Masonite International Corp (DOOR) 2015 Q3 法說會逐字稿

Welcome to Masonite's 2015 Third Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the management's prepared remarks, investors are invited to participate in a question-and-answer session. Please note that this conference call is being recorded.

I will now turn the call over to Joanne Freiberger, Vice President and Treasurer. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. I'm joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer; Larry Repar, Executive Vice President, Global Sales and Marketing and Chief Operating Officer; Tony Hair, Vice President, Business Leader - Residential; and Russ Tiejema, our new Executive Vice President and Chief Financial Officer who officially joined our team on Monday.

The information for the webcast presentation that will accompany today's call is available on our Web site at www.masonite.com under the heading Investors. During this call, we will be making forward-looking statements that are subject to risks and uncertainties, which are described in greater detail in Item 1A of our Annual Report on Form 10-K, which is available on our Web site. Actual results may differ materially from those expected or implied. Forward-looking statements are as of the date that they are made and we undertake no obligation to update any forward-looking statements beyond what is required by applicable securities law.

In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measure is included in the press release and in the appendix of today's presentation, both of which are available on our Web site.

On today's call, Fred will begin with the Company and industry update, Larry will discuss recent acquisitions, then Tony will discuss some specific residential growth initiatives, followed by my review of the third quarter financial performance, and Fred will then summarize our prepared remarks before opening the call up to a question-and-answering session.

And with that, let me turn the call over to Fred.

Thanks, Joanne. Good morning and welcome everyone. Before we begin, I would like to take just a moment to welcome Russ. He just started on Monday, so we figured we would give him a pass on presenting during this call. But we are really excited to have Russ join the team. We believe that his experiences with both GM and Lennox make him a perfect fit for Masonite. So, welcome Russ.

Thanks, Fred, and good morning everyone. I am very excited to be here at Masonite. While this week marks my official start, I did have the fortunate opportunity to participate in the Masonite leadership strategy meeting two weeks ago, with the Top 75 or so leaders in the Company. I was impressed by the talented people here at Masonite and even more by passion and commitment they exhibited for the future of this Company. So in the coming weeks, I look forward to meeting many of you who are joining us on this call here today.

Great. Thanks, Russ. So let's get started. The third quarter of 2015 represented our sixth consecutive quarter of double-digit adjusted EBITDA growth, with 25% growth or higher in all six quarters. Adjusted EBITDA increased 42% in the third quarter and adjusted EBITDA margin increased 310 basis points to 10.6% compared to the prior year.

North American average unit prices continued to improve and reflects the strengthening value preposition supported by our continued focus on and investment in improving the customer experience, while achieving fair value for our products and services. The third quarter marked the 10th consecutive quarter of increased average unit price in North America. Previous price actions combined with the improvement in mix resulting from new product introductions and increased focus on selling door systems contributed to the 7.2% AUP increase in the third quarter compared with the prior period.

The Europe, Asia and Latin America segment delivered a 4.8% increase in AUP in Q3 and in fact all three reportable segments experienced increases in average unit price in the quarter. So following the housing recession, a key tenet of our vision was become the indispensable door provider to our customers, and by doing so, build long-term sustainable value creation for our investors. This tenet underlies our product strategies, our channel strategies and our acquisition strategies as we continue to invest in and provide our customers with a higher value, more complete products and service offering, with a larger proportion of our products being sold as either pre-hung machine and/or fully finished door systems.

Not only is the effect of this strategy evident in our continued improvement in AUP, a function of both price increases as well as mix improvement, but the success of this strategy on our overall profitability is fully apparent on this graph. Since 2010, our trailing 12-month adjusted EBITDA has grown by more than $100 million, an increase of 129%, while sales have increased by 33% on a more modest 13% increase in the number of doors sold as we focus on value over volume. During the same period, our adjusted EBITDA margin increased more than 400 basis points. These results have been achieved through the balanced and purposeful execution of key initiatives, including investing in the right people, programs and technology to enhance the overall customer experience, developing digital technologies and customer interface tools in conjunction with our channel partners that enhance the shopping experience for consumers and provide better understanding for upgrade options, introducing new innovative high-value products with increased emphasis on fully-finished door systems, optimizing our portfolio, by acquiring companies with either higher-end product offerings, integrated door system offerings or unique routes to market, in some cases all three, and at the same time, disposing of companies that no longer fit our strategy.

All of this, while maintaining our strong foundation of driving operational efficiencies through our lean enterprise initiatives to lower cost, improve the quality and shorten lead times. These initiatives are designed to allow us to achieve fair value for our products and services by delivering a superior value proposition, which includes comprehensive value-added customer solutions with premium products and best-in-class service, while simplifying the door purchase process, which we believe will continue to drive adjusted EBITDA growth and long-term shareholder value.

