Masonite International's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Masonite International Corporation (DOOR)
by: SA Transcripts

Masonite International Corporation (NYSE:DOOR)

Q4 2013 Earnings Conference Call

February 24, 2014 9:00 am ET

Executives

Fred Lynch – President, Chief Executive Officer

Mark Erceg – Executive Vice President, Chief Financial Officer

Joanne Freiberger – Vice President, Treasurer

Analysts

Bob Wetenhall – RBC Capital Markets

Philip Volpicelli – Deutsche Bank

Seth Yeager – Jefferies

Howard Weinberg – UBS

Operator

Good morning and welcome to the Masonite International Fourth Quarter 2013 Earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Joanne Freiberger. Thank you, you may begin.

Joanne Freiberger

Thank you Brenda and good morning everyone. I’m joined at our Tampa office today by Fred Lynch, our President and Chief Executive Officer, and Mark Erceg, our Executive Vice President and Chief Financial Officer. The information for the webcast presentation that will accompany today’s call is available on our website at www.masonite.com under the heading, Investors.

The earnings release and presentations made by our executives include forward-looking statements that are based on the beliefs of the management team regarding the operations and the results of the operations of the company, as well as general economic conditions. These beliefs and the related forward-looking statements are subject to risks and uncertainties which are described in greater detail in Item 1(a) of our registration statement on Form 10 filed with the Securities and Exchange Commission on August 19, 2013. This document is available on the Investors tab of our website. Actual results may vary materially from those described in these forward-looking statements. We also encourage you to read the 2013 annual report on Form 10-K in its entirety, which we expect to file by the end of this week.

We supplement our GAAP reporting with the non-GAAP financial measure of adjusted EBITDA. Our definition of adjusted EBITDA is on Slide 3. Our reconciliation to the GAAP measure of net income is provided in the appendix of the presentation.

On today’s call, Fred will begin with a company and industry update. Next, Mark will provide a financial review of the full year and the fourth quarter results, after which Fred will summarize our prepared remarks before opening the call up to a question and answer session.

With that, I will turn the call over to Fred.

Fred Lynch

Thanks Joanne. Good morning and welcome everyone. For Masonite, 2013 was an important year for a number of reasons. First, while new housing starts slowed during the second half of the year due to, we believe, higher mortgage rates and home prices, on a full-year basis total starts increased by 18.7% versus 2012, which reinforces our view that we are in a recovering market, albeit a choppy one. Second, two successful mid-single digit U.S. residential wholesale price increases in the first and fourth quarters of 2013 resulted in three consecutive quarters of average unit price increases in our North American segment. This is the first time in several years that the North American average unit price was positive and was the primary reason we were able to increase adjusted EBITDA by 8.8% on a 3.3% increase in net sales, and this in spite of very difficult competitive environment in the retail channel throughout most of 2013.

Third, we strengthened our position in the North American style and rail category through our acquisition in Chile. We now have completed 12 strategic tuck-in acquisitions since March 2010. Collectively, these transactions have solidified our leadership position in all seven of the product categories we have identified as being critical to our future success and deepened our level of vertical integration. Today, Masonite is now one of only two vertically integrated residential molded and pure wood door manufacturers in North America and the only vertical integrated non-residential interior wood door manufacturer.

Fourth, we continue to exit non-core businesses which have been a drag on our top and bottom line. In 2012, we exited Romania and Hungary, and in 2013 we stopped producing and selling products in Poland. Finally in September, we listed on the New York Stock Exchange and our share began trading under the ticker symbol, DOOR.

Now while these are all notable accomplishments made possible through the hard work and dedication of Masonite’s 9,500 associates, we also faced some headwinds during the year. For example, several markets outside the United States experienced slow growth or in some cases, like France, negative growth, and foreign exchange rates broadly speaking moved against us for much of the year. As referenced earlier, heightened competitive dynamics in the retail channel at the end of 2012 and in the early part of 2013 resulted in the loss of approximately $70 million of annualized residential interior sales with Lowe’s in the northeast and Texas markets, and also precipitated lower pricing throughout this channel. As you may recall, while this was announced in late 2012, the full effects of this decision were not felt until the second half of 2013.

Now with that said, we believe the achievements outweigh the headwinds, resulting in improved operating performance year-over-year. More importantly, we continued to progress the efforts of our Lean Sigma culture throughout 2013, focusing on cost reductions, improved product quality, and enhanced service lead times and fill rates. We also engaged in considerable dialogue with our customers throughout 2013 regarding the need to be properly compensated for this leading value proposition. Taken together, these efforts have set the stage for what we expect to be acceleration in our top and bottom line performance during 2014.

