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Edited Transcript of DOOR earnings conference call or presentation 23-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Masonite International Corp Earnings Call

TAMPA Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Masonite International Corp earnings conference call or presentation Thursday, February 23, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joanne Freiberger

Masonite International Corporation - VP and Treasurer

* Fred Lynch

Masonite International Corporation - President and CEO

* Tony Hair

Masonite International Corporation - SVP, Residential Door Business

* Larry Repar

Masonite International Corporation - EVP and Chief Customer Experience Officer

* Russ Tiejema

Masonite International Corporation - EVP and CFO

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Conference Call Participants

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* Tim Wojs

Baird - Analyst

* Bob Wintonhall

RBC Capital Markets - Analyst

* Jason Marcus

JP Morgan - Analyst

* Alex Rygiel

FBR & Co. - Analyst

* Al Kaschalk

Wedbush Securities - Analyst

* Kevin Hocevar

Northcoast Research - Analyst

* John Baugh

Stifel Nicolaus - Analyst

* Jim Barrett

C.L.King & Associates - Analyst

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Presentation

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Operator [1]

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Welcome to Masonite's 2016 fourth quarter and full-year 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 is being recorded.

I will now turn the call over to Joanne Freiberger, Vice President and Treasurer.

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Joanne Freiberger, Masonite International Corporation - VP and Treasurer [2]

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Thank you, Donna, and 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, Tony Hair, Senior Vice President of our residential business, and Larry Repar, our Executive Vice President and Chief Customer Experience Officer.

The information for the Webcast presentation that will accompany today's call is available on our website at www.masonite.com. 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 the press release that we've made available in connection with this call and in our 2015 annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, 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 were 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 measures is included in the press release and in the appendix of today's presentation, also available on our website.

On today's call, Fred will begin with a Company overview, Tony will discuss our new brand launch, Larry will discuss our new website and digital initiatives, Russ will discuss financial performance and our outlook, and then Fred will summarize before opening the call to a question-and-answer session.

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

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Fred Lynch, Masonite International Corporation - President and CEO [3]

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Thanks, Joanne. Good morning and welcome, everyone. 2016 was another great year for Masonite, marked by strong financial performance and exciting new developments at the Company. On a full-year basis, all three reportable segments reported adjusted EBITDA margin growth, and excluding FX headwinds in Europe, all three showed net sales growth over the prior year.

Our North American residential business outpaced the housing market, with 13% sales growth in 2016. Our DSI business in the UK continued to deliver above-market growth with strong net sales above 20%, and that's despite the uncertainty in the UK market in 2016. And 2016 marked our sixth consecutive year of positive average unit price growth, and the fourth quarter was our 15th consecutive quarter of AUP growth.

Our strategic investment in digital capabilities is ongoing, as evidenced by our new digital innovation center in Ybor City, Florida, which was designed with a focus on innovation and collaboration, and Larry will share more on the investments in digital in just a few minutes.

And as we shared with you last quarter, the multi-year transformation of our architectural business is under way, including commonizing our door chassis configurations, rationalizing duplicate product families, optimizing our manufacturing footprint, and migrating multiple systems onto a contemporary ERP platform.

In late February 2016, we implemented our first share repurchase program, which was approved for $150 million. By the end of our fiscal year, we utilized nearly three-quarters of that authorization. And so after market yesterday, we announced that our Board authorized an additional repurchase plan of $200 million.

Our positive momentum continued, as our 2016 adjusted EBITDA increased 24% and we delivered a 12.8% adjusted EBITDA margin. Since our registration and listing in 2013, our adjusted EBITDA and our adjusted EBITDA margin has more than doubled.

The strength of our 2016 financial performance, combined with business momentum and the continued investment in exciting strategic initiatives, provided for strong progression towards the long-term financial framework that we shared last year.

Let's turn to slide 6. Masonite has invested in providing our partners with innovative new products and a superior service proposition, and we believe these focused areas are valued by our customers, as we have won additional profitable business with existing customers over the past 18 months.

Our focus at Lowe's in 2016 was largely about executing on the new business wins of approximately $50 million annually. With this new business, we successfully transitioned Lowe's from the Reliabilt brand to Masonite's branded products in the markets that we serve.

Doors outperformed the overall millwork category in these new stores as a result of new products, improved marketing and branding, better assortment, and higher-priced doors. We believe our focus on training the Lowe's associates and helping them reach their target customers was also critical to driving improved point-of-sales results.

We now enter 2017 with additional new business wins. We were notified of winning The Home Depot's Florida stores in late 2016 and now expect that to yield roughly $50 million annually. The business, which had been previously supplied by multiple interior and entry door vendors, is expected to transition in the April timeframe.

New offerings and a better assortment of higher-priced products helped to drive better sales and profitability, both for Masonite and our channel partners in wholesale too, as we were awarded some incremental business with customers like Builders FirstSource and BMC.

Despite the relative higher price of our overall product offering, our focus on superior service and product innovations were significant factors in winning this additional business. Innovative new products like the Everland and VistaGrande fiberglass exterior doors and their barn door kits and Heritage series interior doors have higher prices and can drive higher mix for both our channel partners and for us.

Turning to slide 7, at the International Builders' Show in early 2017, we unveiled our new brand with a fresh new look and logo. It depicts the ongoing partnership between Masonite and our customers to continually create a better experience. Our new tagline, Open to extraordinary, is an invitation to break perceptions, challenge the status quo, and open the door to potential. The extraordinary and unexpected possibilities as a defining element throughout the home.

So I'd like to now ask Tony Hair, who leads our residential business, to spend a few minutes discussing why we did this and what it means to Masonite's future. Tony?

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Tony Hair, Masonite International Corporation - SVP, Residential Door Business [4]

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Thanks, Fred. As Fred mentioned, Open to extraordinary is an invitation to unlock the door's potential to be a defining element in the home. Our goal is to change the conversation around doors. We want to empower our builder and remodeler customers to change the conversation around doors through design trend knowledge, allowing them to become the voice of authority.

