Masonite International Corp (DOOR) 2016 Q2 法說會逐字稿

Welcome to Masonite's 2016 second quarter Earnings Conference Call. 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. Please note that this conference call is being recorded. I would now like to turn the call over to Joanne Freiberger, Vice President and Treasurer.

Thank you Rob. Good morning everyone. I'm joined in our Tampa office today by Fred Lynch, our President and Chief Executive Officer, Russ Tiejema, our Executive Vice President and Chief Financial Officer, and Larry Repar, our Chief Customer Experience Officer. The information in our webcast presentation that will accompany today's call is available on our website 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 the Earnings Presentation and press release that we have made available in connection with this call. And in our Annual Report on Form 10-K. All of which are available on our website. Actual results may differ materially from those expected or implied. Forward-looking statements are as of the date they are made, and we undertake no obligation to update any forward-looking statements beyond what is required by applicable Securities laws. 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 website. On today's call, Fred will begin with a Company and industry update, Russ will discuss financial performance, and then Fred will summarize our prepared remarks before opening the call-up to a question and answer session. With that, let me turn the call over to Fred.

Thanks Joanne. Good morning, and welcome everyone. We are pleased with our second quarter 2016 results, net sales increased 8% and adjusted EBITDA increased 16%, representing our ninth consecutive quarter of double-digit adjusted EBITDA growth. Adjusted EBITDA margins for the Company increased 90 basis points to 13.3%. Adjusted EPS was $1.02 in the second quarter, a 60% improvement from the second quarter last year. This is our 13th consecutive quarter of positive averaging and price growth, with AUP increasing in all three reportable segments, reflecting the strengthening value position across our product portfolio. And finally we also repurchased 455,000 shares for $31 million during the quarter.

So let's now turn to a review of each of our reportable segments. Looking at the North America residential segment both US housing starts and completions were up year-over-year, albeit at a slower pace when compared to the first quarter of 2016. We are encouraged that there has been more growth coming from single family starts and completions in 2016, as compared to previous years where multifamily homes were driving most of the housing market's growth. As a reminder, single family units typically have about twice as many doors as multifamily units.

The strong housing demand trends in the first half of the translated to double-digit volume and growth in both the retail and wholesale customer channels. Averaging unit price in the second quarter increased 2% compared to the same period last year. The quarter benefited from the first quarter price increase and positive mix for more prehung unit sales, offset by higher growth in interior doors compared to substantially higher priced external doors. Sales for our new product family introduced in 2015 including the Heritage series of interior doors, and the Vista Grande series of external doors continued, to gain solid traction throughout the quarter, and finally, the strength in the US dollar when compared to the Canadian dollar and the Mexican peso, did negatively impact the North American residential segment's adjusted EBITDA in excess of $1 million.

Let's turn to slide six and our European segment. With the UK representing approximately 90% of net sales in this segment, we were closely monitoring the country's vote to stay or leave the EU. As we mentioned on the Q1 call, uncertainty related to the impending Brexit vote put pressure on new residential construction activity early in the year. Given the vote and support of the UK to exit the EU, we believe that this uncertainty will continue to overhang the new residential construction market at least for the near-term. In spite of this uncertainty, net sales for our Europe segment increased 7% in the second quarter. And adjusted EBITDA increased almost 60% compared to the second quarter of last year.

Our DSI business in particular continues to deliver strong revenue growth reflecting the strength of the business model we are deploying with this product line. And as a reminder our DSI business specializes in the sale of fiberglass entry door systems directly to contractors, for quick ship and installation in the customer's home. Our portfolio optimization efforts in this segment have driven demonstrably higher adjusted EBITDA and adjusted EBITDA margin. In the second quarter adjusted EBITDA margin improved 520 basis points compared to the same period last year. The deterioration of the Pound Sterling in 2015 has impacted both the translation of our UK results to US dollars and our material costs, as we purchase residential door facings in Euros from our plant in Ireland, and sell doors in Pounds in the UK.

Again, we believe this currency negatively impacted adjusted EBITDA in this segments by approximately $1 million in the quarter. It's important to note that the majority of the Pound's sharp decline against the US dollar happened late in the second quarter, and so we do anticipate currency headwinds will continue to impact future results. With that said, we remain positive about our investments in the UK, and over the long-term we believe the UK housing market does have room for additional growth, as demographics suggest approximately 200,000 homes need to be built on an annual basis.