Before Joanne takes us through the more detailed financial results, we thought it would be helpful to discuss some recent specific examples of how this strategy has manifested within our business. So I will now turn the call over to Larry to discuss the strategic alignment with our three recent acquisitions, after which Tony will share progress on a number of important growth initiatives within the North American Residential business. Larry?

Thanks, Fred, and good morning everyone. The recent transformation of our European business is a great example of how we are employing acquisitions to accelerate value creation through a superior product and service proposition. Prior to 2014, our Premdor door business in the UK for the most part sold interior door slabs to our distribution and retail customers. In 2013, the business contributed mid-single digit EBITDA margins and AUP of our product offering was essentially in line with the overall Company average.

Considering we are already a significant player in this space, just expanding share was not necessarily the most attractive strategy. Instead we embarked on a plan to broaden the scope of our UK business. It started with our 2014 acquisition of Door-Stop, which provides premium-priced exterior fiberglass door systems directly to contractors who then install the doors in consumers' homes. DSI's online and three-day service capabilities have positioned the company as the most dependable provider of entry door systems in the UK, becoming an indispensable partner for contractors.

Importantly, the unit prices for DSI's products are on average six to seven times higher than the legacy UK business. And in the 18 months since the acquisition, DSI's sales have grown by 35%, while sustaining high-teen EBITDA margins. Building on this success, this past quarter we added to the UK portfolio with the acquisition of PDS, a high-end millwork operation providing fully-finished custom door systems to large renovation projects that, like DSI, command a much higher unit price.

Finally, we also added National Hickman, previously a major purchaser of Premdor's interior slabs, who provides added value and therefore higher-priced fully-finished door sets directly to builders of private residences. With these combined businesses, Masonite now has a full product line in the UK and the ability to service multiple channels, including merchants, specialists, installers and homebuilders, ultimately allowing Masonite to capture more value through the supply chain at significantly higher AUPs and margins.

Turning to slide seven, you can see how this translates to measurably improved financial results. With the divestiture of our underperforming door business in France, ongoing solid performance from our legacy Premdor business in the UK and these two recent acquisitions, our adjusted EBITDA in the Europe/Rest of World segment for the first nine months of 2015 has nearly tripled to $28.5 million from the $10 million reported in the first nine months of 2014.

Importantly, adjusted EBITDA margin for this segment more than tripled during that same time period, increasing to 10.9% year-to-date from 3.4% reported for the 2014 comparable period. And given that much of this transformation was executed mid-third quarter, we expect continued improvement in the future as we reap the benefits of a full year with our improved European footprint as well as operational synergies as we integrate the new businesses. We have once again taken a similar approach in North America, to capture additional value through superior product sales and a better value proposition via our recent acquisition of USA Wood Door. USA Wood Door is a supplier of architectural and commercial wood doors in the Eastern United States, providing value-added services for both unfinished and pre-finished doors to non-residential customers.

USA Wood Door sources door slabs through Masonite's existing architectural and commercial door manufacturing footprint and provides value-added services of resizing, machining and custom color matching doors, largely for Masonite's existing end customers. The doors are offered in smaller lots and with quick-ship options, which is important, as speed wins in today's market, and customers recognize and willingly pay and support additional prices associated with those value-added services.

As you can see, it has been an exciting four months from a portfolio optimization perspective with very solid alignment to our value creation strategy. I'd now like to turn the call over to Tony Hair to discuss some of the new products and the marketing initiatives our Residential business is pursuing. Tony?

Thank you, Larry, and good morning everybody. Masonite continues to be an industry leader in door design and product breadth and that was validated once again in the most recent Lowe's product line review, where we gained additional business with the customers specifically requesting to use the Masonite brand to replace their former private label brand. We worked with the Lowe's team to help reconfigure the door aisle as we continue to transition Lowe's stores to Masonite branded doors, which we expect to complete in the first quarter of 2016.

As you can see from these pictures, the store resets using our industry-leading brand provide for new updated displays with bold new merchandising and easy-to-follow color-coded packaging. The exterior displays offer the consumers multiple options for door styles, new decorative glass designs, a larger color palette, as well as upgrade options for security features. On the interior door category, our new displays highlight our pre-finished program for both molded and stile & rail wood doors and again the new color-coded packaging has easy-to-read icons for a simplified shopping process [in yard].