Along with our channel partners, we believe we can make the door category more relevant. We believe a door is more than just a door, and we continue to push the boundaries in helping customers elevate the role a door can play in a home's environment.

We believe Masonite can take a leadership position by creating a differentiated brand experience. This includes highlighting our whole-home offering by coordinating interior and exterior door solutions. The first Masonite trend report of 2017 highlights current housebuilding trends and insights from leading industry experts and shares insider knowledge on current and upcoming trends, where to uncover design inspiration, and how a door can be and should be a dynamic design element in any home.

By doing this, we believe we can rise above what we call the sea of sameness and stand apart from others in the category. We strive to be the indispensable door partner to our customers, and we're going to do this through our four brand pillars -- exceptional quality, unmatched service, customer-driven innovation, and trend leadership.

One of the many ways we intend to accomplish these goals is through innovation, by providing innovative products, innovative marketing and innovative routes to market. Innovative products include examples we've already spoken about, including Heritage interior series of doors and the new Heritage exterior door, VistaGrande's series of exterior doors, and the Everland fiberglass door and barn door kits.

Innovative marketing includes our recent effort with the new brand launch, supported by messaging in traditional and digital media to drive awareness, preference and purchase. Masonite has established a trend council to provide a continuous connection between designers and builders and highlight the latest design trends, which we can leverage for product design, marketing and influence our engagement in key events.

Masonite is making it easier for people to buy doors through tools we are bringing to market. We are deploying digital technology to improve the entire buying experience, making it easier for customers to shop for, select, purchase and install a Masonite door. We recognize it's not about the hundreds of thousands of door options, but it's about finding that one perfect fit. By doing so, we believe we'll not only increase Masonite's share, but we'll also unleash latent demand for door products, benefiting the entire industry.

Larry Repar, our Chief Customer Experience Officer, will now walk you through some of the digital innovations his team is focused on to provide a better buying experience. Larry?

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Larry Repar, Masonite International Corporation - EVP and Chief Customer Experience Officer [5]

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Thank you, Tony, and good morning, everyone. One of the ways we're improving the customer experience is through the new masonite.com website. In conjunction with the brand launch, masonite.com was redesigned after extensive research and customer feedback. Our new, interactive website provides easier navigation, technical documents in a clean format, and inspirational videos and blogs to keep customers up to date on the latest trends.

The site targets influencers, specifiers and purchasers of doors and provides an extraordinary experience regardless of who you are or your objectives for visiting the site. Changing the conversation around doors starts with changing the experience on our website.

Finding the right door design and style has been simplified on the new website in the introduction of specific content that focuses on complete home design and solutions for both interior and exterior doors. I invite you to spend some time on our new website.

Our new digital innovation center, as Fred mentioned earlier, is located in an eclectic part of Tampa called Ybor City and has become the central hub of designing and developing new digital tools to improve the customer experience for selecting, ordering and buying a door. Our new office space is designed to foster and encourage innovation and collaboration.

Our agile software environment provides an efficient and effective approach to develop customer-facing digital tools and applications that are designed to inspire and engage all channel participants.

Within the new USA Wood Door website, a company we acquired about a year and a half ago, is the new door builder configurator, which is a new product configuration and purchasing tool. Door builder allows customers to configure, modify and purchase Masonite Architectural wood door slabs that have been machined and finished. Door builder expedites the quoting and purchasing process with greater accuracy -- or said another way, simplifying and standardizing the purchasing process while reducing errors.

On the residential side, the Max Masonite Express configurator combines a sophisticated configuration capability of a deep options-based database with an easy-to-use graphic interface. The Web-based door design and pricing tool provides dealers an easy and cost-effective way to showcase Masonite's product offerings.

We also believe the continued rollout of our ERP in the architectural business can transform the way our customers and manufacturing facilities communicate to get customers the right doors to the right place at the right time.

A digital team in Ybor serves all Masonite businesses by discovering, developing and maintaining technology platforms to improve the customer experience by enabling a simpler, faster and easier way to inspire, configure and transact for our products. Fred?

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Fred Lynch, Masonite International Corporation - President and CEO [6]

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Thank you, Larry. Before we move on, I just want to say what a privilege it has been to work alongside Larry these past ten years. His deep knowledge of the door industry and industry relationships and contagious enthusiasm, as you can tell, has been instrumental to Masonite's success throughout the years and his tenure here. Larry has been a highly valued member of our leadership team, and he will be greatly, greatly missed when he retires in August. And so on behalf of the entire team at Masonite, Larry, we wish you the best.

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Larry Repar, Masonite International Corporation - EVP and Chief Customer Experience Officer [7]

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Thank you, Fred. It's been a wonderful and incredibly satisfying journey thanks to the smart, dedicated and hard-working Masonite employees I've been so fortunate to work with and honored to work with throughout my career.

I also want to acknowledge and thank our loyal and successful customer partners, who have contributed significantly to my career and Masonite's growth and success. Thank you all for what we have accomplished together over the years. Masonite, our employees and our customers are well-positioned for future growth and success. Thank you.

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Fred Lynch, Masonite International Corporation - President and CEO [8]

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Great. Thank you, Larry. So let's pick up on side 13. In addition to our new digital capabilities, we're also investing in operational excellence on the manufacturing side. Increasing demand coupled with a continued tighten labor market presents its own set of challenges for our manufacturing plant. We continue to invest to improve manufacturing capabilities, expand capacity at existing facilities, and automate parts of the door manufacturing process.

As a result, our capital expenditures increased in 2016, and we're planning for a similar level of investment in 2017. Some of the recent CapEx projects we've completed in these areas include the addition of a new fiberglass press line in Laurel, a new automated plate line and presses in the UK, and an automated machine standard for our architectural business in Northumberland.