Turning to Slide 7, net sales in our architectural business increased 2% in the second quarter, while adjusted EBITDA decreased approximately 6% compared to the second quarter of last year. Volume was essentially flat for the segment in the quarter as the implementation of the new door configurator and ERP platform created a production backlog at one of our facilities, leading to a lower volume being shipped from that facility during the quarter. As we stated in the past we are rolling out this new platform one facility at a time, in an effort to minimize production impacts.

It's important to note that the new configurated implementation is a step change in our technology, and it is expected to significantly expand our capabilities. Getting the entire architectural business onto a single ERP platform should also enable consistent business processes across the segment, and afford greater operating efficiencies. Driving production efficiencies, improving business processes, and simplifying the door buying experience through improved technology is in line with our efforts to create an unparalleled customer experience in our architectural business. The benefits of this approach are readily apparent in the growth of USA Wood Door, which deploys a quick ship business model for architectural customers. Now before I turn the call to Russ, I would like to share with you some specifics on the investments we are making in both infrastructure and digital capabilities at Masonite, to provide that unparalleled customer experience. As we have shared previously, we believe that developing the ability to serve as multiple channels utilizing technology, with a focus on quick ship capability for inventoried and high value fully furnished products, will continue to further our strategy of creating additional demand, as we make the overall door purchasing experience easier. We have seen a benefits of this approach, both in the DSI model in the residential business, and the USA Wood Door model in architectural. To that end in the second quarter we opened a new manufacturing facility in the greater Tampa, Florida area, with advanced finishing and quick ship delivery capabilities to service the substantial growth area for both the residential and architectural doors. The facility expands USA Wood Door's geographic coverage to virtually all of the, East Coast with quick ship options for a wide range of architectural doors. The Tampa facility also expands to residential interior and external doors. The facility has the capability to ship slabs, components, and pre-hung doors with less than five day delivery service that will support our one-step distribution partners and local pro dealers in the state of Florida. The distribution facility also provides a broad special custom order business including fully finished interior and external door systems. The start-up costs associated with this investment had a negative impact on our Q2 earnings, but given the solid sales trends, we expect positive results by year-end. We're excited about our investment in the Florida plant, we launched the plant in the beginning of Q2 with sales growing to $700,000 in the month of June. Again, given startup costs the plant had a negative $2 million impact on our adjusted EBITDA in the second quarter, but as we said earlier, based on current sales trends we expect this plant to be accretive to adjusted EBITDA by year-end. Importantly, this investment in infrastructure is being coupled with digital innovation. In expanding our USA Wood Door capabilities to this new site, we did not want it rely on a traditional ordering approach.

Instead we developed a new e-commerce application that enables our customers to select, design, order and pay for in-stock architectural wood doors online, enabling a faster and more seamless customer experience. At Masonite, we continue to prioritize our investments across multiple digital initiatives. Digital initiatives are aimed at both improving the customer experience, as well as driving internal business efficiencies.

To help accelerate this activity Masonite has invested in a 40-plus person strong dedicated digital team as part of our customer experience organization, led by Larry Repar, that is separate from our traditional corporate IT organization. The digital team attached and created customer platforms that provide customers customized door configurators, simplify and accelerate the ordering process, and improve routes to market for both residential and architectural customers. In addition to the more traditional digital applications, such as the development of the new Masonite.com website.

As we discussed earlier, the ERP implementation of the architectural business includes the rollout of an enhanced front end door configurator, while also improving integration of common processes, and shared manufacturing across all plants. Additional investment in improving our internal corporate systems, such as the new cloud-based human resource information system that we recently implemented are aimed at improving our ability to better manage and support the human resource challenges associated with business growth. We believe that these investments are a necessary part of succeeding over the long-term, growing our business, and providing an unparalleled customer experience. And so with that as a backdrop of the performance of our segments in business, I will now turn the call over to Russ to discuss our second quarter financial performance. Russ.

Thanks Fred. Good morning everyone. Solid market conditions helped to deliver a very strong second quarter on both the top and bottom line. Looking at net sales and adjusted EBITDA, this was the strongest second quarter we have had since 2009. Net sales in the second quarter were up 8% compared to the second quarter of 2015 to $514 million. Excluding foreign currency headwinds net sales increased 10%. Adjusted EBITDA increased 16% compared to the second quarter of 2015 to $68.5 million.

On slide 12 let's go a little deeper than top line and bottom line results. Gross profit increased to $111.1 million, or 21.6% of net sales in the quarter, an increase of 170 basis points versus a year ago. Gross margin expansion was due to a combination of higher average unit prices, lower commodity costs, and fixed cost leverage on production volumes. SG&A increased approximately $10 million in the quarter, due in large part to investments that we are making in the business, such as those that Fred previewed earlier.

