from a size perspective, the UK is about a third of our European operations. So it hat a pretty significant impact on that part of the world and our operations in that part of the world. Again, we expect it to get worse. With regards to eastern Europe, we're seeing -- it was relatively strong for us. I believe we were in the high single digits in growth in the first -- in last quarter in our eastern European operations. And with regards to France, France has been slightly up for us.

And so France, I would say -- I would probably characterize France as being stable, where as eastern Europe being up, and then the UK being down. But overall, in the second quarter, the rest of the world, excluding the UK, were up about 8%, and that's actually year to date.

Okay and I think you mentioned in the press release up 2% excluding FX for the quarter, right?

I'm sorry, say that again.

In the press release you said it was up 1.8%, excluding --

Yes.

Now if France is stable and eastern Europe is still growing, and UK weakening more, we're not talking about mid single-digit decline in Europe in the back have half, are we? Obviously it's not growing any more, or is UK weakness so much that it's going to kind of overpower they growth in eastern Europe and stable France?

Again, I don't know that I want to provide any forward-looking information on our numbers, but we do expect that the UK market in the second half of this year will be down about 30% from a housing starts perspective. So we have to see what kind of impact that has on our numbers. There's also -- similar to -- we haven't seen the full impact of the UK right now.

Similar to the US there's a ratio of social housing versus triple-R housing, and we need to understand how that mix will affect us. So while we're not prepared today to give you guidance on how we think it's going to impact Masonite's UK operations, we do believe that the UK as a whole will be seeing high double digits -- seeing market declines up in the range of 30%.

I see. Okay. Fair enough. Moving to the US, Home Depot, I mean looks like, excluding the lost business, Home Depot is roughly stable, I guess. Still down, I suppose, but more stable. And also now you had four quarters of depot declines, so year-on-year basis you would stop comping that now? Is that fair?

Yes. We are going to have no more discussions on the lost Home Depot business going forward. This was the last comparison that we've had to do. Please.

But as far as both in the retail market, we have won back between several retail customers tens of millions of dollars over the last year. So we've been working hard on this making sure that we've repositioned ourselves. We've add number of very important wins. We have not come close to what we loft, but we work it at every quarter, slowly but surely inching our way back, selling our value proposition, selling the innovativeness of our products, explaining why we can offer more than we believe the competitors can offer, and that has worked to our favor to this point.

Obviously we wish the market was a lot better and it would happen a lot faster, but the market is what the market is. And our goal is to make sure that we take advantage of whatever we can to get as much share as possible.

I see. And at Lowe's, excluding depot, at other places as well, share trends are stable?

If you exclude market conditions, overall we have won more programs in 2008.

That's good. Working capital overall looks fine, but receivables are up a little in days, just timing there? Anything to be worried about?

Nitin, I don't know if you're backing out the lost AR securitization --

It was up like three, four days, adjusting for that which is not much.

Yes on our calculation, maybe we have a different basis, we don't see an increase in days.

Okay.

I think we're doing fairly well there.

Good. In the back half, if you -- assuming yoe enter into a new securitization facility, that itself would mean that in the back half you could be generating, I don't know, 100 million from working capital if there is a new securitization, just from a seasonality and timing point of view. Am I off there?

Well, I don't want to get into specific numbers, but I will tell you, again that we are working on an AR securitization facility program, and obviously that would be very beneficial for us in helping us finance working capital and we're committed to that. But more importantly, we're also making -- we've got a lot of effort on our fundamental working capital, improving turns and inventory, reducing days of inventory, and then really lowering our past due receivables and managing our customer terms as best we can in this very tough situation. So that's a big focus for us. It's not just going after securitization programs, but it's really improving the fundamental turns as well.

Great. Lastly, for the government process, amendment process, I guess you're going to be giving a lot of guidance. I wonder if would you put some out publicly as well?

I'm not sure we understand the question. We're not giving guidance.

Okay. Oh, you are not, even as part of that. Okay, that that's fine. Thank you.

Okay. We're not giving any public guidance through the covenant process.

Okay, great. Thank you.

Our next question comes from Philip Volpicelli. Sir, your line is open.

Thank you, good morning. Just with regard to the indenture, the way I believe it's stated is that once you have reached a covenant, someone has to send you a written, I guess, notice of that default, then you have a 30-day grace period from that point. One, have you received a written notice of default, and two, when does that 30-day grace period begin?

Well, first off, we have not received any notification.

Okay. So assuming you get in that the next couple days would you have 30 days from then to either reach a forbearance agreement or reach an amendment before you would be in default?

I don't think this is an appropriate place for us to discuss the legality of the indentures, but Phillip I would go back and reread what you're looking at because I think you're probably mistaken in some of your notes. Obviously this is not a covenant default on our bonds.

But there's a cross-default between the bonds and the bank, isn't there?

I think you need to go back and look at that, but I would suggest that each group goes back and looks and understands what the indenture. We're not -- it's not appropriate for us to be giving you guidance on how to read the indenture.

Okay. I'll call you off-line and we can double-check. In terms of raw material costs, can you go through wood and steel and fiberglass and other costs and just give us a sense of what the magnitude increases are there and also if you're willing, the percent of your total raw material costs that each of those might compose?

we don't do the latter, but we'll do the prior. And they're all high. Steel, we're probably in the 25% range. If you look at the components going into a fiberglass door and you include the resins, the glass, the foam, et cetera, you're probably in the high teens.