In addition, we're focused on projects that improve productivity and throughput in our facilities in each of our business segments. Planned projects include reconfiguring interior assembly plant layouts, standardizing the architectural door manufacturing process, and investing in equipment that optimizes the yield on wood cut stock components we produce to support our door assembly operations, among others.

I'll now turn the call over to Russ to discuss more specifics of our financial performance in the quarter. Russ?

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Russ Tiejema, Masonite International Corporation - EVP and CFO [9]

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Thanks, Fred. Good morning, everyone. Let's turn to slide 15 to summarize our consolidated financial results for the fourth quarter of 2016 versus the fourth quarter of 2015. Net sales were down 1% to $481 million. However, excluding foreign currency headwinds, the 53rd week in the 2015 calendar and adjusting for the deconsolidation of our South Africa business, net sales actually increased 8%.

Gross profit increased to $96.5 million, or 20.1% of net sales, an increase of 50 basis points versus a year ago. Gross margin expansion was due to a combination of fixed-cost leverage on increased production volumes, higher average unit prices and lower commodities costs.

SG&A decreased approximately $4 million due to a $2 million benefit from foreign currency and $1 million each from lower personnel costs and depreciation and amortization.

Adjusted EBITDA increased 7% to $61 million. Recall that the fourth quarter of 2015 had several non-recurring items, including a utilities free fund and a reversal of the sales tax accrual in addition to the 53rd week. If you adjust for these items, fourth quarter adjusted EBITDA would have grown by approximately 23%. Adjusted EBITDA margin increased 90 basis points to 12.6%.

Net income was approximately $15 million, and adjusted earnings per share were $0.55. This was a $0.01 improvement from $0.54 in the fourth quarter of 2015.

Let's turn to a review of each of our reportable segments, beginning with North American residential. Net sales increased 8% in the fourth quarter and 13% for the full year, while adjusted EBITDA increased 9% in the fourth quarter and 28% for the full year. We experienced solid growth in both the wholesale and retail channels during the fourth quarter. Strength from the additional Lowe's business as well as stronger sales from areas like Louisiana and North Carolina, that were rebuilding from summer storms, contributed to higher growth rates in retail.

Average unit price in the fourth quarter decreased slightly compared to the fourth quarter of 2015. As with the third quarter of 2016, this was the result of category mix, not individual door prices, with AUP increasing in both the interior and entry categories. For the full year, AUP increased 1.2%.

The decline in the Mexican peso did negatively impact net sales results in the fourth quarter by approximately $2 million. And as Fred mentioned earlier, we were notified of additional business wins through both wholesale and retail channels that we expect will benefit us in 2017, largely starting in the second quarter.

Let's turn to slide 17 and our Europe segment. Net sales in the fourth quarter were down 16% when compared to the fourth quarter of 2015, due primarily to the decline in value of the pound sterling. Excluding foreign exchange headwinds, net sales were up slightly. For the full year, net sales excluding foreign exchange headwinds were up 6% compared to 2015.

The ongoing uncertainty about Brexit has resulted in an uneven housing market in the UK. Private homebuilders have maintained a relatively stable outlook, while public or government-sponsored housing has been less predictable. In aggregate, however, we're optimistic about the longer-term health of the UK housing market, despite the recent slowdown in new residential construction activity, given the current deficit in available new housing.

Our DSI business continues to perform extremely well, again increasing full-year sales in excess of 20%. And as I mentioned previously, the decline in the pound compared to the US dollar and euro negatively impacted results from both translational and transactional exchange. As a result, our UK business implemented price increases that were effective January 1st.

Turning to slide 18, net sales in our architectural business were down 6% in the fourth quarter compared to the fourth quarter of 2015, but increased 2% for the full year. Adjusted EBITDA increased 18% and margin expanded 170 basis points compared to the fourth quarter of last year. On a full-year basis, adjusted EBITDA increased 8% and margin increased 40 basis points.

The fourth quarter sales volume decline was primarily due to strong demand in the fourth quarter of 2015, including the 53rd week. However, average unit prices increased in the fourth quarter of 2016 because demand in the fourth quarter of 2015 was stronger in stock doors, which carry lower average unit prices, but shifted to higher-end doors in the fourth quarter of 2016. For the full year, average unit prices increased almost 4% over 2015.

Slide 19 summarizes our consolidated financial results for the full year 2016 versus 2015. Net sales for the year were up 5%, or up 11% excluding foreign currency headwinds and adjusting for the deconsolidation of our South Africa business. Gross profit increased to $410 million, or 20.8% of net sales, an increase of 210 basis points.

For the year, SG&A increased 7%, primarily due to an $8 million increase in personnel costs due to wage inflation, investments in additional personnel and higher stock-based compensation, a $4 million increase in professional fees primarily related to IT and digital initiatives, and marketing costs that were $1 million higher in 2016 largely driven by preparation for our new brand launch last month.

2016 adjusted EBITDA increased 24% to $253 million. Adjusted EBITDA margin increased 190 basis points to 12.8%. Net income was approximately $99 million in 2016. Diluted adjusted EPS more than doubled, to $3.03 for the full year 2016, compared to $1.49 in 2015.

Now, turning to slide 20, the strength of our adjusted EBITDA growth continues to enhance our balance sheet and debt metrics. Total available liquidity at January 1, 2017, including unrestricted cash, an undrawn ABL and an accounts receivable purchase agreement, totaled $223 million, or approximately 11% of Masonite's trailing 12-month net sales. Total debt and net debt to trailing 12-month adjusted EBITDA stood at 1.9 and 1.6 times, respectively, compared to 2.3 and 1.9 times a year ago.

I'd like to now frame up our outlook for 2017 by starting with key macro factors we believe will affect our business. We anticipate mid- to high-single-digit growth in US new home completions and mid-single-digit growth in the RRR market. We also expect new business wins, higher-value products and recently implemented price increases to drive higher AUP and adjusted EBITDA margins.

