Q4 2019 Earnings Call

Greetings welcome to me its tonight's fourth quarter and full year 2019 earnings conference call. During the presentation. All participants will be in listen only mode. After managements prepared remarks investors aren't vida to participate in a question answer session. Please note that this conference call is being recorded.

I would now like turn the call over to Joanne Freiberger, Vice President Treasurer.

Thank you Donna and good morning, everyone. We appreciate you joining us today with me on the call today or how are you I guess, maybe a nice president and Chief Executive Officer, and rest teach him out makes a nice executive Vice President and Chief Financial Officer. We also have Tony here President of global residential joining us for acuity.

We issued a press release in Webex presentation yesterday afternoon during our fourth quarter and full year 2019 result. These documents are available on our website at <unk> Dot com.

Before we begin I would like to remind you that this call will include forward looking statement.

Each forward looking statements contained in this call is subject to risks and uncertainties that could cause actual results could differ materially from those projected in such statements. Additional information regarding these actors appears in the section entitled forward looking statements in the press release, we issued yesterday.

More information about risks can be found under the heading risk factors and made life's. Most recently filed annual report on form 10-K, and our subsequent form 10-Q.

I see filings are available at FTC Dot Gov and on our website at midnight Dot com. The forward looking statements in this call speak only as of today and we undertake no obligation to update or revise any of these statements.

Our earnings release in today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliations which are included in the press releases in the appendix of the Webex presentation.

Our agenda for today's call include the business overview from Howard followed by a review of the fourth quarter and full year financial results from Roth.

Long with our 2020 financial outlook, followed my closing remarks from Howard and a question and answer session and with that let me turn the call over to Howard.

Thanks, Joanne good morning, and welcome everyone.

As Jordan mentioned late yesterday, we released our fourth quarter and full year 2019 financial results.

Overall I'm proud of how we finished the year.

Net sales increased 1% year on year in the quarter, partially due to our U.S. residential wholesale business delevering low single digit girl.

Net sales benefited from continued mid single digit average unit price growth across all segments.

Foreign exchange had no impact on net sales in the quarter.

At a consolidated level you p. benefited from both favorable price and mix, resulting in the fourth consecutive quarter of growth in adjusted EBITDA dollars and adjusted EBITDA margin.

This was in line with the company's expectations provided in February of last year as part of our original 2019 outlook.

Our year on year performance was primarily the result of favorable pricing along with the organization's focus on operational productivity Russ will discuss the drivers of adjusted EBITDA in more detail later.

Another area of focus in 2019 was working capital.

I'm pleased to say that we had our third consecutive year of free cash flow conversion exceeding 100% of adjusted net income.

On the right on the slide we have our business an operational highlights 2019 was a great year for the organization execution and continued deployment of the M. vantage operating system.

We ended the year with a greater than 100% increase in the total number of kaizen events held.

It's important to note that this is not just the result of our continuous improvement teams efforts.

The result of prior training and the M. vantage operating system, taking hold out of local plant level.

We're seeing more plants and employees hosted events and as a result, roughly one third of May side employees participated in a kaizen event this year.

We have seen this drive engagement and productivity.

Certainly means to offset the inflationary pressures, we feel in our manufacturing and distribution operations.

On prior calls I've noted my interest and expectation and continuing the strong momentum our team is demonstrating in the area of continuous improvement and operational excellence.

Part of achieving operational excellence is accountability, and reducing unnecessary complexity where possible.

In an effort to achieve both as of January 1st we integrated our internal components function into the corresponding existing business segments.

Purpose of this previously Standalone team was to operate our manufacturing facilities that supply the business segments with components needed to produce doors, such as facing door core and cut stock.

By eliminating this group, we're aligning manufacturing of these components with the businesses they support.

This reduces internal complexity offers more control to the business segments over their supply chain and ultimately holds the segments more accountable for their performance.

I'm also happy to share that 2019, we published our inaugural corporate responsibility highlights report.

As a company that was founded back in 1925, because of William H. Masons desire to term waste wood from the lumber industry into something of value, we have a long history of sustainability.

Because of this history, coupled with the up ever increasing focus from customers employees and investors on corporate E.S.G. efforts. We felt it was important to summarize for all of our stakeholders, how we integrate environmental social and governance considerations into our business across the globe.

We're committed to enhancing this report after reporting effort going forward I invite you to review this report, which can be found under corporate governance on the Investor relations portion of the web site.

Moving to slide six and our margin improvement initiatives.

As mentioned 2019 was a great year for the organizations execution and continued deployment of the M. vantage operating system. The three key pillars of M. vantage been training them standards, which provide the tool set for our employees to drive continuous improvement programs.

Pets crews, which are the performance improvement teams routinely deployed throughout our operations to drive rapid improvement projects in specific areas and finally plant transformations, which are broader improvement a bounce utilizing multiple teams across a single site to evaluate.

Okay and improve entire value streams.

In the fourth quarter, we completed one plant transformation and initiated one more.

Following the successful completion of the transformation at our Haley Bill residential door Assembly plant, we achieved a new five day record front doors produced since then we've been able to sustained production at slightly lower levels with only two shifts as opposed to the three that we were previously Ronnie.

So some great results from our C.I. team and the local employees as they take ownership of driving continuous improvement in their facility.