Resin in general because of oil prices is up in that level. I think everyone is aware that diesel fuel today, although I think it's come down from a high of $4.75, it's down to $4.40, maybe $4.50. If you compare that to where that was in 2007, around the same time, we were in the mid $3. So that's up 30%. And that has a big factor on our costs.

Quite frankly, because of the lower demand in the markets, even though we have a great team in place that's really helping focusing on logistics, our [tube] utilization, as you would expect is not as good as it was a year ago when market conditions were better. So that impacts our freight costs as well. Wood is a mixed bag. Engineered woods are up quite a bit.

Again, because most engineered woods have a pretty substantial chemical and resin component as opposed to in certain cases, if you're looking at wood chips and others, that really depends on very specific market conditions, and it's pretty dynamic. It's really an ongoing supply and demand curve that can change month to month depending upon what's happening in any given market. So I kind of covered what most of our big base commodities for you in that analysis.

That's great. That's very helpful. I guess what chemicals and resins should we be looking for in terms of trying to track where things are going? Is it polyurethane?

Urea, methanol would be two of the big ones. Oil. But those would be the ones that we'd track. If you think about our chemical components, urea and methanol go into the resins, would be one. Phenol, with [thothalic] resins would be another one. Then any of the oil-based compounds that go into styrene resins for fiberglass and the product that goes into the polyurethane foam.

Great. That's very helpful. As we look forward, in terms of the other cost save that is you're doing, you mentioned there are some more facilities that may be closed in the third quarter. What can we expect in terms of, I guess the savings that you would be looking to get from those and the two facilities you closed in the second quarter? Can you give us a number there?

We really can't give you a number. Obviously we're -- our track record is to take the aggressive cost actions when we need to. We have demonstrated in that the past, and I believe we'll continue to demonstrate in that the future.

And again, it's a process of trying to overcome the continuing pressures that we have on volume, and so our goal has always been that we're going to work as hard as we can, although it's not necessarily always practical to try to [variablize] every cost. Obvious we haven't been as successful as we'd like to be, but we continue on as that being our primary goal. Obviously the lower the demand gets in the marketplace the harder that becomes.

Last question for me on capital expenditures. The first quarter was about 7.3, second quarter about 6.2. Is that the right trend level to think about for the second half of the year or can you take it down even further than that?

I would say the one thing that you have to remember in the second half of the year is we do have the spending for the Mac project that will begin down in Laurel, Mississippi. That total project has a spend of about $45 million over the next two years. And so we'll start spending -- that will be in addition to at least in addition to what we're spending today.

It will drive the second half run rate higher because of that project.

Can you give us a sense over the next two years? Is it front end loaded? Is it back end loaded that 45 million?

It's pretty steady over that time frame. So almost on month to month basis starting in the fourth quarter over the next 18 months. We have to have the project on-line by September 10th. It is actually a pretty exciting project for us in some ways because we've come up with some real interesting ways. Typically a big environmental project like this has no pay- back at all.

Not that this has a positive pay back but we've been able to come up with some innovative engineering approaches to not only get some energy benefit out of this project for the long haul for the $45 million that we're spending. But also working together with the EPA and the Mississippi VEQ, we were able to really come up with a new technology that is going to dramatically reduce greenhouse gases than if we had just used a Mac technology.

That's part of the reason why we got an extension, and that also helps us with our -- obviously our cash flow. So there was a nice cooperation between us and the environmental regulators to come up with a project that gave us more time to do the right thing from an engineering and innovation perspective, and that's going to help the environment in the long haul, and our overall operating costs will end up being lower.

So this something, this isn't discretionary. This has to be spent.

Oh, yes.

Okay. So if we figure six to seven million of normal CapEx, another five or six million per quarter from this project is kind of the good run rate to use for the next six quarters or so?

We're going to manage our CapEx carefully. We want to be careful to give looking guidance but you have our run rate and you know about the Mac program and you are going to have to calculate the numbers from there.

Great, appreciate it guys. Thanks.

Okay. Operator, one more question.

Our next question comes from Cliff [Sulson]. Sir, your line is open.

Hi, and thank you for taking my question. So I was just hoping you could do two things. Could you update your business mix for us? I mean there's obviously been a large decline in residential, so I was wondering if you can give us a mix of sort of new residential construction, remodel, and then nonresi as kind of for your current base of business?

I think the best way of looking at our business at a high level is just use one-third, one-third, one-third. One-third being new construction in North America, one-third being RRR in North America, then one-third being Europe and the rest of world.

Got it. And have you seen any change in your vendors with regard to terms of trade as maybe you have a covenant violation and perhaps they're becoming more wary of your credit?

Obviously we have great partnerships with our vendors. We've had and most of our vendors have been long-term partners with us, so we continue -- obviously they continue to value that, and so do we. We have -- they understand our liquidity position and the amount of cash that we have today, and so we're managing that as anyone would in this environment. And we continue to get support and we expect to continue to get support from our vendors.

All right. Appreciate it.

Thank you.

Thank you for joining the Masonite update call. Operator, we are going to sign off now. Appreciate it. See you next quarter.

That concludes today's conference. You may disconnect at this time.