There are also factors that counterbalance these tailwinds to some degree. The housing market in the UK is forecast to grow in 2017, but that growth is likely to be modest and uneven throughout the year as Brexit-related uncertainty continues. In the US, a tightening labor force is increasing labor costs, which, in combination with hiring new manufacturing personnel to support growth, make productivity gains more difficult to achieve.

Commodity and markets will likely increase in the aggregate in 2017, primarily in steel and petroleum-based materials. And of course, there is significant uncertainty around potential US tax and regulatory policy changes.

Overall, we expect net sales will be up 7% to 9% versus 2016, or approximately 8% to 10% excluding expected currency headwinds. Our outlook for adjusted EBITDA for 2017 is between $285 million and $305 million for the full year. Taking into account an effective tax rate expected to be in the low 20% range, and based on our current share count, we expected adjusted earnings per share to be between $4.10 and $4.60 in 2017. Cash taxes are expected to be between $9 million and $12 million.

It's worth noting that while we expect continued strong results for 2017 overall, net sales and margin growth is expected to be more pronounced post-Q1 given the difficult comparative we face on very strong results we delivered, particularly in North American residential, in the first quarter of 2016.

As Fred previewed earlier, in 2017, we plan to continue our increased pace of investment in the business and expect approximately $80 million to $85 million of CapEx spending this year. This is in line with our capital spending in 2016, but higher than in previous years on the strength of the return profiles of our planned projects.

When looking at capital expenditures, we evaluate both maintenance and strategic projects on an individual basis. Maintenance projects often represent good paybacks on risk mitigation alone, such as by avoiding unplanned downtime in the event of unexpected maintenance or equipment failures. Strategic capital projects are typically larger in scope and involve investment in areas such as new product programs, new manufacturing technologies or IT systems.

These projects are subject to a rigorous review at the Senior Management level. We typically target a payback of approximately three years or less or a return of at least two times our estimated cost to capital before committing large amounts of capital to these types of projects.

Our long-term growth framework is predicated on continued market growth and margin expansion initiatives, such as new products and value-added services intended to further shift our product portfolio to higher-value offerings with higher average unit prices.

Meanwhile, we plan to continue investments and initiatives aimed at driving improved factory productivity to help mitigate inflationary pressures we anticipate in labor and commodities costs. In some cases, these initiatives require upfront investment in R&D, systems and people, which we believe will ultimately drive leaner operations, higher productivity and margin expansion over the long term.

On slide 24, we present our updated long range goal framework, now reflecting our view through 2019. We believe that the growth initiatives we are investing in, in combination with a continued housing market recovery, should support a compound annual growth rate of 7% to 9% for net sales over that timeframe.

When combined with expected operating leverage and our continued focus on improving both margin and cost performance, we expect this to translate to adjusted EBITDA margins between 16% and 17% by 2019. Further, we would expect that all of our reportable segments will achieve adjusted EBITDA margins in excess of 15% by that time.

Our cash deployment strategies remain unchanged, and our growing adjusted EBITDA supports strong cash generation that allows us to continue simultaneously investing back into the business while evaluating additional acquisitions and repurchasing our shares. The extent of our repurchase activity in 2016 and the additional authorization announced yesterday afternoon demonstrate our commitment to returning capital to investors.

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

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Fred Lynch, Masonite International Corporation - President and CEO [10]

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Great. Thank you, Russ. So in 2017, with the tailwind of our new brand launch, we're focused on elevating the door category by being trend leaders and inspiring customers to think about doors differently. We're transforming our architectural door business by creating a more efficient footprint and simplifying the product offering as we focus on a common chassis and continue to implement a single configurator and ERP system across the entire business.

We're also investing in tools and projects designed to improve our productivity across our manufacturing network by finding more efficient routes to market, automating selected parts of the manufacturing process, and developing the digital tools to improve ordering, manufacturing and delivery.

We believe the strategies we are pursuing at Masonite are delivering strong financial performance through a dedicated effort to provide high-quality products and value-added services to our customers.

Net sales increased 11% when adjusted for foreign exchange and the deconsolidation of MAL. Adjusted EBITDA increased 24%, and margins increased 210 basis points. During the year, we repurchased $109 million of shares and currently have authorization to repurchase up to approximately $240 million of additional shares. At the February 21st closing price of $68.55, that would equate to 3.5 million shares, or 12% of our total outstanding shares.

The strong results that we shared with you today were made possible by our 10,000 employees working hard to help people walk through walls. Thanks to each and every one of you. We believe the investments we are making are transforming our business, and we're committed to continuing our efforts to provide an extraordinary customer experience in 2017 and beyond.

And with that, we'd like to open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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Thank you, Mr. Lynch. (Operator Instructions)

Our first question today is coming from Tim Wojs of Baird. Please proceed with your question.

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Tim Wojs, Baird - Analyst [2]

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Hey, guys. Nice job and nice to see the momentum here.

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Tim Wojs, Baird - Analyst [3]

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I'm going to sneak in two questions, if you don't mind. I guess the first one, just bigger picture, you guys have done a really good job, you know, picking up some new business over the last couple of years, and as you kind of look past and, you know, out into 2018, 2019, you know, how do you kind of frame up the ability to continue to take share, you know, in terms of, you know, what might become available from a product -- or from a, you know, line review standpoint, things like that?

And then, secondly, just on the sharing purchases, is that one included in guidance? And, then, two, you know, how should we think about the use of that through the year?

Thanks a lot for the time.

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Fred Lynch, Masonite International Corporation - President and CEO [4]

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Okay. Great. We'll let you get away with two questions this time, Tim, but --

So I'll start with the first one. I'll start with the first one. It's the spread. You know, our focus is never about gaining share for the sake of share. Our focus is about gaining value. As you can tell, and you heard with what both Tony and what Larry said, it's about new products. It's about innovation. It's about unleashing demand in the market by making the process of, you know, selecting -- shopping for, selecting, purchasing and installing a door more easy or simple and fast, and I think you're seeing that across everything that we're doing.