In total we completed for plant transformations in 2019.

We completed three additional events in the fourth quarter. This brings the total number of pet events to 20 for the full year.

As mentioned earlier, we more than doubled the number of kaizen events for the full year.

In addition to roughly one third of Mesa night employees participating in kaizen events during 2019.

Particularly encouraged to see that 2300 of these individuals where new participants.

We also had a greater than 100% increase in the number of lean certifications for the full year.

It's worth noting that we've introduced additional levels of certain certifications for 2020.

For those employees that have been lean certified and are actively engaged in hosting kaizen events, we want to provide them with the opportunity for additional training to strengthen those skills benefiting both the individual and May site.

In the center of the slide we have a brief update on our footprint optimization initiatives during the quarter. We successfully exited the three remaining north American facility closures that we announced early in 2019, bringing the total number exited before we also completed the relocation of our cuts.

<unk> facility from Stockton, California to burn I, Nevada, what the goal of reducing cost and improving output.

In addition to these closures. We also recently announced the closure of a north American residential exterior door plant in Quebec, Canada.

Well. These decisions are always difficult. We believe this was an important step to further optimize our manufacturing footprint in a way that reflects geographic demand and most effectively supports our customers.

Over the next several months, we plan to simultaneously phase out production as we transferred to other plants that are well positioned to service our customers in that region with full closure of the facility target by the targeted by the end of the second quarter.

We're also taking steps to consolidate our north American residential customer service team from a number of plants to two locations. We believe the centralization and redesign of the customer service team will further our goal to provide an extraordinary customer service experience the differentials.

Differentiates Mason from the competition.

It also aligns with our new quality and service investment strategy, which I'll talk about shortly.

Transition activities are already underway and will continue through the end of this year.

Finally, our new tier one of plant, which began shipments in October continue to ramp up during the fourth quarter.

Shifting to the right side of the slide and portfolio optimization.

In line with our expectations, we successfully divested the third non core business in the UK European margins benefited from the divestiture or two noncore businesses earlier. This year. This divestiture is also margin accretive for the segment.

We continue to see the benefits of portfolio management in the quarter on HCP and margins.

The realignment of our Mexico business toward higher value products has helped increase a upi and shed some margin diluted business.

We continue to focus the available capacity previously dedicated to the low margin skews in Mexico to service hire a U.P. business elsewhere in the North American residential segment.

Last quarter, we mentioned the reduction of our North American entry door design offering by over 30% beginning in the first half of 2020.

We believe that reducing existing designs and making room for more on trend and differentiated doors will ultimately lead to hiring Upi and related margins.

This reduction in skews as expected to have a minimal impact on customer demand and will simplify production as we focus on improving quality and service.

Overall, a very good year for our margin improvement initiatives the team executed well in a variety of strategic areas, allowing us to successfully complete all of our previously announced 2019 footprint and portfolio actions.

Moving to slide seven.

In conjunction with our North American pricing actions, we announced our intention to invest an incremental $100 million over the next five years in three areas.

Service and quality.

New product innovation and marketing initiatives to drive improved down channel demand.

Since then we've been sharing with channel partners, where this investment will be focused and how we believe it will benefit them to be aligned with mace Tonight in the long term by further enhancing the service and value proposition our products offered to end users.

This slide represents an overview of those goals and potential benefits.

Under each of the three areas of investment we have our aspirations goal for service and quality, it's to achieve best in class lead time and quality.

This benefits our customers in two ways.

First higher quality construction leads to fewer returns and warranty items.

Improved lead times shorten the length of time between order and delivery and can reduce inventory holding levels for our channel partners.

As mentioned on the last call we plan to focus on service and quality to start so I'd like to share a couple of concrete examples of our work and plans to date.

First we are making me purposeful investments in some material and components to improve overall product quality and performance. For example, we are upgrading some of our door styles to improve edge paint ability and finish quality.

As we focused on the end customer we're finding that they are willing to pay more for ease of use statics and durability.

This is an example of a simple investment in higher quality quality componentry that benefits the end customer and the entire channel by potentially reducing product returns.

To achieve faster delivery and reliable inventory levels, we are working to implement make to stock capabilities for some of our highest demand skews, allowing us to more quickly respond to customer orders on our best selling products, reducing lead times and improving the responsiveness of our partners to their customers.

It's down channel.

This is an example of where a modest yet strategic investment in working capital and have the potential to deliver excellent returns by improving service levels and demand.

In the center of the slide you'll see our aspiration goal for product innovation is to double the sales impact of new products.

This would allow both masonite and our channel customers to be the first to market with differentiated products that homeowners desire.

While our public commentary on this strategy will be limited ahead of new product launches you should think about this objective as being focused on increasing the cadence of new product introductions and more rapidly offering value enhancing features across a broad portion of our product line.

We believe our team in the Mason I innovation center in Western cargo can introduce innovations that allow us to grow revenue and profit through a better mix of differentiated products.

Lastly on the right through end customer marketing, we hope to drive homeowner demand for masonite products.

We are not attempting to create broad general population awareness, rather we do want to be top of mind when consumers are considering a project that includes doors.

We recently took an initial step towards driving targeted awareness as the door sponsor for well known remodeling show that haven't season premiere this past Sunday on HGTV.