As we shared on previous calls, we expect our net sales to increase by roughly $50 million annually from the new Lowe's business. Today's consumers are demanding newer, more innovative designs for their doors. So at Masonite, we continue to invest to meet those demands by expanding our product offering, particularly in these higher-value categories shown on slide 10. The Heritage Series of interior doors combines the authentic lines of shaker style with the durability of molded panel engineering. We initially launched the product line in late 2014 and added more designs earlier this year and while it still remains a relatively modest total in the scheme of door volume, customer response to the Heritage door series has exceeded our expectations through the first nine months of the year. In fact, sales of these higher-value, higher-priced Heritage doors are 13% above our initial expectations.

Barn Door Kits were launched exclusively at The Home Depot this fall and early customer feedback also shows this product is being extremely well received. A key element in this program is that the entire kit is sold in one package inclusive of hardware, simplifying the purchase process and providing a total solution for the consumer. As such, the Barn Door Kits are set up to be a relatively easy do-it-yourself project. While still pretty affordable at $499 retail, it's also a considerable upsell from a $70 hollow core six-panel prehung.

Vista Grande is our new line of exterior fiberglass doors, which we launched in our distribution channel this year. The doors benefit from the new technology that allows a larger glass pane with sturdy fiberglass frame. It's a great exterior door and provides us a viable option to more effectively compete in the patio door category. Sales of Vista Grande are performing at nearly 10% ahead of our initial expectations. And finally, our newest exterior door product is the Everland door, a new smooth-finish fiberglass door, which is now available through The Home Depot. Everland doors provide consumers the authentic look of real wood with the durability and low maintenance of fiberglass. The Everland door would support an AUP of five to six times higher than the steel slab sold in distribution. And the door pictured here with double sidelights and an overhead transom would support our strategy of complete door solutions and have an AUP of 25 to 30 times higher than the [steel glass].

Turning to slide 11, we also continue to drive greater awareness through digital marketing and down channel selling initiatives to help our channel partners grow their business more effectively. We recently announced an exclusive relationship with Angie's List, the leading Web site that connects consumers with local businesses and installation services. Angie's List will have a dedicated team assigned to the Masonite Preferred Remodelers program, providing their members with Masonite product information and linking them to train Masonite Preferred Remodelers in their local area.

Tomorrow's consumers are expecting the same high-quality products but with increased design option and aesthetics, more features and a more streamlined purchasing and installation process. Our goal is to lead this transformation, making the door category more relevant in the eyes of designers, builders, contractors and end consumers. By making it easier and more attractive for customers to undertake door renovation and upgrade projects, we believe we can enable further share growth by increasing the overall size of the [pipe].

I will now turn the call back over to Fred.

Great. Thank you, Tony and thank you, Larry as well. So as you can see, Masonite is in a business of selling high-value products and services, and delivering an unparalleled customer experience. We believe that complete door solutions, innovative products, superior service and simplified purchasing enable premium pricing and will drive future growth and continued success over the long term.

So with that, let me now turn the call over to Joanne to discuss clear evidence of this in our third quarter financial performance. Joanne?

Thanks, Fred. So as Fred previewed, overall we had a great third quarter with strong adjusted EBITDA growth on mid-single digit constant currency net sales. Reported net sales in Q3 were essentially flat when compared to the third quarter of 2014. The 5.5% foreign exchange headwind and 1.4% dollar volume decrease were offset by a 6.6% increase in average unit price. Excluding foreign exchange, net sales increased 5%.

Adjusted EBITDA increased 42% to $50.5 million compared to the third quarter of 2014. Excluding the negative impact of foreign exchange, adjusted EBITDA increased 49% versus the third quarter of 2014. This was achieved despite a 6% door volume decline, of which roughly 40% was attributable to the sale of our door business in France. It should be noted that on a dollar volume basis, this decline was just 1.4% due to improved price and mix, reminding us again that in our business not all units are created equal.

On slide 14, we provide a summary income statement of our 2015 third quarter results. Beyond the net sales and adjusted EBITDA numbers already cited, gross profit increased 32% to $87.5 million or 18.4% of net sales, an increase of 450 basis points versus a year ago. SG&A increased $5.7 million to $59.6 million. The combination of significantly higher gross profit balanced with targeted SG&A investment, resulted in a 310 basis point expansion in our adjusted EBITDA margin from 7.5% last year to 10.6% this year.

Turing to slide 15. We examine the change in net sales and adjusted EBITDA for our two large reportable business segments. Net sales in our North America segment increased 1.2% or $4.5 million. Excluding the $16.5 million negative impact of foreign exchange, net sales increased 5.7%. Average unit price increased net sales by $26.5 million or 7.2%. This increase was partially offset by a 1.6% lower dollar volume, which decreased net sales by $6.2 million. Higher average unit prices were the primary driver behind the $5.7 million increase in North America's third quarter adjusted EBITDA, which was up nearly 16% year-over-year from $36.3 million last year to $42.0 million this year.