That dialogue I just mentioned has resulted in important changes in the North American residential pricing environment, as evidenced by recently implemented price increases to our North American retail customers as well as another price increase in the first quarter of 2014 for our North American wholesale customers. These previously undisclosed price increases range from mid to high single digits in certain product categories. We anticipate the net effect of 2014 price increases on a year-over-year basis will be mid-single digits after taking into account the impact of the negative retail pricing pressures we suffered during 2013. One item that is particularly noteworthy is the broad-based nature of these new pricing actions, which we estimate will impact approximately 55% of our total global business, and this compares favorably to our U.S. wholesale price increase during the first quarter of 2013 which affected approximately 25% of our global business and a 2013 fourth quarter price increase which only impacted 15% of our global business. The price increases that we have just implemented have resulted in pricing at both retail and wholesale moving in tandem for the first time in a very long time, which we view as an important first step towards capturing the appropriate value for the high quality products and services that we provide our channel partners.

Turning to Slide 7, you can see by the recently conducted price surveys in the retail channel that retail prices for our products have already been reset with retailers putting in placed what appears to be a logical pricing progression across the product category that appropriately reflects derived value for the consumer. This is particularly encouraging from our perspective. Over the past years, we’ve undertaken numerous studies to better understand the expectations and needs of our customers with respect to the services and products we offer. Our consumers have made it clear they are looking for a quicker turnaround, installation support, innovative designs, fully finished products, products with safety and security, improved weathering and sound dampening characteristics, just to name a few. By working more effectively with our channel partners, we aim to meet the needs of this broader consumer base and provide them with the right products for the right application with the right value proposition that matches their expectations. We believe that a better understanding of our product offering and attributes and trade-up opportunities will be beneficial for us, our customers and consumers, and provide appropriate value for all.

Strategic tuck-in acquisitions have created value for our shareholders and been a critical part of our overall growth strategy. With the U.K. housing market forecasted to grow 9% this year, combined with the considerably improved margin environment resulting from multiple price increases over the past two years, it made sense for Masonite to expand our footprint in our fourth largest market if an appropriate opportunity became available. Consistent with that, we were excited to announce earlier today that we have closed on the acquisition of Door-Stop International, a leading fiberglass entry door manufacturing company servicing customers throughout the United Kingdom. We were attracted to Door-Stop’s high quality product offering, technology-driven ordering process, best-in-class customer service, and their strong financial characteristics.

While encouraged by the prospects for accelerating growth in combination with our leading position in interior doors in the U.K., we were mindful not to overpay, as evidenced by the approximately 6.5 times pre-synergy adjusted EBITDA multiple that we paid to acquire this high quality asset. Net, we believe the combination of Door-Stop and Masonite in the U.K. provides broader selection for our customers, expanded opportunities for all U.K. employees, and a platform for increased value creation for our shareholders.

As shown on Slide 9, Door-Stop expands on our leading position in the exterior fiberglass product category and fits into our core competency of designing, manufacturing and distributing doors. By staying close to our core competencies, we continue to solidify a leadership position in all seven of the product categories that we’ve targeted, paying fair value in the process.

Looking forward, we remain encouraged by the macro-economic trends being forecasted for 2014. U.S. residential new construction has continued its rebound and is forecast to grow in the mid-teens on a percentage basis, although we expect that growth to be choppy as indicated by the variability in housing starts over the last several months. Likewise, residential home improvement spending is forecast to grow mid-single digits in 2014. While non-residential construction is currently forecasted to grow low double digits, we think this might be overly optimistic as we expect increases in non-residential construction to be more of a 2015 and 2016 theme, especially when one considers the extended lag between commercial project initiation and door installation. Nonetheless, these positive indicators should provide Masonite with a strong tailwind as we look to capitalize on the strength and momentum of building activity in the United States, our largest market, aided further by an improved pricing environment across all of North America.

As markets have begun to recover, it is only natural that we’ve been shifting our focus at Masonite from downsizing and cost control to organic growth. In order to grow share and expand margins at a rate in excess of the broader market economic environment, we plan to focus on five strategic platforms. First, accelerating our automation efforts to continue to produce high quality doors and door products with higher labor productivity and shorter lead times, because we believe that speed wins in today’s market environment and will remain critical in our future success. Second, driving product line leadership as we continue to offer our customers the widest breadth of high quality, innovative products and services in our industry, and of course getting paid value for the value we provide.