Personnel costs increased approximately $2 million, as we made staff investments to drive our expansion and technology initiatives, and we also incurred higher stock compensation of approximately $2 million compared to the second quarter of 2015. Investments in professional fees related to our IT and digital initiatives were approximately $2 million higher than the second quarter of last year as well. Adjusted EBITDA margin increased 90 basis points in the quarter from 12.4% last year to 13.3% this year.

Net income was approximately $33 million in the second quarter, and adjusted earnings per share of $1.02. This was a $0.60 improvement compared to the $0.42 in the second quarter of 2015, although it's worth noting that this includes approximately $0.20 benefit from lower tax expense associated with adopting a new accounting standard for share-based compensation.

The table on slide 13 details the change in net sales for each of our three reportable business segments and the primary drivers of the year-over-year change. Net sales in our North America residential segment increased 16%, excluding foreign exchange headwinds. Volume in the segment increased 14% as a result of the additional Lowe's business, and overall strength on in both the wholesale and retail channels. Average unit price increased 2% through a combination of previously-announced price increases, and our continued effort to drive innovation and shift our mix to higher value products. This partially offset by growth in interior doors that outpaced growth in exterior doors.

Net sales in our Europe segment increased 10% excluding foreign exchange headwinds. Growth was driven primarily by our DSI business, which sells fully finished exterior door sets, at higher average price points than our other UK businesses, and continues to perform ahead of the overall market. Volume increased slightly in the second quarter, as revenue from our 2015 UK acquisitions was largely offset by the impact of the sale of our door business in France in 2015, as well as some softness in the UK residential housing market. Net sales in our architectural segment increased 3% excluding foreign exchange, primarily driven by a 2% increase in AUP. Volume was essentially flat in the segment from the plant backlog caused by the ERP implementation, that Fred discussed earlier in the call. Turning to slide 14, our view on 2016 overall remains largely unchanged. We expect mid-to-high single digit percentage growth in the US housing market, and mid-single-digit percentage growth in the RRR market. New product rollout should continue to benefit 2016 and drive higher average unit price across the portfolio. We also foresee a commodities cost environment that should remain slightly favorable when compared to 2015. As demand has been increasing we have experienced a tightening labor market and associated cost increases. Along with higher wage inflation new employees can take four to six months to ramp-up to normalized productivity levels, having a negative impact on costs in the short-term. The UK's referendum to leave the EU has negatively impacted the UK housing market and it's currency, which we expect will continue to be soft for the remainder of the year. In keeping with our preferred approach of focusing on our three year growth framework, rather than routinely revising near term guidance, we are not updating the 2016 outlook provided earlier this year. I would point out, however, that the $0.20 tax benefit in Q2 from adopting a new share-based compensation accounting standard, would be additive to our previously disclosed adjusted EPS outlook of $2.70 to $3.00 per share.

Turning to Slide 15, our robust earnings growth has continued to support a strong balance sheet, even as we carry out multiple layers of our cash deployment framework, namely continued capital investments in the business, and execution of our share repurchase program. In fact, during the second quarter we repurchased $31 million of stock. Subsequent to the end of the quarter we purchased an additional $7 million, bringing our total repurchases to $54 million since the authorization was put in place earlier this year. Total available liquidity at July 3rd, 2016 including unrestricted cash and undrawn ABL and an Accounts Receivable purchase agreement totaled $228.8 million, or 12% of Masonite's trailing 12-month net sales. Total debt and net debt to trailing 12-month adjusted EBITDA stood at 2 and 1.7 times respectively, compared to 2.8 and 2 times a year ago. With that, I will turn the call back to Fred to summarize on today's discussion.

Thank you Russ. We believe the strategies we're pursuing at Masonite are contributing to our strong financial performance. The second quarter of 2016 was the ninth consecutive quarter of double-digit adjusted EBITDA growth. For the quarter net sales increased 8%, and gross profit increased 17%. Gross margin expanded 170 basis points, and adjusted EBITDA margin increased 90 basis points to 13.3%. We believe the investments we are making both internally and customer facing are transforming our business, and we are committing to continuing our efforts to deliver above-market performance by providing an unparalleled customer experience.

We continue to launch new innovative products and services, which are having a growing impact on our overall business, and we're committing to driving operational efficiencies by incorporating a Lean enterprise operating system throughout the organization. As you look at our business in the past to profitable growth, we have identified six areas that support our growth trajectory. The first four are beneficial tailwinds. They include a continued market recovery, industry footprint consolidation, an optimized portfolio, and our ability to leverage an improved manufacturing cost structure, all of which have been helping out our performance.