North America adjusted EBITDA margin in the third quarter was 11.2% compared to 9.8% in the third quarter of 2014, a 140-basis point improvement. Net sales in our Europe, Asia and Latin America segment decreased 6.5% or $6.1 million compared to the third quarter of 2014. Excluding $6.9 million of foreign exchange headwinds, net sales increased 0.9%, with positive performance in the UK, almost entirely offset by the disposition of the door business in France.

Average unit price increased net sales by $4.5 million compared to the prior-year quarter. This increase was offset by lower dollar volume which decreased sales by $3.8 million. Adjusted EBITDA increased $6.5 million versus the third quarter of 2014. Strong double-digit adjusted EBITDA growth in the UK and the year-over-year comparative benefit realized from the disposition of our door business in France, drove the increase in this segment. Adjusted EBITDA margin for this segment was 9.6% in the third quarter, a 760 basis point improvement compared to the 2% adjusted EBITDA margin in Q3 of 2014. We expect this margin improvement to continue as the adjusted EBITDA margin for Europe, Asia and Latin America segment on a pro forma trailing 12-month basis, excluding France and including a full 12 months of PDS and Hickman, was actually 13.6%.

On slide 16, you can see that the focus on our higher value products and disciplined financial management has improved our free cash flow generation over the past four years. On a trailing 12-month basis, we generated $139 million of free cash flow at the end of the third quarter, compared to $61 million for the same period last year. Adjusted EBITDA continues to increase, as Fred showed you at the beginning of the call. We're encouraged by these results and believe they represent clear evidence that our balanced growth strategy and our focus on business execution is working.

Given our strong performance in the first nine months of 2015, our recent acquisitions and the pace of performance we've seen in October, we are increasing our 2015 adjusted EBITDA estimate to a range between $193 million and $196 million on net sales that we believe will be relatively flat versus 2014.

And with that, I'll now turn the call back over to Fred to summarize today's discussion.

Great. Thank you, Joanne. The strategies we are pursuing are delivering strong financial performance. Gross profit increased 32% and gross margins expanded 450 basis points. We've reported six consecutive quarters of adjusted EBITDA growth of 25% or higher. We believe the steps we have taken are transforming the business and will deliver an unparalleled customer experience for years to come. The acquisition of PDS, National Hickman and USA Wood Door broaden our product portfolio and expand our service capabilities across multiple channels. And the disposition of our door business in France was another positive step in transforming our business to focus on improved financial performance. We continue our commitment to driving operational efficiencies, incorporating a lean enterprise operating system throughout our organization.

At this time, I want to take the time to thank all of our hardworking employees throughout the world for their continuing efforts during the first nine months of 2015. Together, we are committed to making Masonite the best provider of building products in the eyes of our customers, our employees, our shareholders, our suppliers and our communities.

And with that, we will now like to turn the call back to the operator to open up the line for questions.

Thank you, Mr. Lynch. (Operator Instructions) Alex Rygiel, FBR & Company.

Couple of quick questions. First, you just made a comment with regards to the pace of performance, actually Joanne made it, pace of performance in October. Could you expand upon that a little bit, and also help us to get a little bit more comfort as to what kind of volume growth in North America you might expect in the fourth quarter?

Yes, so, I'll just talk to October at this point in time. I don't want to give guidance other than what we have given on the adjusted EBITDA side for the full year. October was relatively positive to last October, sales were up low-to-mid single-digits and that's actually in spite of the fact that one of our large retail customers has made a decision to back down on some inventory as they come to their year-end, which was $7 million in October. So it was definitely a stronger month on a year-over-year basis than what we had seen over the last five or six months.

And then, is any of that attributable to the [loading for Lowe's? Was that a 1Q event]?

The loading for Lowe's would have been very minimal on that. It is picking up and it will pick up as we get through the November and December time frame. I would say that Tony talked about $50 million. You would expect that to be roughly $12.5 million a quarter because this is being done through the first quarter, as well as you are probably looking at only $5 million impact at the most, I would say, for the fourth quarter.

On a net sales basis.

On a net sales basis.

Adjusted EBITDA would actually be much lower than that because there were some investments in setting up fee and the displays throughout the store that go to the expense line.

And lastly, looking at the bigger picture, could you help us to reconcile in North America your negative volume mix versus maybe what the market has done over the last six months, and maybe help us to better understand how the market might change in the next three to six months, and how it might lag housing starts?

Yes. You know, again, I think there are two parts to the equation, one is what's happening with the market with respect to housing starts. We do see housing starts beginning to pick up. We also see the fact the lag continues to be extended and we continue to hear that from both builders and others, so we try to take that into consideration as we think about our operating cadence and our planning for our business.