We believe our partners would benefit from this targeted awareness as it generates demand around doors. The due more to ensure our distributor customers can fully capitalize on this increased demand we plan to provide them with improved digital tools for easy of configuration quoting and ordering.

A lot of good work has taken place already some of which I can share with you and some of which I look forward to sharing and a future point as we continue to focus on delivering doors that do more.

With that I'll turn the call over to Ross to provide more details on our financial performance an annual outlook Ross.

Thanks, Howard and good morning, everyone.

Let's move to slide nine for a summary of our consolidated financial results in the fourth quarter.

We had net sales of $531 million up 1% versus the fourth quarter of 2018.

Continued strength in average unit price across our three segments contributed growth of 5%, which was offset by a 3% decline in base volumes and a 1% decline in sales volumes from the net acquisition net impact of acquisitions and divestitures.

There was virtually no impact from foreign exchange during the quarter at a consolidated level.

The base volume decline was relatively in line with our expectations overall, given the impact of divestitures and product line exits.

We did however, see some destocking in the North American retail channel.

Ill provide some additional color on those items when discussing each segment.

We experienced another quarter of strong gross profit and gross margin expansion, primarily due to higher Upi, partially offset by the impact of lower volume.

Gross profit was up by over 16% in the fourth quarter with gross margin expanding 290 basis points versus the prior year to 20.9%.

S. DNA spending was $77 million in the fourth quarter of $15 million compared to the prior year.

Approximately $4 million of the increase was due to year on year variance and incentive compensation, while an additional $3 million was related to non stop noncash stock and deferred compensation expenses.

The remainder of the increase was largely due to general wage and benefit inflation and professional fees principally associated with legal costs related to the previously disclosed grow up lawsuit.

Net income for the fourth quarter was approximately $2 million.

This was a decrease of roughly $11 million from the prior year largely explained by a 6 million dollar after tax increase in charges related to previously announced restructuring plans and a 4 million dollar after tax charge related to an anticipated pension settlement as noted on our third quarter earnings call.

Diluted earnings per share or six cents as compared to 46 cents per share in the fourth quarter of 2018.

Excluding the impact of restructuring and pension related charges. Our adjusted diluted EPS was 69 cents compared to 68 cents in the fourth quarter 2018.

As Howard noted earlier, we delivered year on year increases in our adjusted EBITDA and adjusted EBITDA margin for the fourth consecutive quarter.

Adjusted EBITDA increased by approximately 8% to $62 million, while adjusted EBITDA margin expanded 80 basis points to 11.7%.

As you'll see in the adjusted EBITDA Bridge on the right side of the slide the net impact of volume and a Upi primarily a upi this quarter were significant contributors.

Materials were a net positive in the quarter largely due to the great work, our global sourcing team did to deliver savings projects to offset what was still only slightly inflationary environment, particularly in Europe in architectural segments.

Terrace continued to be a headwind, but the year on year impact was lower in the quarter as we have fully lapped. The initial 10% implementation of the section 301 tariffs in late September 2018.

Factory costs were higher in the quarter, primarily due to a year on year variance at healthcare accruals for our factory employees and startup and ramp up cost for our new factories.

Absent those impacts factory costs were roughly flat as we continued to deliver productivity improvements sufficient to offset wage and benefit inflation and the impact of lower volumes.

Distribution costs remained higher in the quarter virtually all due to the shipping lane changes that we noted on our third quarter call to better service existing retail customers on the West coast.

Turning to slide 10, and our North American residential segment.

Net sales were up 3% compared to the prior year driven by growth of 4% from a upi.

And 1% from our acquisition of BW why in the fourth quarter 2018.

These gains were partially offset by a 2% decline in base volumes, primarily due to our retail customers taking inventory levels during the quarter.

However, it is worth noting the point of sale data indicates the sale of our products at retail were actually up year on year in the quarter.

Our wholesale business was relatively flat year on year with low single digit growth in our us business being offset by continued weakness in Canada and the impact of our previously discussed Mexico portfolio actions.

Despite the negative impact of the topline the rationalization of our product lines in Mexico, supporting adjusted EBITDA margin improvement by freeing up manufacturing capacity for higher value business elsewhere.

Improved mix along with our 2000, our December 2018 pricing actions drove 4% hire a U.P. growth in the fourth quarter. This marks the segments 12 consecutive quarter of the growth.

The North American residential segment also delivered strong a strong another strong quarter of adjusted EBITDA performance with adjusted EBITDA of 36% compared to the prior year and margins improving 360 basis points on the benefits of higher Upi, coupled with supply chain optimization and.

Study.

Within the North American residential segment, our global sourcing team successfully executed savings projects to offset both material inflation and tariffs during the quarter.

Meanwhile, our operations team continued to deliver improved labor productivity sufficient to offset wage and benefit inflation and reduced overhead absorption due to lower production volumes as well as incremental costs related to ramping up new plants.

We also began to see initial savings from our 2019 restructuring actions launched earlier this year as inventory and equipment transitions were completed and savings from closed facilities were realized.

Moving to slide 11, and our Europe segment.

Net sales decreased by approximately 11% year on year in the fourth quarter, driven primarily by a 9% decline from our divestiture of non core UK businesses.

As Howard mentioned earlier, we completed our third planned UK divestiture during the fourth quarter.