When we look at the new business wins that we have had, I can tell you in -- you know, particularly in the retail space, we have been told by our customers that, "Although you're higher priced, we like what you're bringing to the market because you're helping us drive our average unit price up in the marketplace." And it's all about new products, you know, in those markets.

And so, you know, we think we're fortunate that when, back in 2012, we had a concerted effort to really reinvest in our R&D in our product. The focus on design in our marketing team, and Tony's team has been put in place. It is really changing the game, and people are coming to us and saying, "We want those doors." And I think that's allowing us to get above-market growth at these customers when they do switch their stores, you know, the markets that they put Masonite in after having a different brand, you know, prior to it like Lowe's had with Reliabuild. So that will continue to be our focus. It's all about value. All about value.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [5]

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And, Tim, it's Russ. I think your second question was related to the sharing-purchase program and whether or not that was baked into our assumptions, I'm assuming on the EPS side for 2017. And the answer is no. I mean, by definition an open-market, sharing-purchase program that we would execute opportunistically just as we have during 2016, really can't predict the impact on share count in any given corner. So that is not factored into the EPS guidance that we've given.

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Tim Wojs, Baird - Analyst [6]

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Well, keep up the good work. Thanks.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [7]

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Thank you, Tim.

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Operator [8]

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Thank you. Our next question is coming from Bob Wintonhall (phonetic) of RBC Capital Markets. Please proceed with your question.

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Bob Wintonhall, RBC Capital Markets - Analyst [9]

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Hey, guys, great finish to a very strong year. The transformation's been nothing short of a huge success.

Wanted to ask on the long-term growth framework that Fred and Russ outlined, you're talking about top-line (inaudible) growth of 7% to 9% and EBITDA margin targets of 16% to 17%. You had also called out kind of a 1.5 million housing starts, I guess, by 2019.

I was just trying to understand, you talked about cash flow to (inaudible), and to get to your new long-term growth targets, do you have to do M&A? Is that a piece of the narrative here?

And what are the other assumptions around the guidance you're providing for these targets?

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Russ Tiejema, Masonite International Corporation - EVP and CFO [10]

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Hey, Bob. It's Russ. M&A is not factored into the guidance that we've provided here, and I would just point folks back to the different factors that we outlined on 23, Slide 23 of our WebEx. This really outlines the different parts of the growth framework.

Obviously, market growth is going to be a tailwind we would expect. You know, frankly, sitting here a year ago, we would have thought that the new housing market would have recovered at a faster pace in the U.S. It's not. We see a little bit more of an elongated recovery, but we still feel that by the time we're into or exiting the 2019 time frame there's a good basis for the housing market to return to its historical average of 1.5 million units.

We are encouraged, though, that the initiatives that we've been putting in place here around product mix and AUP have continued to drive us along the pathway of margin improvement despite the new housing market running a little bit slower in its recovery than we would have anticipated.

But back to this slide, it essentially lays out the three key factors -- volume leverage on that improved market, the price and mix that we are driving with investments in our product portfolio and the offsetting factors in cost. Some headwinds, in terms of labor costs and commodities inflation. Some tailwinds, in terms of the efforts we're making to get more efficient in our manufacturing operations.

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Fred Lynch, Masonite International Corporation - President and CEO [11]

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Yeah, and I do want to just, you know, reinforce also, it's not just average, you know, price improvement as a result of new products, but we anticipate continued like-for-like price.

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Bob Wintonhall, RBC Capital Markets - Analyst [12]

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Okay. And, Fred, on that -- and then I'll pass it over -- average unit price in North America was down by, you know, it's basically flat, just slightly negative, but can you give us a little framework to think about the difference between like-for-like pricing in North America versus the mixed impact of a shift towards interior residential doors?

Because some of your prior comments are obviously getting upsell with your customers, because you're driving more value in the channel, so you're getting compensated for that, but AUP is going lower. So there's obviously a dynamic here, and I was hoping you guys could spend a minute just talking about how that narrative plays out as we go into 2017.

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Fred Lynch, Masonite International Corporation - President and CEO [13]

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So I'll talk a little bit about it qualitatively, and then, Russ, you can jump in on the quantitative section.

You know, the big difference, of course, is as you look at the -- each product category, we're seeing average unit price improve in both interiors and entry, but entry doors are at a much higher price than interior doors, and our growth in interior was actually quite phenomenal in 2016, largely driven by new products, some customer wins and also, I would just say, you know, very strong service propositions that allowed us to take advantage of the demand in the marketplace.

With respect to -- When I think about respect to, you know, dealing and managing -- as you mentioned like-for-like pricing -- we have announced price increases that will take place or have taken place in the first quarter, and so we'll continue to drive both averaging price to mix and averaging it -- or conditional pricing through like-for-like price.

I don't know if you want to add anything quantitative to that.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [14]

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Yeah. Sure. I would just add that the narrative around the mix impact and AUP is essentially unchanged from what it's looked like the last two quarters in that we're seeing growth rates on the interior category in excess of 10%, and in the fourth quarter we saw growth rates on the entry category in the mid-single-digit range.

And so when you take into account that the average unit price is (inaudible) magnitude about 3X on an entry door as it is an interior door, and you take a look at that differential growth rate in the two categories, pretty soon, you can come up with about a 3% headwind, roughly, on AUP just by that differential growth rate between the two categories.

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Bob Wintonhall, RBC Capital Markets - Analyst [15]

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Got it. That's helpful. Your stock's up 10%. Great way to finish the year. Good luck in 2017.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [16]

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Thanks, Bob.

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Fred Lynch, Masonite International Corporation - President and CEO [17]

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Thanks, Bob.

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Operator [18]

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Thank you. Our next question is coming from John Marcus of JP Morgan. Please proceed with your question.