Again, I think the real issue is our focus continues to be, as I think we tried to make clear today, around ensuring that we're focused on that higher end mix that we believe is much stickier from a share perspective. That's where our investment dollars have been. That's where consumers are heading, and that's where we clearly want to play. As we talked about on the -- I think on the lower end of the market, that share is -- the term we like to use internally is, it's fungible and temporal, and so it can shift over time, but the sticky share is what we want to drive in the long run.

John Baugh, Stifel.

I wanted to jump right in on the -- I don't know, Europe/Rest of the World. As we know, global GDP is slowing, but I am just curious, should we just not really worry or think about that influencing your business given all the mix change of your business there, maybe share gains, and any color on how you're doing relative to those markets, and if you are concerned that slowing markets would impact your business or not?

Yes, I would say that we've been concerned for quite a while about our European footprint and quite a while about the impact on Europe, particularly in the business that we had in Eastern Europe that were relatively subscale, and the fact that we didn't feel that our position in France matched the strategy that we had for the Company going forward. So I will tell you, John, where we stand today is, we feel really good about what we've done in Europe. We had set out a plan and a strategy to change our position there.

I think if you look at the first nine months of the year, you can see that relative change on a year-over-year basis is quite extraordinary. And quite frankly, it doesn't reflect the real potential because we have only a partial quarter. That has affected that. So our position on a global basis today, particularly in the Europe, Latin America, Rest of the World segment, we feel really positive about that and positive about the prospects going forward, and positive about our positioning in those markets not only from a product perspective, but also how we are set up from a channel perspective.

And then a follow-up on the Lowe's business. Once we get it fully up and running which maybe isn't until Q2 and we are doing the $50 million pace, how do we think about that in terms of influencing the margin?

Yes. As we've said in the past, we do not give customer-specific margin and we won't do that going forward. That's too competitive information. But I will say though that we did mention when we won the business, we not only won the business, but instituted a price increase through that process.

Al Kaschalk, Wedbush Securities.

I want to maybe just focus on the volume topic, particularly in North America, Fred is there any way you can help us parcel out what is strategy related, in other words, you are less focused on the lower end or unprofitable and maybe just market volume characteristics?

Maybe a way that we can help that is, people have asked well if you think about the units that were -- on a year-over-year basis, what kind of units did you lose during that time frame? I think we mentioned -- Joanne mentioned during the call or one of us mentioned during the call that about 40% of that was due to France. If you look at the rest of that component tree, we had about -- if you think about from a North America perspective, about 20% of that was related to export business from North America to other markets that were I'd say more of a one-time in nature in prior years. That was about 35%.

Canada is down around 30%, now that's partially due to the -- Canada makes up 15% of the total; but the North American piece, the remaining piece, is roughly 30%. And again that's in large part a combination of what's happening in the marketplace itself. The other piece is also steel. We had mentioned that we had some steel business down relative to the fiberglass. Clearly, we are focused on fiberglass. We have a very good position in steel. Steel can be more competitive at the lower end, an area that we will continue to look at. But as we said earlier, I think when we think about those volumes, they tend to be fungible and temporal in nature. And our focus is on making sure that we are really providing the sticky volumes with our key customers and our key channel partners, because the rest of that volume will ultimately flow through.

That's helpful. So I guess we should start to see some of the -- [I won't say] run-off meeting the comp, it's less challenging with perhaps a more positive volumes relative to the market going forward?

And I think that's fair. And again, our focus is on the value, right? Our focus is on just driving unit volumes. I think it's important that the discussion goes back to sales volumes versus unit volumes, right, because we are focused strategically on driving mix and value. I think we try to make it clear, all (inaudible) great. All units are not created equal in this business, right. You can sell -- as Tony mentioned, a steel slab going into distribution versus an Everland door with two sidelights and a transom, the difference in AUP is 25 to 30 times.

We want to sell one of those doors all day along compared to a steel slab into distribution. So, we are trying to be really thoughtful and intelligent about how we run this business and where we put our resources and where we focus our efforts. We don't think of ourselves as a commodity unit volume company; that's not where we are going to play.

If I may transition quickly with my last one here, the changes going on in the Europe/Rest of the World, can you help us -- can you just clarify is this more of a sell-in versus sell-through business? Or given the nature of your customers, think about it more as a sell-through business, getting at the question about inventory build or slowdown, acceleration, just want to appreciate the dynamics going on there?

This is in Europe?

Yes. Just because of -- your customer now I think is more -- I saw was more of the contractor or the builder versus -- that's what I am getting it.