Lower base volumes contributed contributed another 8% to year on year declines due to previously lost share in the UK builder channel along with generally weak demand in the broader UK market.

We attribute this market softness at least in part the continued uncertainty of Brexit ahead of the UK general election held in December.

We continue to see a negative year on year impact from foreign exchange in the quarter, but at a much lower rate than previous quarters in 2019 headwind of approximately 1% to net sales.

This is a result of the British pound our largest currency exposure in this segment strengthening via versus the US dollar to ultimately ended the quarter roughly flat year on year.

These declines were partially offset by growth from a upi up 6%.

Europe segment continued to deliver solid adjusted EBITDA growth of 14% in the quarter compared to the prior year with adjusted EBITDA margins, increasing 320 basis points to slightly north of 15%.

This margin improvement was primarily the result of the divestiture of noncore UK businesses, which were margin dilutive to the segment as a whole along with continued strength in our UK entry door business. The supports the repair and remodel market.

Turning to slide 12, and the architectural segment.

Sales increased by 4% in the fourth quarter due to growth of 8% from you.

Which continued to benefit from higher pricing on projects quoted beginning in early 2019 and improved mix due to those projects skewing toward higher value products.

This growth was partially offset by a 2% decline in base volume and a 2% decline in the sale of components and other products.

Adjusted EBITDA was $6 million in the fourth quarter, a 10% decrease compared to the prior year, primarily due to factory productivity shortfalls and unfavorable inventory adjustments.

These results were well short of management expectations for the quarter and clearly disappointing.

As for operational performance became evident during the quarter. We quickly took action to identify root causes and make changes as necessary to address them going forward.

First we initiated leadership changes in operations finance and plant management.

A new VP of operations for the architectural segment has joined makes night and she brings deep experience in both building materials manufacturing and supply chain management from several world class companies.

Generally a new segment finance leader was appointed a very seasoned mace night financed professional with extremely deep manufacturing experience, who most recently served as the finance leader for our components function.

We believe these personnel changes coupled with new plant managers at two key facilities will help drive improved results and increased accountability.

We also deployed our continuous improvement team to review specific operational issues in our largest architectural plant and supplemented their efforts by engaging a consulting firm that knows our operations well.

Through this work we identified bottleneck areas that were constraining production throughput and invested in equipment upgrades where necessary to prove that we.

We are making progress.

Our largest architectural plant recently achieved a double digit percentage increase in weekly production rates as compared to the fourth quarter.

Bottom line, we were disappointed in the segment's performance and have taken Swift actions that we believe will address the issues.

On slide 13, we summarize our full year financial results for 2019.

Net sales were up only modestly compared to 2018.

Pete contributed growth of 5% and the net impact of acquisitions and divestitures contributed another 2%.

These gains were offset by a 5% decline in base volumes and a 1% negative impact from foreign exchange as well as a modest decline in our sale of components and other products.

Gross profit of $478 million represents an increase of 10% over the prior year, while gross profit margin expanded 180 basis points to 21.9% for the full year due primarily to increased a upi and improved operational performance, partially offset by lower volume.

Higher materials cost driven in part by tariffs.

Adjusted EBITDA increased 6% to $283 million for the full year, while adjusted EBITDA margin expanded 70 basis points for the prior year to 13%.

Our balance sheet and cash flow performance. Both ended 2019 strong as illustrated on slide 14.

Total available liquidity, including unrestricted cash and accounts receivable repurchase agreement and our Undrawn ABL facility was $377 million or approximately 17% of our trailing 12 months net sales as of December 29 2019.

Net debt was $624 million and we ended the year with net debt to adjusted EBITDA leverage at 2.2 times.

During the fourth quarter, we repurchased approximately 22000 shares under our share repurchase program at an average price of $70.77 per share totaling approximately $2 million in the quarter.

This is lower than preceding quarters of the year due to continued share price appreciation in the fourth quarter.

For the full year, we repurchased approximately 1.2 million shares at an average price at $51 in 20 cents per share for a total of $60 million.

Since we initiated our share repurchase program in February 2016, we have repurchased nearly 25% of the shares outstanding at that time for an average price of $61.58 per share.

As of yearend, we had $144 million remaining for repurchases under the existing programs.

As Howard mentioned earlier, we achieved our third.

Year of free cash flow conversion in excess of adjusted net income.

Our conversion performance was notably strong in 2019 at 149%.

Free cash flow increased 15% year on year, and operating cash flow increased 9% year on year on solid improvements across all areas of working capital.

Capital expenditures were slightly higher than our annual outlook of $75 million to $80 million, owing largely to the timing of payments related to capital projects.

On slide 15, we outlined a number of external market factors, we expect to see in 2020.

As well as key company initiatives that we believe will contribute to our performance.

With respect to the US housing market the largest end market that we serve we expect to see continued growth and housing starts and completions continuing the strengthening trend of housing that was reported in the second half of 2019.

In 2020, we're planning for low to mid single digit growth in us housing and low single digit growth in the us triple our market.

Elsewhere in North America, we're planning for virtually no end market growth, particularly in Canada, where single family housing starts data have trended down the last two years and show no immediate signs of improvement.

In the UK, we're anticipating an uncertain macroeconomic environment overall is the country resets trading relationships following its exit from the EU.