The last two are forward-looking in nature and are more strategic. These are avenues where we can have more direct influence on our future, and we plan to drive better performance going forward. We're investing in technology and R&D to create new innovative new products, and digital initiatives to drive an unparalleled customer experience. Secondly, we're employing our M vantage Lean enterprise system to improve operations with a focus on automation, efficiency, speed, and simplicity. We believe these areas of focus will drive profitable growth and superior returns over the long-term. And with that, we would now like to take any questions you may have. Operator.

Thank you, Mr. Lynch. (Operator Instructions). Our first question comes from the line of Mike Wood with Maquarie, please proceed with your questions.

Hi. Good morning. First question just on the North American incremental margin. You gave a lot of color there in terms of your new hiring inefficiencies and IT spend. Do these investments continue at this pace near-term, so just trying to understand if we exclude expect incrementals to remain temporarily low given these investments, or should we expect something more similar to what you had prior to this quarter going forward?

Yes, Mike. I think the way that we have described it in the past is that we did not expect to get a lot of SG&A leverage in 2016, because we knew coming into this year that we had important investments to make for the future, but the reality is these are lumpy right? We have lumpiness. They're not going to happen at the same level quarter to quarter. So I think that we believe that remains the case. Won't see a lot of SG&A operating leverage this year as we continue to invest. Certain impacts like the start-up of the plant here in Florida which we're really excited about, the first quarter startup of the plant is going to cost you money, and in this case it cost us $2 million. But we think that's a great investment and really does underlie the strategy that we have going forward to really improve that customer experience, and so we're excited about making those investments, and I think you will continue to see lumpiness in that.

Great. And then with the North American price deceleration year-over-year, just you kind of talked about the mix impact of interior versus exterior on AUP, but you didn't quantify that. Is that something you can give us some color on? And just also some color on the February 1 price success versus last year. I know you anniversaried that spring 2015 increase?

Mike, it's Russ. Let me provide a little bit of color on the first part of that question. Certainly around AUP. When you think about our interior versus exterior business, they were both up in the quarter, but the exterior door entry was up low single digits, and our interior business was up to a much higher amount and when you think about the average unit price on an exterior door system as being over three times the average unit price on an interior system, that higher relative growth rate was a material driver in AUP. I would say relative to the price actions that we have already taken, we feel comfortable with our progress there.

Great. Thank you.

Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your questions.

Hey. Good morning.

Good morning.

Hi Trey.

I just want to get a little bit more clarity on the comment and guidance, Russ. You said you're not updating the guidance. Does that mean that you're reiterating the guidance that you have in place now, or what do you mean by that, I guess?

It would have been, we're going to have this conversation every quarter. We're going to give annual guidance once a year at Masonite, and we're going to talk to our three year outlook, which is to drive this business 7% to 10% in top line, and to get to 14% to 15% EBITDA margins by 2018. So we will give it to you guys once a year. That's philosophical in nature. Exactly because we know we have lumpiness on a quarter to quarter basis, we're not going to get into an update every single quarter.

All right. Understood. The next question I have would be I guess just with these new initiatives, I just want it make sure that I understood the commentary in the quarter, the costs. So Tampa facility was $2 million, investments kind of streamlining the ordering process, the website and so forth was $2 million, stock comp was $2 million. What else was I missing? It sounds like about an $8 million impact to EBITDA from some of these different items here. Is that about right?

Yes. Yes. That's right, Trey. It's Russ. And we also had some incremental brand and marketing spend in our residential business, too that was a headwind on the order of a couple million dollars, so those items together represent kind that net $8 million headwind you're thinking about.

Although the stock comp is not part of adjusted EBITDA.

True.

Okay. Got it. Okay. And then could you guys talk a little bit about the capacity utilization that you have, kind of where it's at now, how you think about that longer term, in well I guess both in the medium and long-term, especially given these new initiatives you're putting in place. It sounds like that could really help accelerate some of the demand, especially in the interior door segment?

Yes. Certainly, Trey. And this has been an area that's been kind of interesting to watch over the last several years as we continue to utilize our door facing capacity to a higher extent. If you look at the end of Q2 on a rolling four-quarter average, we were operating our large capital-intensive door facilities at about 72% capacity utilization. Within Q2 our Ireland facility which we have continued to talk about is running at relatively low levels comparatively, more in the 50% level, whereas the remainder of our facilities are running between 80% and 100% capacity utilization. So we're encouraged by the fact that we continue to get better at capacity utilization in the door facings in particular.