Yes. So I think what's happened in the UK in particular, is we have just taken a much larger position in the marketplace servicing all of the customers, right, all of the channels. What's exciting about the business in the UK particularly in DSI is that the route to market has fundamentally changed there and we've been able to take advantage of that, where the sales [of direct to contractors is the home] for renovation project in a much, much faster time, as Larry mentioned, right. We're providing products and installs to customers in three days.

So what I would say that's happening there is, the world in the UK and the building products world has taken advantage of the digitization trends and the trends in way consumers purchase and shop and quite frankly, we are at the leading edge of that.

Bob Wetenhall, RBC Capital Markets.

Just wanted to ask this and I might be getting this wrong, so be gentle with me. I thought you guys got $26 million in top-line growth this quarter. That was all attributable to price increases or essentially stemming from better performance on AUP.

Correct.

And you guys had given guidance before and said that you had a -- previous price increases went into effect in 4Q 2014 and then you said that there was another price increase in 1Q 2015 that went into effect in March, and you suggested that each of these would have like $5 million impact or essentially $10 million. So you are getting $26 million from AUP this quarter and I thought the benefit of the two price increases was $10 million. So I am just trying to understand what's the $16 million? Is that all mix and upsell because you are executing well?

Yes, that's the way to think about it. If you think about that movement, there is a couple of things that impact, right? You have the price and mix that's driving it. It's a little bit more price than it is mix, but it's a combination of those two that are really making the difference in the business, probably in a range of 60% to 70% -- 60% price, 40% mix, kind of how to think about it.

So like on that $26 million, it's 60% price, 40% mix. Is that correct?

Give or take, yes. I'd probably get my math corrected by Joanne and Brian at some point, but it's in that range.

Of course.

I'm sorry, I just wasn't aware that the mix was that relevant, I mean that much of a powerful factor driving top-line above profitability. Just on a more of a housekeeping issue, can you give us a step through for top-line and EBITDA in Europe? You got acquisitions in the UK and the disposition of the French business, and then the exit from Israel. Could you guys kind of step us through that?

Sure. We'll take a quick look at what that looks like. So, you want to do it for Q3?

Yes sir.

Alright. So, for Q3 last year, I think we were roughly $1.9 million. We are at $8.4 million. And the way to think about that is it's a combination of -- I guess, here's a better way to answer that question I think, Bob, if we think about where the business is going forward, it's basically we are taking it from this roughly low-to-mid single-digit EBITDA margins. Well we expect to have as we come out of this quarter and we have full quarter operating results, as we mentioned in the last call, we think it's about 1,000 basis point improvement. And that 1,000 basis point improvement is the fact that reality is, last 12 months France had been zero to negative from an EBITDA perspective, and the businesses that we bought in combination were in the low-teens from an EBITDA margin perspective.

To give you just a little more color, Bob, on remembering that the third quarter, if you are focusing on top-line, the third quarter only had a partial quarter of PDS and Hickman in it. So from a net sales standpoint, those two combined were probably worth about $25 million in the quarter and that information will be out in the Q when it's filed at the end of the week.

And the only -- following point on that is, you do have the effects of step-up accounting on finished goods inventory for those. So, the margin for that $25 million would have been low-to-mid single-digits for this short and stub period, because of step-up accounting, which eventually, as we work through that, that finished good inventory, step-up purchase accounting, we work through that, it will go to normal margin basis.

Right. And then the disposal of the France business would have been a big negative on the net sales line and we gave you that by quarter in last quarter's presentation in the appendix.

Yes, it should be noted as we think about that, and here's another point, I wanted to follow-up on the discussion we had earlier on sales in October. Our Europe/Rest of the World segment will actually be negative, actually negative in sales in October. That was driven by the fact that the France business had higher unfortunately less profitable sales than the acquisition businesses that are replacing that, which are lower in number, but clearly much more profitable. So, it kind of goes back in discussion we had earlier about, not all units are created equal.

To give you just a little more color, Bob, on remembering that the third quarter, if you are focusing on top-line, the third quarter only had a partial quarter of PDS and Hickman in it. So from a net sales standpoint, those two combined were probably worth about $25 million in the quarter and that information will be out in the Q when it's filed at the end of the week.

And the only -- following point on that is, you do have the effects of step-up accounting on finished goods inventory for those. So, the margin for that $25 million would have been low-to-mid single-digits for this short and stub period, because of step-up accounting, which eventually, as we work through that, that finished good inventory, step-up purchase accounting, we work through that, it will go to normal margin basis.

Right. And then the disposal of the France business would have been a big negative on the net sales line and we gave you that by quarter in last quarter's presentation in the appendix.

And then maybe Joe, if you could just kind of tie things together a little bit of the comments, how should we think about pre-buy in 4Q, given you guys are in the marketplace with the latter talking about price increases versus typical organic growth? And help us step through the $10 million increase in EBITDA guidance.