Well the uncertainty of the Brexit decision is now officially behind us feedback from our key customers in the UK suggest they expect the housing market to remain under pressure in the near term and so we anticipate demand that is flight flat to slightly negative versus 2019.

Meanwhile, we expect labor inflation to persist as a tight us labor market is expected to drive low to mid single digit wage and benefit inflation again in 2020 as we continue to compete with other companies for talent.

Labour inflation is also anticipated in the UK as recently increase the minimum wage thresholds in that country are expected to result in upward pressure and pay scales more broadly.

Inflationary pressures are expected to moderate slightly yet still persist in commodities.

While section 301 tariffs on China source product did not increase to 30% in late 2019 as originally anticipated we're planning for tariffs to remain at current levels throughout 2020 and represent a slight headwind.

Year on year, given implementation timing of the various product list.

It is also worth noting the current health concerns in Asia have the potential to disrupt supply chains, if the flow of goods impacted for an extended period.

Our global sourcing team is developing strategies to diversify our supply base in ways, we believe protect us from supply disruptions, albeit at higher cost.

Taking all of these factors into account, we anticipate material cost inflation could run in 1% to 2% range again in 2020.

Note that this outlook excludes the impact of any potential new trade actions. An example of being in recently filed countervailing duty and anti dumping petition, which targets molding and millwork products for Brazil, and China and could impact the building products industry broadly.

Aside from these sourcing strategies and the ongoing operational initiatives that we've been discussing throughout 2019. The area. We believe will be most impactful to our results in 2020 is the implementation of our North American residential pricing strategy disclosed last November.

Ill talk about the expected impacts that strategy on the next page.

Turning then to slide 16, we've outlined our current outlook for consolidated full year results in 2020.

Given that our new pricing went into effect just two weeks ago. There remains a degree of uncertainty for how this strategy will read through to financial results in the North American residential segment this year.

As a result, we're providing a wider than normal range in our annual outlook at this time.

With that said, we currently expect consolidated net sales growth of 2% to 7% versus 2019 with negligible impact from foreign exchange throughout the year.

Growth dynamics are expected to differ meaningfully across our three segments.

In our Europe segment, we're planning for net sales to be down modestly with a upi gains more than offset by mid single digit headwind from the impact of our divestitures in 2019 and end markets that are expected to remain weak in the UK.

In the architectural segment, we're planning for a low single digit net sales increase on a combination of modest end market growth as well as continued a upi gains LP it at reduced levels from 2019.

In the North American residential segment, we're planning for mid single digit net sales growth with a number of moving pieces.

Based on the US residential end market drivers I cited earlier, we expect low single digit market growth overall, partially offset by an approximately one point headwind from the impact of our product line exits in Mexico initiated during 2019.

At this time, we're planning for a mid single digit decline in base volumes in response to our price increases let me unpack our expectations around this further.

If you recall last November we disclose that we plan to implement price increases across the north American residential product lineup that yielded a weighted average percentage increase in the mid teens effective for orders placed February threerd.

Those increases have been implemented as planned although we would not expect to see a significant benefit prior to the second quarter, given timing of shipments and the impact of pre buy activity we witnessed in January.

Our net realization will likely be impacted somewhat by mix as we anticipate volume losses will be more concentrated with products, having the highest price increases.

Additionally, there are limited situations, where we've ordered pricing for large projects quoted in advance of the price announcement, and we recognize that some customers existing growth incentives maybe triggered at increased levels due to the higher pricing.

Taken together these factors suggest a high single digit a U P increase maybe expected in the North American residential segment in 2020.

Against this net sales growth outlook, we expect adjusted EBITDA to be in the range of 310 million to $345 million.

The largest variable impacting adjusted EBITDA growth versus 2019 is expected to be the net benefit of our new North American residential pricing strategy.

Depending on the magnitude and timing of volume losses, we would expect the detrimental impact on margins to be higher than our normal pass through rate until we were able to adjusted op operations Accordingly.

This adjusted EBITDA outlook includes cost associated with the planned incremental investments, we announced in conjunction with the pricing strategy that Howard discussed in detail earlier, partially offset by operational savings from restructuring that ramps up in 2020.

The effective these investments and restructuring savings are expected to be realized largely in the north American residential segment.

We would expect minimal margin expansion in Europe as benefits of ATP and our divestiture of lower margin businesses are likely offset by the risk of lower volumes in the near term and higher wage inflation.

We anticipate margin improvements in the architectural segment.

Segment, driven by recovery from the operational issues, we've discussed and higher.

We expect adjusted earnings per share in 2020 will be in the range of $4.25.

To $5.25. This range incorporates an assumed tax rate of 24% to 27%.

An average diluted share count of roughly 25.6 million.

Relative to key cash flow drivers, we expect cash taxes to increased from $13 million in 2019 to a range of 18 million to $22 million in 2020.

With respect to capital expenditures in 2020, we currently expect to reduce spending from 2019 levels to a range of 70 million to $75 million.

This reflects our intent to focus our team executing fewer projects with the potential to deliver higher returns and be more accretive to our return on invested capital performance.

This in combination with continued tight management of working capital leads us to anticipate free cash flow conversion in excess of 100% again in 2020.

In addition to providing a wider than normal range for our 2020 outlook, we're electing to hold off for providing an updated long term growth framework until the second quarter.