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Jason Marcus, JP Morgan - Analyst [19]

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Jason Marcus. This is Jason Marcus here.

First question, just on your U.S. housing outlook, I think you said you expect mid- to high-single-digit growth in overall U.S. housing completion. Want to get a sense as to how you're thinking about single family versus multifamily and what the implications could be there as you continue to seek continued growth in 2017 in interior versus exterior, and if that could cause a little bit of a headwind, you know, relative to the prior year.

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Unidentified Participant [20]

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Yeah, so I think, you know, we tend to, you know, to believe what we're seeing out there from the prognosticators as regards to growth, that single family is, you know, beginning to outpace multifamily, largely just because multifamily is kind of coming to its peak level.

As we've talked about in the past, for us, that's a -- typically a positive, because single-family homes require about double the number of doors that a multifamily unit would require. So while, you know, again, we expect that moderate growth of that mid-single-digits, the more that it shifts to single family, that's a benefit to us.

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Jason Marcus, JP Morgan - Analyst [21]

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Right. But from a mixed perspective, could that -- how would that impact average unit price?

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Unidentified Participant [22]

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You know, it's interesting. In the past, we would have said that single-family homes tend to have better mix than multifamily homes, and I think we still believe that to be the case, but if you saw some of the building that was occurring in the last couple of years, there have been some, you know, more higher-end multifamily-type buildings. There's been greater need for products that are wider because of ADA, et cetera. So that differential in mix probably doesn't exist to the same level.

When it comes to entry doors, clearly, single-family homes will drive a much higher value entry door than a multifamily unit.

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Jason Marcus, JP Morgan - Analyst [23]

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Okay. Great. And, then, just quickly, on the new business wins. I think you said it should largely come in effect in April and it's about $50 million. Is that $50 million an annualized number? Is that what you would expect for the full year, for 2017?

And, then, how should we think about the margins, you know, of the new business wins in aggregate relative to (inaudible) average?

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Unidentified Participant [24]

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So we don't speak about margins on a specific customer basis, but, as I said earlier, this was a good win for us. We like the focus on new products in this marketplace. We are displacing, as we said, more than one vendor and we're combining that into a single portfolio, and we're a single source of product for the customer in the Florida markets, and, again, the Heritage series and the -- on the exterior and the Everland are big wins on the exterior side, so we're pretty excited about this win.

The way you think about it is we'll start in April, you know. It'll be a rolling transition through the second quarter, and so look at getting, you know, somewhere a little over half of that impact in 2017.

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Jason Marcus, JP Morgan - Analyst [25]

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Great. Thanks.

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Operator [26]

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Thank you. Our next question is coming from Alex Rygiel of FBR. Please proceed with your question.

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Alex Rygiel, FBR & Co. - Analyst [27]

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Thank you for taking my question, and very helpful thoughts, gentlemen. I appreciate it.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [28]

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Thanks, Alex.

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Fred Lynch, Masonite International Corporation - President and CEO [29]

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Thank you.

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Alex Rygiel, FBR & Co. - Analyst [30]

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First question is just a little bit more clarification on that last answer as it relates to the 2017 new business wins. In their entirety, not just Home Depot, but -- and not necessarily the distributors either, but in its entirety, how much extra revenue in 2017 do you think is available to you now because of those marked share wins that weren't fully appreciated in 2016 or not yet recognized in 2017?

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Unidentified Participant [31]

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That's a tough one, because there's off been -- you know, all the times we have, you know, business wins and moves back and forth. We just think about kind of the big-line reviews last year.

You know, we're probably, as we said, I just mentioned that one customer is probably in the 25 million plus range. You're going to be looking at, you know, 25 million to 60 million kind of range on just pure -- on pure business wins from major line reviews.

But, again, we're out there focusing on winning business each and every day through our existing customers, through their existing, you know, channels of distribution, and that's happening on a day-to-day basis at the dealer level and at the customer -- and the end-customer level, mostly driven by new products, by innovation and by service and delivery excellence.

And so we look at the whole package. It's not these incremental wins that drive our business long term. It's the whole focus on our business model.

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Alex Rygiel, FBR & Co. - Analyst [32]

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Of course. And, then, as it relates to North America residential, the sales in the fourth quarter are about similar to the third quarter, but yet your margin was down a little bit sequentially. Can you give us a little bit of color into that?

In addition, do you happen to see any pre-buy ahead of the price increases? This is sort of the third or fourth year in a row where you've gone through sort of January like price increases. Have your customers gotten smart in starting to sort of pre-buy into that?

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Russ Tiejema, Masonite International Corporation - EVP and CFO [33]

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Hey, Alex. It's Russ. One thing that I would point out relative to the Q4 comps, note that we reminded folks of some one-time items that occurred in Q4 of last year. So, specifically, we had a significant utilities rebate and we had an adjustment to some of our sales tax accruals. Those two items really accrued to the residential business last year, so that made for a very difficult margin comp year on year. That's why you're not seeing the amount of margin accretion this year as compared to 2015 based on the volume --

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Alex Rygiel, FBR & Co. - Analyst [34]

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Yeah, I think what I was trying to get to the sequential decline in the margin from 3Q to 4Q on a flat sales number.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [35]

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Yeah, I think, in that case, you're just seeing timing of expenses. As we've talked about, it can be a lumpy quarter-to-quarter depending on timing of expenses, and given that we did just launch the new brand in residential in January, we had some additional costs in the residential business in preparation for that during the fourth quarter.

You had a question relative to pricing. I'm going to let Tony talk about that one relative to customer pre-buy.

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Tony Hair, Masonite International Corporation - SVP, Residential Door Business [36]

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Yeah, Alex, just a couple of notes there. One, we did have some additional expenses as we got prepared to launch the brand and pull the trigger as we did with -- at IBF the beginning of 2017, but relative to customers, we do see some pre-buying ahead of price increases. We usually announce those, you know, 90 days out, so they have time to plan. So we do see some of that.