Sure. I'm taking your question on price increases first. We have a consistent practice of really not talking about price increases until after they are implemented in the market. And so, it is -- and having said that, it's very typical for us to communicate with our customers several months in advance of a price increase going out there. So we haven't put 2016 guidance out in general, and given our stands on communicating on price increases, I can't really give you more color on that right now.

But, having said that, obviously we do continue to pursue strategies that result in receiving fair value for our products and our services. The step-up in the adjusted EBITDA guidance increase is a combination of factors. It's the acquisitions performing really well since we closed the deals, both PDS or all PDS, Hickman as well as USA Wood Door. And then, the pace of what we saw on October which Fred already drilled down into a little more that North America is doing really well, and our confidence is much higher -- high enough so that we feel comfortable increasing that guidance range for adjusted EBITDA.

Got it. Just one final question about Fred's comments about mix. I don't understand this, I've followed you guys for a couple of years, is volume not going to be a very helpful indicator going forward just because there is such a shift like almost a paradigm shift in your mix? I am just struggling how to think about volumes from a relevancy standpoint, if you are almost migrating the business out of the commodity side of the door market into the upper end? Thanks and good luck.

Okay. Thank you, Bob, and that's a fair comment. Sales volumes will continue to be important. Unit volumes obviously are less interesting because we're -- you are missing the large part of the strategy in the story. Other questions?

Mike Wood, Macquarie Group.

Hi good morning and thanks for all the color. I was hoping you can give some more color in terms of the actual volume decline you saw in Canada, and I believe some of the start activity there has been picking up. Is that going to help going forward or is there other competitive pricing issues there?

Yes, I would say the -- you have a couple of issues going on in Canada. Clearly the starts hopefully will start picking up, I think if oil prices [also] start picking up. That's an economy that's highly related to oil pricing. With that said, there is a significant lag from the time a housing start occurs till the time we actually drive -- until we actually get a sale. As far as the change in the government there, I think it is yet to be seen what policies will take place with the new Prime Minister and the Liberal majority. So, we have a resident Canadian sitting in the room, Larry Repar who has been trying to educate us on Canadian politics and understanding how that could influence what the market will do.

We are seeing, as we mentioned earlier, some of the same effects in Canada because of the currencies which we did see some of the effects in Canada with regards to the steel door volume. And as I said, on that lower end of the market, making decisions on how far we raise prices, how much we should raise prices, how do we deal with currency, because that's a whole different discussion around price increase when we think about currency related price increases. They are not necessarily increases in US dollar value, but they are increases in local Canadian dollars, and so that always has an impact on the business as well.

So I would say that, as we think about Canada right now, it's a market that I wouldn't say is distressed, but it's kind of relatively flat. We've had some difficult times over the last six months. We do think it will improve going forward and we will continue to watch it closely. But our strategies are no different in Canada than anywhere in the rest of the world. It's really about driving value over volume.

Okay. And I recall at the beginning of this year, you talked about a record year of product innovation. We're clearly seeing that pay off in the mix up. But I'm curious going forward, how aggressive you could be continuing to push that mix up with investment or is it something that once we anniversary, this year's record product innovation, we will start to see that benefit subside?

I won't give any specifics, but I will tell you, we would be really disappointed if this doesn't seem to be a major portion of our strategy.

Nick Coppola, Thompson Research Group.

I want to continue on the positive mix impact and I'd imagine that the majority of it was within your residential door market, and can you also talk about performance in non-res architectural doors and the impact that's having on your mix as well?

Yes. So I will tell you that the mix impact is across all aspects of the business. It's through our acquisitions, it's through our businesses in Europe, the UK, Europe/Rest of the World segment, it's in our residential in both wholesale and retail. So, it is a strategy that is all consuming across the company, and of course in the non-residential space as well. So, we've had some -- if I think about this year, we didn't talk specifically about it, but we've had a number of new product developments in the non-residential space with regards to some of our core activities, which are the materials that go inside the door. Because we are so backward integrated, it's been an interesting opportunity for our team in Chicago to develop some new materials.

And then, from an STC perspective, the sound transmission [preference] we've offered a bunch of new products this year in working with sound attenuation type products, which is becoming a big issue, or at least a big expectation from whether it's hospitals or hotels, how do they reduce sound in the buildings and between rooms. There is a lot of recent research that shows that patients will actually heal better and faster and it will be cheaper for the hospitals if their sound attenuation is better in the rooms. So, there is actually a cost benefit to them buying more expensive doors. So, that's an example.