Third, facilitating electronic enablement for our proprietary automated ordering and customization processes and full suite of e-commerce tools to get the right products to the right customer at exactly the right time so we can proactively anticipate and address the new norms of the consumer. Our fourth strategic platform is investing in sales and marketing excellence to deepen and expand relationships with key customers, market influencers and end customers. Understanding and connecting with the influencers is critical, but doing it cost effectively and efficiently is even more critical. Finally, we will continue to leverage our strategic tuck-in acquisition program while optimizing our global business portfolio; for example, by acquiring companies like Door-Stop in the U.K. while simultaneously exiting certain non-performing businesses in eastern Europe. We believe solid execution across these five strategic platforms will create a best-in-class company that cannot be easily replicated.

So with that, I’ll now turn it over to Mark to review our financial results. Mark?

Mark Erceg

Thanks Fred, and good morning everyone. In conjunction with the bond offering we executed last month, we released an estimated range for 2013 net sales and adjusted EBITDA and we are pleased to report actual net sales and adjusted EBITDA were right in the middle of that range. Specifically, net sales grew 3.3% and adjusted EBITDA increased 8.8%. Volume increased 2.3%. We have chosen to provide some additional perspective on unit volumes during today’s call because there is an important underlying trend which is not readily apparent from simply looking at the total rate of unit volume growth. As you can see on Slide 14, unit volumes to North American wholesale customers increased 17% during 2013. This closely mirrors the 18.7% increase in U.S. new housing starts that Fred referenced earlier. On the other hand, volumes in North American retail customers declined 19% as a result of the previously disclosed Lowe’s business loss. Across the balance of our door business, volumes were down 2.8% due to market contractions in France, our decision to discontinue certain unprofitable product lines in France, and our exit from several unprofitable eastern European countries.

Turning to Slide 15, gross margins increased 10 basis points to 13% of net sales and SG&A as a percent of net sales decreased 30 basis points to 12.1%. Adjusted EBITDA increased $8.6 million to $105.9 million in 2013, or 6.1% of net sales, a 30 basis point improvement compared to last year.

On Slide 16, we examine the change in net sales for each of our three reportable business segments and the primary drivers of the year-over-year changes. Net sales in our North America segment increased by 8% or $97.5 million. This increase was primarily driven by higher wholesale volumes. Higher average unit prices as a result of the U.S. wholesale pricing actions implemented during the first and fourth quarters of 2013 also contributed to the favorable comparison versus year-ago. Net sales in our Europe, Asia and Latin America segment decreased 8.2% or $30.4 million compared to 2012. This was primarily due to a $33.3 million decline in volume resulting from a broad-based contraction in construction activity in France, a proactive strategic shift in our customer and product base in France and Asia which was designed to improve overall profitability, and our decision to exit unprofitable businesses in eastern Europe. This volume decline, along with a $9.9 million decline in component sales, was partially offset by a $9.1 million increase in average unit price driven by targeted price increases in the United Kingdom as well as a $3.7 million benefit from foreign exchange.

Net sales in our South Africa segment decreased 14.7% or $12 million as a $3.8 million decline in unit volumes and a $12.3 million unfavorable impact of foreign exchange were only partly offset by a $4.1 million increase in average unit price. While we have successfully executed significant price increases in our South African segment, the highly inflationary environment for both labor and energy and a weakening rand have negated virtually all of these gains.

During the fourth quarter of 2013, we experienced some operational headwinds which were generally one-time in nature. Those headwinds were detailed during our 2013 third quarter earnings call and the preliminary financial results released on January 15, 2014. The significant items bridging the fourth quarter of 2012 to the fourth quarter of 2013 included a $3.3 million benefit recorded in SG&A related to the Marshfield business interruption insurance claim which was recorded in the fourth quarter of 2012; a $2 million headwind related to inventory reduction which negatively impacted fixed cost absorption; start-up costs in our new Arizona and Nevada markets with the Home Depot, and optimization costs for our new automated line in Denmark, South Carolina. We also incurred charges of $4.5 million related to exiting the Poland market, product quality issues in our Israel business, and integration costs and synergy capturing efforts association with our Chilean acquisition. These headwinds were partially offset by $2 million of benefits principally derived from U.S. wholesale price increases.