We also see some customers in an effort to hit rebate tiers will advance by at the end of the year as well. So those two dynamics can have an impact.

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Alex Rygiel, FBR & Co. - Analyst [37]

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And, lastly, Russ, can you come back to sort of your directional thoughts on the first quarter? I didn't quite follow them all.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [38]

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Well, I was just pointing out the fact that we had very, very strong results in Q1 of 2016. I think our sales volume in the North American residential business alone was up on the order of 20%. So that tough comp alone leads us to believe that a lot of the growth in margin and revenue on a year-on-year basis is going to be more of a post-Q1 event as opposed to right out of the gate here.

And, you know, Tony, to some degree, supported that point with the point he just made about pre-buy during Q4 and what that means for revenue trajectory into early Q1.

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Alex Rygiel, FBR & Co. - Analyst [39]

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Very helpful. Thank you. Congratulations.

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Operator [40]

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Thank you. Our next question is coming from Al Kaschalk of Wedbush Securities. Please proceed with your question.

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Al Kaschalk, Wedbush Securities - Analyst [41]

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Good morning, guys. Real quick one on the share-account assumption for 2017, if you could provide that. I assume that means your level's set relative to the -- where you ended the year on a fully diluted basis.

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Unidentified Participant [42]

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Yeah. That's right. We don't provide any projections for share account. We just provide the guidance based on year-end count.

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Al Kaschalk, Wedbush Securities - Analyst [43]

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Okay. And then just in the broader picture, given the mix shift and the other dynamics going on, I wanted to maybe lift up and look at EBITDA and then the percentage of operating cash flow of EBITDA and the conversion there. Looks like it's around 70%, 71% today, and whether it's the right (inaudible) or not, it is, I think, indicative of what you've guided from an EBITDA perspective that you're going to be generating a fair amount of operating cash flow.

So could you support a view that that number should see some increase, whether it's three-quarters of every dollar that you generate in EBITDA goes to offering cash flow?

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Unidentified Participant [44]

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Yeah. We've talked about this and we've not provided any explicit guidance on operating cash flow or, for that matter, free cash flow or free cash flow conversion.

But I would tell you that, as we look into 2017, we would anticipate our free cash flow conversion, which we defined as operating cash flow less our planned capital expenditures, to be order of magnitude roughly equivalent to our net income.

In 2016, I think we ran at just less than 90% free cash flow conversion on that basis. We would expect that to improve slightly in 2017.

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Al Kaschalk, Wedbush Securities - Analyst [45]

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Okay. And then if I could just follow everyone else in asking seven questions, I'll take three questions, and my third question would be, just in terms of the timing of last year's SG&A, we had -- you know, we had a little bit of noise in there in terms of the investment you were making. I think we're seeing some of that investment come through now.

Should we think about 2017 as a relatively level investment on capex or does the strategic and growth capex come in chunks?

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Unidentified Participant [46]

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I'm sorry, Al. I want to clarify. Are you talking about capex or SG&A? Because I heard both of those woven into your question.

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Al Kaschalk, Wedbush Securities - Analyst [47]

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Yeah, and I did wove them both in, and I guess I was trying to get four questions in, but --

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Unidentified Participant [48]

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We caught you.

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Al Kaschalk, Wedbush Securities - Analyst [49]

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Yeah, you sure did. You're sharp as a tack over there. Either way you want to address it, whether it's SG&A or capex, that's fine. I guess I just wanted you to be able to provide expectations on terms of either the expense side of things from this investment or the capex dollars. I'll let you choose for us. Thank you.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [50]

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Well, I tell you what, I'll give you a piece on both. I just reiterate the point that I made during my prepared remarks that from a capital spending basis, we expect it to be a largely carryover to what we saw in 2016. That is a little bit higher level than you saw in prior years, and that's really on the strength of some of the return profiles that we see on some significant strategic projects to help support growth in the business and some of our manufacturing efficiency initiatives.

Fred previewed some of those in his remarks also.

On the SG&A side, you know, on a full-year basis, if you take a look at our SG&A as reported in our GAPP financials, we lost about 20 basis points of leverage. If you back out some of the non-cash expenses, like stock op expense and depreciation and amortization, we actually got about 20 basis points of leverage in our SG&A on more of an EBITDA basis. And we would expect that to continue or even accelerate slightly into 2017.

But with that said, you know, we did launch the brand in the first quarter, so you would anticipate that we were going to have a little bit lumpier spend in Q 1 in 2017.

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Al Kaschalk, Wedbush Securities - Analyst [51]

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Thanks a lot, guys, and good luck.

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Operator [52]

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Thank you. Our next question is coming from Kevin Hocevar of Northcoast Research. Please proceed with your question.

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Kevin Hocevar, Northcoast Research - Analyst [53]

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Hey, good morning, everybody, and congrats on a great end of the year.

I'm wondering -- You talked about -- In Slide 21, you talked about 2017 tailwinds that you expect price increases in all the business segments. So wondering if you could comment on that. I know architectural, I know you had a price increase in early 2016 that takes time to ramp and you've got a couple of price increases here -- well, one in each North America and Europe. So just kind of wondering if you could comment on what level of success you're seeing there and what your expectations are for 2017.

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Unidentified Participant [54]

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I think just at a high level, as you mentioned, we have price increases in all the segments in the -- coming through in the first quarter. And, you know, we expect that we'll meet the price increases that we put in place. So most of those are in the, you know, low- to mid-single-digit kind of level.

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Kevin Hocevar, Northcoast Research - Analyst [55]

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Okay. And then with the Scherer purchase I think you mentioned in the press release that you expect to deploy that over the next two years. So wondering what that means for M&A. I mean, it looks like, you know, you'll probably (inaudible) some ample cash to put toward M&A as well. So, you know, does the timing of that over the next two years depend on the M&A opportunities as well or can you still deploy that over a two-year period and still tack on M&A on top of that?