By that time, we would expect to have better visibility into the outcome of our north American residential pricing and investment strategies.

And we'll plan to share additional information about our objectives for improving our future financial performance.

Now I'll turn the call back to Howard for some closing comments.

Thanks for us.

I am proud of the organizations continued commitment to operational excellence and delivering results. We saw our fourth consecutive quarter of year on year, adjusted EBITDA growth and related margin expansion at a consolidated level.

We executed exceptionally well in 2019 as it relates to the continued deployment of our M. vantage operating system, we completed for plant transformations in the air and exited the year with one in progress.

And then events more than doubled for the full year 2019, and we had over 2300 new participants.

We successfully completed all of our previously announced 2019 footprint and portfolio actions. These actions allowed us to achieve our previously stated goal of 10% reduction in our total number of manufacturing locations by the second half of 2020 early.

Lastly, I am optimistic that we are well positioned to deliver significant year on year improvement in adjusted EBITDA and adjusted EBITDA margin, primarily driven by the benefits of our North American residential pricing strategy and a focus on continuous improvement and operational excellence throughout our business and with that.

I'd like to open the call to questions operator.

Thank you.

And for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation Tal indicate your line is in the question Q you May Press Star too if you would like to move your question from the Q.

Participants uses.

And maybe necessary to pick up your handset before pressing the star keys. Once again that is star one to register questions at this time.

First question is coming from Tim will just of Robert W. Baird. Please go ahead.

Hey, everybody good morning.

Okay.

Maybe just to start on.

Maybe if we think about the EBITDA guidance is there a way to do maybe breakout.

Some of the moving pieces for us in terms of.

How you kind of build up pricing.

Maybe first and then and then how should we think about some of the volume headwinds.

As well as the factory consolidation or productivity savings, we should be in 2020.

Yes, good morning, Tim its Ross, let me kick that went off.

During our prepared remarks, we took a shot of giving a little bit of color on some of the specific backdrops in each of the segments on market driver. So.

I would just point to that as is how we think about market growth right. If you look at the North American residential segment, Thats, where the greatest variability arguably could be within the wider range that we provided this year.

But when you model out.

Low single digit market growth.

High single digit UBI and the mid single digit headwind that we have projected on volume losses related to the pricing strategy that brings you in line with that that mid single digit revenue growth that we have expecting that we've outlined is being our our expectation for north American residential.

Once you get below that.

Think about some of the key drivers around how that volume detrimental will look.

We typically have guided in the past that incrementals on volume are about 25% in this case.

Given the uncertainty around when volume comes out of the business how quickly into what degree it's going to take us a little bit of time potentially to react operationally. If we see very rapid volume loss in any particular region or any particular plant and so we would expect the decrementals on that volume loss could easily be too.

That's what we would typically see incrementals are decrementals on small volume changes once you get beyond that.

A lot of it is around the reinvestment we've talked about the $100 million of reinvestment that we're making in the business over five years Howard spent some time during his prepared remarks to discussing some examples.

We still view that as largely linear across that five year period, so that.

All else being equal could be circa 20 million of headwind that you would expect into PML.

And that would largely be operating expense in 2020.

Commodities and tariffs.

We commented to the fact that we still see about a point or two there.

And I view that as about a point worth of gross inflation and about a half a point worth the terrace remember the tariffs did not fully come into effect at current rates until may of 2019, so, particularly in the first quarter even into the second we'll have some headwinds around tariffs.

Broader SGN a inflation in the business probably in the 3% to 4% range against the total SDMA base of the company this year up to about $310 million.

And then offsetting that you've got the improvement from our restructuring initiatives recall that our guidance was.

Approximately $20 million in savings from all of our restructuring actions that will begin to ramp up we saw a little bit of it in the fourth quarter 2019 that will begin to ramp up in 2020.

Now we do have some additional offsetting costs. This year, because we have announced some incremental actions and while a lot of the cost associated with centralizing customer service and closing an additional plant will become restructuring charges as we've discussed before theres also some a little bit a drag along of operating costs as we re commissioned equipment or move inventory.

So that'll be a bit of a headwind. So maybe you could think about say half of that total restructuring savings is be materialized in the PML into 2020 timeframe does that help.

No no thats helpful and I appreciate all that that Thats good detail and then.

I guess, maybe just on the on the volume piece.

In terms of just the conversations that you've had with your customers around around pricing and kind of volume have you how has that gone relative to your expectations in terms of pricing traction and then also I guess any sort of projected volume loss and.

Sorry for the complex question, but I guess from it from a volume loss perspective is that going to be lost volume or is that just day, we might lose some volume and so we want to make sure that we have appropriate contingencies in our guidance to kind of assume that.

Alright. Thanks, Tim This is Howard let me start and then I want to turn it over to Tony for more specifics on on customer conversations with as you know it's early days on our pricing action. We're only a couple of weeks then.

And customer conversations are ongoing.

And we expect that theres going to be some level of uncertainty.

In fluidity, if you will in the market for a good part of the year as a situation unfolds and and potentially changes throughout the year I've been involved in a number of conversations myself Tony has been involved in more someone let him comment maybe on some of the specifics yes am after the after we initially shared the strategy with customers are.

Our conversations have really been focused around the planned incremental investment of 100 million over the next five years.