The impact of these reconciling items on our fourth quarter P&L can be seen on Slide 18. Net sales increased one-half of 1%, gross margins decreased 40 basis points to 12.2% of net sales, and SG&A as a percent of net sales increased 50 basis points to 13%. Adjusted EBITDA in the fourth quarter of 2013 decreased to 4.2% of net sales.

Turning to liquidity, cash flow and balance sheet metrics, available liquidity at December 29, 2013, including unrestricted cash and undrawn ABL and an accounts receivable purchase agreement, totaled $222.1 million or approximately 12.8% of Masonite’s trailing 12 months net sales. Total debt and net debt to trailing 12-month adjusted EBITDA stood at 3.6 and 2.6 times respectively. Our trailing 12-month adjusted EBITDA interest coverage ratio was 3.2 times and our trailing 12-month fixed charge coverage ratio was 1.8 times. Cash flow from continuing operations in 2013 was $46.1 million compared to $55.7 million in 2012. Capital spending was $46 million, which was 2.6% of 2013 net sales.

In January, we closed on $125 million add-on to our 8.25% senior unsecured 2021 notes that is not reflected in our December 31, 2013 financial results. The add-on notes priced at 108 ¾ plus accrued interest from October 15, 2013 resulting in a yield-to-worst of 5.704%, which after transaction fees raised approximately $137 million. A portion of these proceeds were used to fund the Door-Stop acquisition Fred commented on earlier. We plan to use the remaining funds for general corporate purposes, which may include additional acquisitions in the future.

Before Fred summarizes today’s call, we’d like to take this opportunity to inform you that we have decided not to provide quantitative guidance for 2014 at this time for two reasons. First, we expect the price increases that we implemented very recently, which are going well, to impact order patterns for a number of weeks. Second, we’d be remiss if we did not point out that we have experienced a cumulative total of 35 down days since the start of the year, all of which traces back to uncharacteristically cold temperatures. This compares to zero plant down days during the first quarter of 2013. Not surprisingly, many of our customers have also experienced unplanned downtime at their locations. These two dynamics, coupled with what is already a seasonal business, has led us to the conclusion that it would be prudent to wait at least until a normalized pattern of customer orders, production schedules and shipments has been re-established before trying to predict full-year top and bottom line results.

Finally, we’d like to remind everyone that we received a $4.5 million business interruption insurance benefit during the first quarter of 2013. As such, when we do release 2014 first quarter results, our operational comparison will take this into account.

With that, I’ll now turn the call back to Fred to summarize today’s discussion.

Fred Lynch

Thanks Mark. So again looking forward, we are encouraged by a number of factors. Improved pricing across the North American residential market is at the top of that list. In the past 12 months, we have executed three U.S. wholesale price increases and now that we have secured retail price increases across all of North America, both wholesale and retail prices have moved in tandem for the first time in years. Subsequent to the completion of $125 million senior unsecured bond add-on, we closed on our 12th acquisition since 2010 with the purchase of Door-Stop International. Door-Stop International significantly expands our residential door business in the United Kingdom and further strengthens our overall leadership position, leadership positions that now span all seven of the product categories we have identified as being critical to our overall success.

Despite being somewhat sporadic, macro-economic factors remain favorable and we are encouraged by the long-term outlook for new housing starts, home improvement spending and non-residential construction in our principal market, the United States, as well as encouraging signs of accelerating profitable growth in the United Kingdom. As a result of the hard work and effort of our teams throughout the downturn, we have established a solid operating foundation at Masonite. As markets continue to recover, our focus on execution on our five strategic growth platforms – accelerating automation, driving product line leadership, facilitating electronic enablement, investing in sales and marketing excellence, and executing strategic tuck-in acquisitions while optimizing our global business portfolio – provide a clear path to sustainable, profitable growth and supports our vision of being the best provider of building products in the eyes of our customers, employees, shareholders, suppliers and communities.

Before we turn the call over to the operator for the Q&A, I’d like to again take a moment to recognize the hard work that the entire Masonite team put into making 2013 such a successful year. Thank you.

Operator, we’re now ready for questions.

Question and Answer Session

Operator

Certainly. Ladies and gentlemen, at this time we will be conducting a question and answer session. [Operator instructions]

Our first question comes from the line of Bob Wetenhall with RBC Capital Markets. Please proceed with your question.