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Fred Lynch, Masonite International Corporation - President and CEO [56]

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So I think the great thing is we -- And I'll start and I'll have Russ finish up. The great thing is we have a balanced approach to capital allocation and capital deployment, which is -- and we are fortunate to be in that situation because we are generating, you know, strong free cash flow.

So I think that in and of itself, you know, we have been, I think, thoughtfully acquisitive over the last five years or so, looking for acquisitions that make sense. At the same time, we're always very diligent with our investors' dollars and making sure that we're going to apply them down to businesses that are going to provide the types of return. And so, you know, we'll continue to do that.

Our acquisition profile has also been lumpy, because as we acquire things, we make sure that we're putting the time and effort in to integrating them in an appropriate manner.

But when you look at where our debt levels are and the free cash flow that we should generate and even with the stock buyback you could imagine that we have ample liquidity to be really strategic.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [57]

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Yeah, really nothing to add. I think Fred summarized it well, just given the optionality we had with the balance-sheet strength we have, borrowing capacity that's available, we feel like we're in a good position to simultaneously execute on each of those pieces of our cash deployment framework, including continuing to evaluate strategic acquisitions as they arise and as they make sense for our portfolio, simultaneous with repurchasing shares.

Obviously, you can modulate between those two depending on the size of any M&A target, but in the absence of any significant M&A over the last month, we've been certainly assertive on the share-repurchase program and would continue to expect or would expect to continue doing that.

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Kevin Hocevar, Northcoast Research - Analyst [58]

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Okay. Great. Thank you very much.

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Operator [59]

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Thank you. Our next question is coming from John Baugh at Stifel. Please proceed with your question.

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John Baugh, Stifel Nicolaus - Analyst [60]

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Thank you. And congrats on a great year. And I think I can count. I have two questions.

Number one, the UK, could you update us or refresh our memory on the waiting of DSI versus the new construction piece? And is it your expectation that DSI still grows in that 20% plus rate or is the scale getting such that that's tough to compete against?

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Unidentified Participant [61]

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Well, DSI is not a huge part of our UK footprint, but it's sizeable and it is growing, and what encourages us about the DSI business is that it is 100% repair and remodel. And so the strength that that business has continued to exhibit suggests that despite all of the headlines, concerns around Brexit, and despite the fact that new construction is seeing some headwinds, the consumer in the UK seems to continue spending on their homes.

And DSI, just by virtue of its unique distribution model, it's direct sale to contractor, and the ease and speed with which it allows a homeowner to configure and have a new entry door installed, we think that's really unlocking latent demand in the market. It's not as if the remodeling market in the UK is growing at 20% per annum. It's certainly much lower than that, but we're unlocking and delivering additional demand.

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John Baugh, Stifel Nicolaus - Analyst [62]

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Okay. And then if you could help me just to clarify your assumptions for 2019 on I guess maybe housing starts. Was that 1.5 million by 2019 or at some point later?

And then are you seeing any shift in the size of single-family homes starts or making any assumptions about the size, which may influence the number of doors for a start? Thank you.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [63]

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Sure. Our general view is 1.5 million units by the time we get into 2019, but let's be clear, there are a lot of other strategies that we're executing around product mix, around price, around operational efficiency that we think are just as important, if not more so, to our margin profile.

Relative to the size of homes, we have not made any explicit assumptions or average footprint of a home and what that means to the average number of door openings in it.

But going back to some remarks that Fred made previously, we do think that there's the opportunity for a shift back to more single-family versus multifamily, and by virtue of, you know, two X the number of door openings in a single-family detached home, we think that is a volume tailwind as well.

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John Baugh, Stifel Nicolaus - Analyst [64]

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Great. Thanks and good luck.

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Russ Tiejema, Masonite International Corporation - EVP and CFO [65]

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Thank you.

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Operator [66]

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Thank you. Our next question is coming from Jim Barrett of C.L. King and Associates. Please proceed with your question.

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Jim Barrett, C.L.King & Associates - Analyst [67]

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Good morning, everyone. Fred, you know, the company's knocking the cover off the ball in residential. I'm trying to understand why architectural, even after adjusting for one less week in 2016 is not tracking at a mid-single-digit rate, which is consistent with your long-term expectation for the market.

And then on a related point, I assume, given your scale, given all you're doing in architectural, longer term you're expecting to take market share. Is that how we should think about the business conceptually in future years?

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Fred Lynch, Masonite International Corporation - President and CEO [68]

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I would first say that, you know, we're going through what we refer to as the architectural reset within the company. We acquired a number of businesses that we put together. You know, I'll say that our initial integration didn't go as fast as we would like. We stepped back and relooked at that and took a much bolder approach to -- as Russ mentioned earlier, and I referred to, is to really change the manufacturing footprint to put the products on a common chassis, you know, readjust our branding approach.

And so we had that process in place, the start of that, last year or in the middle of 2016, and we will have a major initiative on that as we go into 2017, including the completion of our ERP migration by 2018.

So, you know, we, again, we're taking bold moves. We have exited some business that doesn't make sense, the top line. We are in the process of shutting down a location, and as part of that shutting down location, we're also exiting some product lines as well that we felt weren't as profitable.

But we are very confident about our strategy, and we're very confident about the position that we can create in this industry and in this marketplace to, you know, to make a big impact.

So we're excited about the architectural piece, but it is -- you know, it's a bold, courageous plan and it's hard work and we'll get there.

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Jim Barrett, C.L.King & Associates - Analyst [69]

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Okay. Thank you very much. That was helpful.

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Fred Lynch, Masonite International Corporation - President and CEO [70]

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Thank you.

Okay. It looks like we're at the end of our time frame. We have no more questions. We appreciate everyone's participation and we look forward to talking to you later in the year.

Thank you very much.