And what we're already actively working on in service and quality improvements in you heard Howard highlight a couple of those in his his prepared remarks.

Well, we think will drive value for them and as you would expect in some cases customers have decided to diversify their supply base of of doors than in others.

Partners have said no we think thats got to benefit us and we're excited about what the investment profile looks like and they've committed to stay with us.

I think it's important Tim, but we anticipated that there would be potential for business ships. When we made this price increase decision.

We evaluated the impact of those.

Shifts or potential losses with the price increase and decided that this was the best course of action for our business.

So the losses that we expect to incur are well within the modeling that we did prior to initiating the strategy.

Okay. Okay. That's helpful. Good luck on 2020. Thank you. Thanks. Thanks.

Thank you. Our next question is coming from Michael Rehaut of Jpmorgan. Please go ahead.

Hey, this is a lot on for Mike Congrats on the corridor.

I, just find sorted out and get a.

Thanks.

Thank you dive in a little bit more color again on the pricing and maybe just talk to the p. by activity that you mentioned in January and.

And what you're seeing from competitors I think things like some of that might be following the move as well.

Yes, a lot of just this is Tony I just can be a highlight.

When we look at Q4, we didnt have any appreciable a pre buying that we could identify and the volume that we saw their north American raz.

We have seen some pre buying as we expected probably low single digit percentages increase in our January business ahead of the February Threerd.

Pricing announcement, and if activity of that pricing.

So inline with what we had expected.

Okay, Great and then can you also give us.

A sense of sort of what you're expecting for one Q in terms of.

Sales growth and margin expansion.

Yes, yes, a lot it's Russ so ill take a little bit of a shot at just giving you some qualitative color there.

Let me first I would say that just given the timing of the the pricing announcement timing of shipments.

The pre buy activity that Tony just mentioned, we wouldn't expect to see a significant benefit in our PNM all until about the second quarter.

So as you think about margin progression through the year, we think that that the margin improvement that's implied by our full year guide, we think theres an opportunity certainly to drive margin improvement across all quarters in the year, but it would be much more pronounced starting in the second quarter simply due to timing of shipments under the new pricing.

You do have a few moving pieces in the first quarter as I mentioned earlier when I was talking about kind of walk to our guide into the role that material cost plays you will have a continued year on year headwind for tariffs in the first quarter and even into the second quarter, just because we have not fully lapped the last round that was implemented on China source.

You also we'll have some cost associated with investment on the reinvestment programs beginning ahead of actually realizing pricing from the products.

So you've got a couple of items like that that are moving in and out as well as the operational cost that I talked about on some of our latest restructuring actions I think about those is more front half loaded first half of the year versus second half.

Okay, great. Thank you.

Thank you.

Thank you. Our next question is coming from Kevin Hocevar of Northcoast Research. Please go ahead.

Hey, good morning, everybody.

Yes.

Yes, I think you called out high single digit pricing realization in North American residential, but it's still a little early days to determine exactly where that will shake out just wondering if you could just give a little more color on what that means exactly does that mean.

No you expected to be in that high single digit range, which could be at the low and high end of that or is it possible that.

It's in the.

Something better than that like the low double digits or for something just trying to get a sense of what you know at this point in terms of how this will shake out versus.

How much variability is there in terms of where that could ultimately shake out.

Yes, I think Kevin the point of variability here is not necessarily price its volume.

You can pretty readily walk from what we commented on back in November as being roughly in the mid teens down to high single digit just by taking into account. Several factors first of all the fact that we don't see any significant benefit to the PNM until into the second quarter. As a result, the timing of shipments I mentioned that a couple of times.

That probably Knox.

Three to four percentage points off rate there.

2020 basis.

And then we also commented on the fact that.

In certain cases done a limited basis certainly.

But we've got certain customers, who are committed to working with Mason night that Ted bid some specific projects well in advance of the pricing announcements and in those cases, we have agreed to work with them.

Mutually honor those pricing to it to the end customers.

That in addition to the fact that you've got some growth incentives in place think about those is a tiered volume rebates.

We believe are likely going to trigger a slightly higher levels simply because of the impact of the higher pricing.

And then finally, we are taking into account that.

For the volume that we anticipate losing its probably likely that's going to be lost more in the product categories that had the highest percentage increase in price and so there's a natural mix headwind if you will against our price realization.

Those are all the factors that if youve got to take into account three to four percentage point drag off of a mid teens level just for timing of realization in the piano and then a few points for the other factors that I suggested that's how you get into that mid.

Sorry that high single digit a few realization, but the pricing has been implemented its stated rates that's not the issue here I think the a point of variability is where we'll customers ultimately lab on moving volume.

And how much do we absorbed in the PNM from volume losses.

Make makes sense, Okay, and then why do you think there was de stocking in the retail channel in the fourth quarter. It seems kind of how did you know there'd be some destocking ahead of a big price increase.

Like like this so curious your thoughts on why that that happened in do you expect any type of restock.

Going forward.

Yeah. Kevin This is Tony I don't know that we can speak to this strategy on the Destocking. We certainly saw it play out and keep in mind in retail very very difficult because we shipped direct to store for them to do any kind of pre buying so we don't traditionally see a pre buy ahead.

Of price increases from the retail standpoint.

And we did start to see some recovery of the Destocking as we got into January so.

I think they will get back in the right inventory positions as they move forward.