Now I will say as we look forward, one of the benefits that we have of having this large system is that we have done some analysis on what it will take to increase capacity in the system. We believe that within our current system we have in the range of easily accessible 10 million door facings of capacity that we could effectuate with capital projects in the range of under $20 million. So that's less than $2 per facing. And I think that's an important equation. When you think about the cost of a brand new facility. A brand new facility of 10 million to 12 million skins, you would be in excess of $100 million. So you're talking about an investment of $8 to $10 per door facing, versus our incremental investment of less than $2 per door facing. So rest assured we feel very comfortable about our ability to meet the market demand for the foreseeable future.

Okay. Good color there Fred.

Does that answer your question?

Thanks for taking my questions. Good luck.

Thank you.

Our next question is from the line of Bob Wetenhall with RBC. Please proceed with your question.

Hey. Good morning and thanks for all of the detail on the quarter. I was trying to understand some of Fred's comments that the SG&A leverage, because of what is going on operationally is going to be less than it normally would, and in that context should we anticipate that SG&A as a percentage of sales will be flat in the back half of the year, because you absorb most of the SG&A costs, or the incremental SG&A costs in the first part of the year?

Yes. I don't think we're giving specific guidance on what we'll be spending in the second half. What we said was that we did not expect to get leverage this year. I will say that Q2 did have a pretty significant spend, planned spend, and that it will be lumpy, but I don't believe we're going to provide specific forward-looking guidance on what the SG&A as a percent of sales will be in the second half of the year. What I would say is that our anticipation as we move out beyond 2016 is to begin to start seeing operating leverage with respect to SG&A.

Got it. Got it. That's helpful. Fred, what's your thoughts with Brexit? Obviously it increases near-term uncertainty in the European market. What are you doing operationally, what's the feedback since the Brexit vote I guess it was like June 23rd or something. How are you preparing the organization? It's a big topic. A lot of building products companies with international exposure like yourself are coming in with kind of mixed views on the demand cycle over there, you're sounding rather optimistic about the long-term outlook for housing demand. Maybe if you could step us through your thought process there?

Yes. We think long-term the housing demand will be solid. Near-term there is clearly an impact from FX that we're going to have to manage. Our door facings that go into that market for instance are coming into that market in Euros, with the pound Sterling declining, we're selling in pounds we're buying in Euros. That's never a good thing, right. So we do expect to have impact on our results as we go through the second half the year. Obviously that means we need to look at two things. One is what can we do to continue to drive our costs down, and can we look at alternative vendors, et cetera, to make sure we're staying in line, and two, what can we do from a pricing perspective. So I think those are obviously the two big levers that we're going to be able to pull in that business.

It's really a tale of two cities for us in the UK, because we have the traditional legacy business that's focused on new housing, that is being impacted for instance by the housing numbers we're seeing right now. And then you have our DSI business which is focused more on the RRR market. We're seeing very little impact at this point in time from a demand perspective on the RRR market, and the DSI market, and we believe again, that's because there's been unmet demand with people wanting to change out their doors, and we have made--, it's so difficult to do so that we have made it simpler, and as a result of that we think we're creating share that didn't quite exist before.

Now again, I'm not naive to think that if the UK overall market continues to be hurt, or go through a recessionary period, it will have some impact on that. I just think it would have a lot less impact than we would see otherwise if we had a traditional business model. The demographics, I think the need for housing in the UK is there. I think the demographics will play out in the long run. So we're going to continue to do what we have always done in our business, is manage it carefully for costs make sure we're running a great operation there, that we're meeting our customer needs. We think that platform in the UK that we have today and in Europe is far superior to what we had a year ago, even in spite of the Brexit move. So I would say overall we're encouraged by it, but there's clearly a lot of management attention to making sure we're going to make the moves that are necessary to optimize that business.

That's very helpful. Thanks. If I could just speak one in over on Russ' side of the field. $31 million in share repurchase activity plus another $7 million. Really healthy balance sheet and good cash flow. How are you thinking as CFO about share repurchase activity in the next 18 months? Thanks, and good luck.

Thanks for the question, Bob. I would think about it in the same context as we have articulated it pretty consistently from the beginning of the year, which is we have the got a multi layered capital deployment framework. To your point we are maintaining a strong balance sheet, and are in a position to execute very well across all those layers simultaneously. As you saw in this quarter we continue to make significant investments in the business, and those really are our first and foremost priorities, as we continue to make strategic investments either in capital or in working capital, that will better expose us to some of the higher value, or higher margin aspects of the value chain in the door business. And then after that we're going to continue to look for growth opportunities on the strategic acquisition front, and also share repurchase, and clearly we're being opportunistic about that share repurchase program, but we would like to believe that we're being very assertive about executing it when the time is right, and as the cash flow of the business allows. And that's exactly what you saw through the second quarter, and subsequent too.