Bob Wetenhall – RBC Capital Markets

Hi, good morning. I was interested to hear your remarks – a lot of progress last year. I was hoping you could give some insight based on Mark’s comments about the magnitude of the disruption caused by the weather. It sounds really severe, and if there’s any way you can give us guidance towards what the magnitude of the disruption and the impact that will have on operating leverage, that would be helpful.

Fred Lynch

Yeah Bob, as we said, at this point in time we’re not prepared to provide overall guidance. What I can tell you is that as we look coming out of January, we were clearly affected by the downtime in our plants with 35 down days in our various plants throughout North America and our customers seeing the same. At this point, until we see what happens in the month of March as the weather starts to improve and as the ordering pattern of our customers starts to improve, we’re really not in a position to determine how much of that volume will be picked up again through the rest of the quarter.

Bob Wetenhall – RBC Capital Markets

Okay. So one final question, Fred – you had mentioned that wholesale and retail prices, for the first time in a number of years, are both trending positively, which is a big step forward. Do you view that as being sustainable given current market dynamics, and what do you see as the incremental likelihood that that mid-single digit price increase in the wholesale channel stays in effect through the year? Thanks a lot, and good luck.

Fred Lynch

Okay, thanks Bob. Yeah, we feel at this point very good that the prices increases that we put in place will hold and are sustainable.

Operator

Thank you. Our next question comes from the line of Philip Volpicelli with Deutsche Bank. Please go ahead.

Philip Volpicelli – Deutsche Bank

Good morning. With regard to the $4.5 million business interruption that you recorded in the first quarter of ’13, what line item was that in, and was that included in the $26.2 million of EBITDA for that quarter?

Mark Erceg

It was recorded in SG&A and yes, it was included in the $26.2 million that we reported for the first quarter of 2013. There was actually two pieces of it. You may recall there was a $3.3 million benefit in the fourth quarter of ’12, and then the final payment of $4.5 million was reported in the first quarter of ’13, both reported in SG&A.

Philip Volpicelli – Deutsche Bank

Okay, so we’re starting at 21.7 as the apples-to-apples number that we should be comparing against for last year?

Mark Erceg

Correct.

Philip Volpicelli – Deutsche Bank

Great. As we look forward, some of your distributors, at least that we heard from in their conference calls, are talking about 4 to 7% price increases. Can you confirm that that’s what you guys are pushing through? Is that the mid-single digits that we’re talking about?

Fred Lynch

Yes.

Philip Volpicelli – Deutsche Bank

Okay. Last question – are there any line reviews upcoming in the first quarter with your two large retail customers?

Fred Lynch

No.

Philip Volpicelli – Deutsche Bank

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Seth Yeager with Jefferies. Please proceed with your question.

Seth Yeager – Jefferies

Hey, good morning guys. If you back out the impact of weather, can you just give us a broad sense as to the utilization rates across your various geographies, and how should we think about pro forma what that would like after some of the integration that’s still going on outside of the U.S.?

Mark Erceg

Yeah, what we’ve talked about in the past and I think what you’re referring to is largely the large facing mills themselves, and we have a global network strategically placed around the world that encompasses five different facilities. The operating rate varies depending on which mill you’re specifically speaking to. In the past, we’ve talked about the fact that we had during the downturn found outlets for a lot of product in other places around the world, so our mills in southeast Asia and down in South America are running at pretty high rates of capacity utilization. Similarly, our facility up in Canada is running at very high rates of capacity utilization. There’s a lot of workforce incentives that we access and that makes it a very efficient mill and very cost efficient mill for us to run, so that mill has for a number of years now been running at pretty high capacity rates.

The large flagship facility in Laurel, Mississippi, which is about 40% of our total global capacity, I would tell you right now it’s probably running in the 65 to 70% range, and then our facility over in Ireland where we have two lines is probably running around half capacity, and that’s been consistent as well given the product trends in western Europe and the overall state of that economy, although we’re encouraged by what we’ve been seeing out of the U.K. recently.

Seth Yeager – Jefferies

Okay, that’s helpful. Thank you. On the pricing front, it’s nice to hear you’re making some announcements in the retail channel. What happened versus last year, what changed? Given some of the issues around seasonality, I wouldn’t imagine that volumes have been improved versus the prior year, at least to date. Are you willing to give away a little bit of share, or are your competitors also increasing around the same magnitude there?