Okay. Okay. Thank you very much.

Thanks.

Thank you. Our next question is coming from Michael Wood of Nomura Instinet. Please go ahead.

Hi, good morning.

I wanted to drill.

Let me just drill down one of the pieces of the plan volume fall from the pricing strategy can you sort of parse out what portion of what you're planning is just the demand elasticity or.

What portion is related to potential share loss and and after you see how things shake out what would you be planning for more SK you rationalization. If you determine that the altered mix make certain products, just not not profitable to manufacture.

Yes, Michael This is Howard first of all of them just going to repeat again, it's really early days here. We're just two weeks into this so we're modeling and planning.

As as we see things evolve and as I said earlier, we expect that that.

Solution and sort of fluidity will continue for a bit of time in the market I think when it does settle out we'll certainly take whatever actions necessary to ensure that were.

Optimizing our business model.

I don't expect that will be in a situation that would have to eliminate skews, but if it came to that we certainly wouldn't we wouldn't.

As opposed to doing so but it's early days were going to let this thing play out and as I said earlier.

We expected some shifting in business and what we expect to incur is well within.

Okay.

Our internal expectations.

Mike as Russ if I could just jump in an AD remember when we announced our pricing strategy.

We've also commented on some of the research that we've done that highlights what consumers believe door should cost in a renovation project and the data suggest that that people ascribe a lot more value to an interior door.

In many cases Theyre currently transacting in the marketplace. So that alone would suggest that elasticities not necessarily a key factor here.

The other thing that we need to bear in mind is that we are seeing trends on the new build side toward smaller footprint homes more to service the entry level and as you might recall from some analysis that we shared back in the first quarter last year that is having a volume headwind on the business. So we have to take that into account, but we see those is that is more of a.

Market factor.

Around what the size of the structure, that's being constructed not elasticities for the actual door openings in home per se.

Great and just switching gears and architectural the operational issues you called out or these more kind of tactical shorter term changes that need to be made or are there bigger footprint or flow changes needed like what you experienced in North America residential.

Yes, Michael we're very disappointed with the performance of the segment in in the quarter margins were sort of our expectations and so we took some pretty swift actions, we made some management changes.

We dropped our continuous improvement team into our largest plant there we hired some third party consultants that weve used in the past to supplement our internal resources and they found a variety of things actually some of which are more tactical in nature that we can fix quickly others required for example, some capital investment on some equipment to eliminate some some bottle.

Next in the operation So I.

I wouldn't say, it's anything major but maybe some slightly more than tactical if you will and.

We're addressing those issues as swiftly as possible.

We are seeing some improvements although it's early days were certainly not ready to declare victory there yet, but we're seeing some improvements based on those actions and we're optimistic that this that will turnaround.

Okay. Thank you.

Thank you.

Thank you. Our next question is coming from Mike Dahl of RBC capital markets. Please go ahead.

Hey, it's actually Chris on from Mike Thanks for taking my questions.

Hi, Chris question is just has just going back to the topline guide.

Are you able to quantify what the mix benefit you're expecting this year for from the new product launches and is that separate from your high speed high single digit pricing commentary.

Well no we always comment about this is run by the way on average unit price is being a combination of price and mix.

Everything associated with a product portfolio actions would be incorporated into that.

Outlook for 2020.

That said I would characterize the primary driver of average unit price in 2020 as being price.

Got it that makes sense.

And then just secondly.

Do you have an initial estimate at all of US a rebate headwind could be this year.

How are hard to say I'm, assuming that you're talking about the rebate headwind associated with the new pricing strategy in the pushing growth incentives into higher tiers.

Yes, yes exactly.

Yes, I wouldn't view that as material at all but at the margin. It is one of the factors that would drop the price utilization down slightly.

In 220.

From my comments earlier on how to think about that high single digit a upi in the North American residential business.

Got it appreciate the color.

Thank you.

Thank you. Our next question is coming from John Baugh Stifel. Please go ahead.

Thank you can morning, and congrats real quick could you remind us I think you had some kind of pre buy.

Apple or limit and then how do you think volumes relative to your 5% or mid single digit I guess down for the year, how does it play out in North America in Q1 in light of.

January being stronger with some pretty good falloff in February and March. Thank you.

Yes, just a quick follow your initial part of your question on pre buy.

We look at historic run rates for our customers and try to help in managed to pre buy level that we can manage as I mentioned earlier with mid single digit impact of pre buy in January which we anticipated we didnt see a substantial pre buy in December.

Yes, and so.

It's to that of the pre buy I think was right right in line with our expectations John and.

And Russia already commented on our first quarter expectations.

So everything's evolving sort of as we expected.

Great. Thank you good luck.

Thanks, John.

Thank you. Unfortunately, we have reached the end of time for the question and answer session I would like to turn the floor back over to Howard for closing comments.

Thank you Donna and thank you all for joining US today. We appreciate your interest and your continued support and this concludes the cost Donna if you would please provide replay instructions.

Thank you for joining masonite fourth quarter in full year 2019 earnings Conference call. This conference has been recorded the replay may be accessed until March 4th to access. The replay. Please dial 87766 06853 in the United States were 20161 to seven for one five.

Outside of the U.S. Please enter conference I'd have won 369 keeps zero nine heat.

Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

[music].