Thank you. Our next question is from the line of Jason Marcus with JPMorgan. Please proceed with your questions.

Good morning. My first question is on the architectural margins. I think I have spoken in the past about the opportunity for significant improvement there over the next few years. This quarter you took a little bit of a step back from a margin standpoint even despite I think some improvement in average unit price. So I just wanted to get a sense of other than some of the lower productivity that you spoke from new employees, if there were any big drivers there? And then if you could just comment on how you are thinking about the strategy in that business, and when you would eventually expect to return to margin improvement?

Yes. So the one impact I think on the margins in the quarter that we saw specifically was we did implement our new ERP systems in one of our plants. That plant did have a pretty significant backlog through the month of June as a result of that, so the implementation didn't go as smoothly as I would have liked to have seen it. With that said, we have been able to recover most of that backlog in the plant is running pretty well right now. The largest impact I would say of the reason for the decline in the margins in the quarter really had to do with costs associated with as we mentioned earlier, with getting that plant up and running, and the fact that the revenues just didn't come to play because of the backlog that we had.

When we think about that business, and that business today is running let's just say it's in that 10% EBITDA margin range, adjusted EBITDA margin range, we still believe and have always believed that as we put this system on a common platform that we update the front end configuration capability of this business, and that we align the portfolio more effectively, because today with being on separate systems it's hard for us to get the best synergies across the multiple plant facilities that we have, that there's no reason that this business should not be at least as profitable from an adjusted EBITDA margin business as the residential businesses that we have. From a time frame perspective, we haven't been out there, but what I will tell you is that part of our 2018 three year outlook assumes that we're going to bring that business in line with the other businesses.

Okay. Great. And then just going back to Brexit for a minute obviously given that it happened at the end of the quarter, I just wanted to see if you could comment on what you have seen in the UK so far in July and August?

I think we kind of mentioned that earlier. We're seeing clearly the impact of FX is there and continues. From a new housing perspective our business is, there's a lag in our business, so we're not really seeing any major impact on the new housing product, the legacy products that go to new housing that we saw before, and actually the DSI business is doing well. So I would say in the short-term, other than FX, right now we're not seeing any major impact on the business.

Okay. Thank you.

Our next question is from the line of Alex Rygiel with FBR. Please proceed with your questions.

Thank you. Good morning. A couple of quick questions. First North American volume was up a strong 14% in the quarter. How much of that was load in versus core growth? If there was any load in?

I'm not sure I understand the question?

Could you break down the North American volume growth. Was there any sort of one-time volume in the second quarter that not be reoccurring?

No. It was a normal quarter.

So there was no new store or market share gains, or anything of that nature?

No.

Nothing material there, Alex.

Okay. And then as it relates to price, the mix shift. Are you viewing that as a one-time event, or is that sort of a reoccurring trends that you're seeing out there in the marketplace?

I think again that a large part of the mix shift in pricing is as you think about we increased the production of, or the sales of interior doors as you know we increased our position at Lowe's, as a result of a line review through last year. So some of that AUP is just simply the impact of a higher volume of interior doors versus our overall product portfolio. So that was not really unexpected, because of the fact that a portion of that 14% growth, and maybe that's where your question was earlier. on a year-over-year basis we clearly a portion of that growth is the result of the line review that we won at Lowe's back in 2015.

Although, Alex it's Russ, I would just add that when you look at the business growth it's to the like it was particularly skewed one way or the other between wholesale and retail. We saw pretty balanced growth across both channels.

As it relates to the increase in SG&A year-over-year, that $8 million headwind, how much of that should we think about as reoccurring versus one-time in nature?

I think we have already kind of answered that question earlier. It's going to be lumpy. As we look forward to the remainder of the year, we do not expect to get SG&A leverage in 2016. We said that as we came into the year, and it will be lumpy from a quarter to quarter basis on where that occurs, but we do believe that going forward in 2017 and beyond, we should start to see SG&A leverage as we continue to grow the business.

Thank you.

Our next question is from the line of Al Kaschalk with Wedbush. Please proceed with your questions.

Good morning. I guess by the nature of the SG&A question it's still not clear, but I'll go over to the startup costs on the Tampa facility. How many facilities do you have in line of sight to maybe open up, or is this just the one that you're planning for the next 12 to 18 months?