Fred Lynch

I think from our perspective, there was a need for the industry to recognize that in order to get the return on investment that our customers needed us to have in order for us to continue to invest in this business, it made sense for pricing to improve. My belief is based on what we hear in the marketplace, and we hear from customers, is that other suppliers have also been increasing prices, but ultimately I think at the end of the day we provide great products with a great service proposition, and we’ve been pretty adamant that we need to get paid for it and our customers are responding appropriately.

Seth Yeager – Jefferies

Okay, excellent. Just last quick one – it sounds like you may be spending a bit more on internal capital projects. How should we still think about CAPEX – is it still around 2.5, 3% of sales this year, or is that going to tick up? Thank you.

Mark Erceg

Yes, great question. We have said consistently that our target is to be at 3% or less CAPEX as a percent of sales. You can see that in the year that we just printed, I believe the total CAPEX spend was $46 million. That came in at 2.6% of sales, so we’re comfortable with the 3% estimate for 2014.

Operator

Thank you, and once again as a reminder, please press star, one on your telephone keypad if you wish to ask a question at this time. Our next question comes from the line of Howard Weinberg with UBS. Please proceed with your question.

Howard Weinberg – UBS

Thanks. Mark, I want to go to that slide that you provided which breaks out the volume, which was actually quite helpful – I think it was Slide 14. Could you talk a little bit about how much of that volume growth, that 17% volume growth was organic versus some of the benefit from some of the acquisitions that you made in 2013—or 2012, I guess it would have been. And then likewise, of the decline in retail, how much was attributed to Lowe’s if it’s not 100%?

Mark Erceg

Got it. For the North American wholesale, the 17% increase that we spoke to, I would tell you about 2 points of that, maybe 2.5 points of that was driven by acquisitions specifically, so the vast majority of that was organic. And then as far as North American retail being down 19%, that traces almost exclusively to that Lowe’s business loss.

Howard Weinberg – UBS

Great, and then—sorry, Fred?

Fred Lynch

Howard, the only thing I was going to add is just recall that the North American wholesale business does feed both the RRR market as well as predominantly the new construction market, so just take that into account with regards to comps.

Howard Weinberg – UBS

Perfect. That’s quite helpful. Just an accounting question – the $3.1 million of other expense that was included is an add-back to your EBITDA. What specifically was that? I don’t think it was—I may have missed it, but I don’t think it was in the press release.

Mark Erceg

I’ll have to go back and double-check that one for you. I think part of that relates back to the $2.4 million of registration and listing fees and for one-time items in the context of 2013.

Howard Weinberg – UBS

Okay. I thought it was—okay, we can talk offline. It looks like it was mostly in the fourth quarter, so, but we’ll talk about that offline. That’s it. Thanks guys and good luck.

Mark Erceg

Thank you.

Operator

Thank you, and our next question comes from the line of Philip Volpicelli with Deutsche Bank. Please proceed with your question.

Philip Volpicelli – Deutsche Bank

Hi. Could you give us any kind of guidance on what kind of contribution margins you expect on incremental revenue throughout 2014? Historically you’ve been kind of in the 15, 16% range over the last 12 months. Is that about right?

Mark Erceg

Yeah. We have historically said that all else being equal, assuming no change in prices and that the global procurement group and our Lean Sigma program can offset commodity escalation, that our normalized pass-through rate would be roughly 25%. Now, to the extent that we have been able to secure pricing in North America at both the wholesale and retail side, I would think that that 25% pass-through rate should be higher by the amount of the price increase that we’ve been able to effect, again assuming that commodities are offset by our cost programs.

Philip Volpicelli – Deutsche Bank

Okay, great. What are you seeing in terms of commodities? Have you had any headwinds, any price increases announced from your suppliers?

Mark Erceg

So far, the commodity environment looks to be manageable. As we’ve talked in the past, we have a very active Lean Sigma program and a really astute global procurement group, so we estimate that we derive up to $20 million of benefits per annum from those programs, so we’re comfortable saying that between the work that we’re doing and what we see out there on the inflation front today, we should have a relatively benign environment net; but that’s again because of a lot of the internal work that we do.

Philip Volpicelli – Deutsche Bank

Great, thank you.

Operator

Thank you, and it seems we have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Fred Lynch

Great, thanks. Well, we appreciate everyone’s attendance on today’s call. We look forward to speaking with you again when we are ready to announce our first quarter results, and if there are no questions, let’s pass it back to the operator to provide replay instructions. Operator?

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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