And then of course, the Harring acquisition was, earlier this year, which -- I guess it was December of last year, which we didn't speak to specifically in the call earlier, but those high end stile and rail doors are a big opportunity for us to grow, and quite frankly the growth rate of those products has been terrific. It's a relatively small business. But I don't have the numbers in front of me, we can share them at some point, but that growth has been extremely high. One of the highest growing parts of our business on a standalone basis.

And then lastly, as Larry spoke, it's about the speed, I mean, the whole focus is speed to market, something that we were just okay at. I think with the acquisition of USA Wood Door and trying to drive that further in the business and start to look at doing that in more areas, will really help the business be more effective.

That's helpful. And then, I also wanted to ask you about your automation initiatives, something you talked about in the past, so what kind of benefits did you see from automation in the quarter in terms of cost perspective, but also maybe that speed to market component?

Yes. We haven't historically talked about specific benefits of the programs. We have again a whole philosophy that we need to continue to drive automation throughout our business. We have numerous automation projects that are underway at any point in time, some relatively small, to some larger. We just did a -- so for example, Tony talked about the Vista Grande product that we just came to market with, that was a new product design, larger panes of glass, sturdier fiberglass frame. We actually put an automation equipment for that new line so that we made the product automated from the very start.

We are doing a lot of work in the non-residential area, where from a machining perspective trying to drive automation to speed up the machining. And again, it goes back to that speed. Today, our automation -- our existing processes can sometime take several days to move a product through a bunch of machining centers, specifically if it has a lot of complexity with the hinges, with the door closure systems, with the lock systems, sometimes they have wiring going in-between the door.

We are investing in quite an interesting platform of automation in one of our plants in the non-residential space that takes what literally is taking a couple of days down to a couple of minutes. So we are pretty excited about those opportunities. It won't be something that we'll call out specifically. It's just part of our Lean Sigma enterprise focus that we're going to continue to focus on. We do not want to walk away from all of the hard work that we put in place in making our operations significantly more efficient. We also recognize that labor content is something that is an important part of our -- of what we provide and we have to make sure that our labor content is not so high that we get affected by it, but we expect to see labor shortages across this industry in general, so automation is in part a defensive maneuver to prevent that.

Scott Levine, Imperial Capital.

Firstly, Joanne I think you mentioned, [not sure] I have this right, did you say 13.6% EBITDA margin was kind of the pro forma for the European, Asia and Latin American group after all the acquisitions were fully factored in for a quarter, is a good jumping off point going forward, did I not hear that correctly?

What you heard me say was, on a year-to-date basis pro forma, 13.6% is the adjusted EBITDA margin, so that and then improvements that we make to the business, so that would be a threshold margin for you to think about for that segment.

As a follow-up, I don't know if you break out individual countries, can you give us a rough sense -- if you can give us an exact number of how much the UK accounts for within that segment and maybe any other noteworthy other regions to take any consideration in trying to forecast that segment going forward?

Yes, we don't breakout the exact dollar amount, but to give you a perspective, with the acquisitions and again looking at it pro forma, the UK is probably about three quarters of the segment on a net sales basis. They are clearly the most significant.

Right, 75% you said, right?

Yes.

Okay. And then maybe lastly, with the move of market generally with the product mix, can you comment on what you're seeing on the repair and remodel side of your business, and should we be looking at that maybe as a little bit more of a driver of demand on a go-forward basis as your mix continues to move towards the higher end of the market?

I'd say that we would anticipate those markets to be in the low-to-mid single-digit type growth rate. I think what's really interesting though is the work that we are doing with regards to digitizing the process, changing our route to market, making it easier for consumers to shop this category, which quite frankly has never been the easiest category in the world. To buy a door is not an easy thing, and we're going to make it much easier.

What we've seen in the UK is that, by making the process easier, by driving speed and getting it down to a very short lead time, by involving the contractors to a greater extent, and putting the purchasing and selection tool through a mobile application, we believe we are expanding the actual demand in the marketplace. We're getting more people to make that decision to change out their product. That's one of our goals as a company. We believe there's a latent untapped demand of renovation and repair and remodeling that we can tap into, if we can make the purchase process much easier, and that's one of our goals. Angie's List is a good example of how we are doing that.

Got it. Great, thank you.

Okay. Thank you. Alright. I think we are coming close to the end of our time. So, I'm assuming there is no further questions at this point. I just want to thank everyone again for joining the call today and we look forward to speaking to you soon. And operator, if you could please provide the replay instructions to the people. Thank you.

Thank you for joining the Masonite International third quarter earnings call. This conference call is being recorded. The replay may be accessed until November 19. To access the replay, please dial 877-660-6853 or 201-612-7415, enter ID conference 13614492. Thank you.