Yes. If we were doing more, then we wouldn't provide that information for competitive reasons. So the only thing we'll talk about is what has happened.

I think it would be helpful if you provided a little more color though, just on this lumpiness because the next, the visibility has certainly been reduced despite maybe consistency that you're seeing in the business?

We have very consistent visibility based on what we said is going to happen over the next three years. 7% to 10% top line growth, EBITDA margin 14% to 15%.

All right. Appreciate it. In terms of tax benefits going forward, any change on the rate there?

What we're now guiding to is 18% to 20% tax rate for the year, and that really is just reflective the fact that we had this significant and discrete income tax benefit in Q2. It was about $6.2 million associated with the new share-based compensation accounting standard.

All right. So that's $0.20, and then in 2017 we should revert back to your prior guided range, or how do we think about that fray cash flow perspective?

Yes, Al. That's how I think about it.

Okay. Thanks a lot. Good luck.

Thank you.

Thank you.

Our next question is from the line of Nick Coppola with Thompson Research. Please proceed with your questions.

Hi. Good morning.

Good morning.

In the architectural segment you talked about the implementation of a door configurator and ERP platform creating some delays there. Can you talk more about what you're seeing in terms of end market demand, and how we should think about volumes ramping back up in the second half?

Yes. I mean end-market demand has been single digits we believe for the commercial space, and we saw that in the first quarter. Obviously we were hurt by this ERP implementation in Q2, but we would anticipate that market will grow mid-single-digits.

Okay. And then going back to North America residential volumes, obviously quite strong there. Other building product companies were out talking about wet weather in the quarter. Do you think that there was any impact on your business there?

Remember we have a little bit of different lag than some of the other companies. I think that's what you have to look at. So when we're looking at our 14% growth, it's really reflecting what happened in the fourth quarter and the first quarter of this year with regards to housing starts. So because we're later in the build cycle, so if you think about the housings being started, clearly housing starts were lower in the second quarter compared to, better than last year but they not as robust as they were in the first quarter. We'll see the reflection of that in our third and fourth quarter. So where if you are on the exterior of a house, if you are in sidings or windows, you are probably going to see that effect a quarter before we see it. If that helps, is that clear?

Okay. That makes sense. Thanks for taking my questions.

Thank you. Our next question is from the line of Josh Chan with Baird. Please proceed with your question.

Hi. Good morning. Thanks for the color around price mix, and if I can ask about the shift interior versus exterior, I understand that Lowe's obviously has an impact to that, but excluding that is there any reason to believe that interiors would grow more than exterior, or do that view that as more of a quarterly fluctuation this quarter? And then kind of maybe more importantly, just to confirm that nothing has changed in sort of the competitive pricing environment there?

Yes. I would say that is mostly the Lowe's impact would be the largest portion of that, and then I would say from an overall pricing perspective, no, we're not seeing any change in dynamics.

Okay. Okay. That's good. If I can stay on resi in terms of the volume that you saw through the quarter, did you see any fluctuations on the monthly basis? I understand there might have been some pull forward early in the quarter, but just curious on color on that front?

It was a normal quarter.

Okay. Okay. And then just the last question on the architectural backlog. Do you expect that to catch-up fairly quickly in Q3, and also do you anticipate kind of other ERP implementations in other plants potentially having an impact on the rest of the year?

So I would say that as mentioned earlier the backlog at that one plant is largely behind us at this point. And then with respect to additional ERP implementations, we don't expect any impact for the rest of 2016. We will have ERP implementation in 2017.

Okay. Understood. Thanks for your time.

Thank you.

Thanks, Josh.

Our next question is from the line of Kevin Hocevar with Northcoast. Please proceed with your questions.

Hey. Good morning, guys.

Good morning.

Wondering if you could, and maybe I missed it, but you mentioned that there was a $1 million FX impact to Europe in the second quarter, and that from transactional and transitional impacts, it sounds like it came later in the quarter, so what type of impact do you expect that to have for the full quarter, in the back half of the year?

I would say we're not going to give any specific guidance, Kevin, on what that FX impact could be for a couple reasons. First of all, there's going to be continued volatility, I think, as particularly in the UK they sort out the Brexit situation, and what that means for the near-term economic outlook for the country. The other thing that I would say though, is that when it comes to transactional FX we're going to do whatever we can to manage that as aggressively as possible, from within the Company and I think as Fred mentioned earlier on the call, we obviously have to take a look at pricing mechanisms where possible, and where the competitive market will allow.

But when you think about the overall quarterly impact of FX on the business just in Q2, total Company we saw close to $3 million between translation and transaction, and a majority of that was on the transactional side, and when you consider that the significant downdraft in the pound Sterling in particular happened pretty late in the quarter, that would indicate that there's plenty of headwind in front of us, again we're going to be aggressively moving to manage both costs throughout our supply chain as well as price wherever we can, to help recover some of that in the market.

Okay. Got you. And you talked about opportunities with some customer consolidation that could potentially lead to share gains, no guarantees, and one of those customers indicated on their second quarter call that they completed their door review. So wondering if you have any updates there, if you think you're gaining some share, or just if there's anything to update there?

Yes. I would say that at this point that we don't believe there will be any material impact in 2016. While they have completed their door review, there are still moving pieces there so we haven't gotten all of the full view, and then given where we are just in the year we think it's going to flow into next year. The one thing I will come back to is as you think about the plant that we put in place here in Tampa, one of the opportunities of this plant is it will be able to supply quick ship to these large one step operations. So I would say that from a customer perspective, and Larry, you can comment on it, the customers are pretty excited about the opportunity for us to be able to provide these one steppers with a quick ship in a very large and fast-growing market here in Florida.

Very true.

Okay. Just final question is the RRR market sounds like it's doing pretty good in North America. You mentioned both RRR and the distribution channels up double-digits. How is the RRR market in terms of sell-through? I know your benefiting from lapping the new Lowe's business, but what's the sell-through like in the RRR market?

We still believe the RRR for this market is going to be in that mid single digit range. We're not seeing anything to say otherwise and again part of the reason that we have had even higher growth than that in the second quarter is really driven by the fact that we picked up some of that additional business with Lowe's.

Okay. Great. Thanks very much.

Thank you.

Our next question is from the line of Scott Levine with Imperial Capital. Please proceed with your questions.

Hey. Good morning, guys.

Morning, Scott.

So, Russ, I just wanted to be clear, when you say the $0.20 tax gain should be added to the EPS guidance, are you effectively saying you're EPS guidance is $2.90 to $3.20 now?

That is what the math would suggest, yes.

Okay. I just wanted to be clear on that. And is there any reason we shouldn't expect a typical seasonality in your business in the back half of the year in is there anything that you have seen so far that would suggest anything would be different seasonally versus 2015 or 2014 even?

No. No. I don't think so. Aside from the comments Fred made a moment ago, just around how we're levered more to housing completions as opposed to housing starts. So we see the effect of starts in Q2 more in Q3. Think about the timing that way relative to seasonality, but that's all driven by market conditions and industry. Nothing unusual for our business internally.

Got it. Understood. One follow-up lastly on the strength in the European pricing and the margins. Maybe a little bit more color if you could offer it, with regard to how much of that is mix versus underlying pricing strength, or a little bit more color there?

I would say that we have seen strength on both fronts, but the largest single driver of the AUP accretion that you saw in Europe was really this outsized growth on the part of our DSI business, and back to the comments that I made earlier, you're selling fiberglass exterior door sets direct to contractor for installation. That's significantly higher averaging of prices than you would for the average of the balance of the UK portfolio, and that in combination with the fact that we're seeing solid double-digit growth on the part of the DSI business ,that's really the primary driver there.

Understood. Thank you.

Thank you.

Thank you.

Thank you. We have time for one more question today. That will be from the line of Jim Barrett with CL King. Please proceed with your questions.

Good morning, everyone.

Hi, Jim.

Fred, given your emphasis on investing in technology, new products, and ERP and related initiatives, when we look forward longer-term, do you foresee less interest or dependent on making bolt-on acquisitions, relative to reinventing the core business, and how you go-to-market?

I would say that it depends. If we see bolt-on acquisitions that can be additive to our strategy, we're going to make them. So I give you two good examples. USA Door and DSI were both bolt-on acquisitions. Both of those are actually foundational to our strategy change, and so when you think about the plant that Larry has put in place here in Florida, it's really being modeled after those capabilities. So if we find more bolt-on acquisitions that help support it, we'll continue to do that.

Okay. Okay. Well, thank you very much.

Thank you.

Thanks, Jim.

Thank you. I will now hand the call back to you, Mr. Lynch.

Okay. Great. Thank you. That was an easy last question. So we appreciate everyone's continued participation in the Masonite story, and we look forward to speaking to you again next quarter. Thank you.

Thank you. Thank you for joining the Masonite International second quarter earnings call. This conference call has been recorded. The replay may be accessed until August 25. To access the replay please dial 877-660-6853 in the United States, or 201-612-7415 outside of the United States. And enter a conference ID number 13641059. Thank you.