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Masonite International Corporation (NYSE:DOOR)

Q2 2014 Earnings Conference Call

August 7, 2014 10:00 am ET

Executives

Joanne Freiberger - VP & Treasurer

Fred Lynch - President & CEO

Mark Erceg - EVP & CFO

Analysts

Scott Levine - Imperial Capital

Al Kaschalk - Wedbush Securities

Bob Wetenhall - RBC Capital Markets

Philip Volpicelli - Deutsche Bank

Presentation

Operator

Welcome to the Masonite's 2014 Second Quarter Earnings conference call. During the presentation, all participants' will be in a listen-only mode. After management's prepared remarks investors are invited to participate in a question-and-answer session. This conference call is being recorded. The replay will be accessed until August 21st. To access the replay please dial (877) 660-6853(877) 660-6853 in the U.S. or (201) 612-7415(201) 612-7415 for outside at the U.S., and as your Conference ID number 13586620.

I will now introduce Mr. Joanne Freiberger, Masonite Vice President and Treasurer. Please go ahead.

Joanne Freiberger

Thank you, Manny, and good morning everyone. I'm joined in 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.

Slide 2 includes our Safe Harbor and non-GAAP financial measures. The earnings release and the presentations made by our executive include forward-looking statements that are based on the beliefs of the management team regarding the results of the operations of the company as well as industry and macro-economic condition. These beliefs and the related forward-looking statements are subject to risks and uncertainties which are described in greater detail in item 1A of our annual report on Form 10-K which is available on the Investors tab of our website. Actual results may vary materially from these described in the forward-looking statements.

Since management uses adjusted EBITDA to measure our operating performance, we supplement our GAAP reporting with the non- GAAP financial measure of adjusted EBITDA. Our definition of adjusted EBITDA and a reconciliation to the GAAP measure of net income is provided in the appendix of today's presentation which can be found on our website.

Looking at the agenda on today' call, Fred will begin with a company and industry update. Next, Mark will provide a financial review of the second quarter results, and then Fred will summarize before opening the call up to the question-and-answer session.

With that, I'll now turn the call over to Fred.

Fred Lynch

Thanks Joanne. Good morning and welcome everyone. Recent data on U.S. housing completions continues to confirm what we have been observing for some time. First, the U.S. housing market continues to advance, but the recovery remains choppy. And second there continues to be a large disparity within the housing sector between multifamily and single family construction.

Year-to-date, total housing completions are up 15.4%, however, single family completions were up 9.4% while multifamily completions were up 36.7%. And this extension is important because a multifamily unit has on average roughly half the number of doors as a single family dwelling. So adjusting for this difference, equivalent completions have increased 12.8% year-to-date, which importantly, we believe, is the correct number at least with respect to new construction to benchmark our own unit volume performance again.

With this in mind, Slide 5 shows that our second quarter North American wholesale unit volume which is closely tied to new housing construction grew from 4.6 million to 5.3 million units or roughly 15%, which compares favorably versus year-to-date equivalent completions of 12.8% I just mentioned.

Meanwhile, North American retail unit volume which is closely tied to residential repair, renovation and remodeling spending grew from 1.6 million to 1.7 million units. We believe this mid-single digit unit volume growth is consistent with what other businesses with close ties to residential repair, renovation or remodeling spending have been reporting recently.

While year-to-date competitions were up low double digits, growth in US housing starts during the same time period has been somewhat less encouraging. Whereas total U.S. housing start continues to trend higher over a multiyear horizon, which you can see on Slide 6, single family starts are actually flat versus a year ago.

Year-over-year growth in multifamily start have been much stronger at 19.8% but then, one, multifamily only represents about one-third of total starts and, two, there are less doors used in multifamily units, the total number of housing units starts and equivalent starts year-to-date has only increased by 5.6% and 3.3% respectively.

Historically, there's been a three to six months lag between U.S. new housing starts completion which suggest at least to us that the market unit volume growth in the U.S. during the second half of 2014 were likely be slower than the first half of the year. So again, while we believe the housing market is improving we believe growth will be modest and likely sporadic over the next several quarters.

While we can't control the U.S. housing market we can focus on ensuring we receive a fair value for the high quality goods and services that we provide, and in that regard we are pleased to report that things have been steadily improving.

Our first quarter 2014 price increase as well as pricing actions we took during the first and fourth quarters of 2013 helped drive a fifth consecutive quarter of North American average unit price growth after seven consecutive quarter of decline. Moreover, the mid to high single digit first quarter 2014 North American price increase we previously discussed was fully realized in the second quarter. We estimate that this pricing action allowed us to capture approximately $10 million of net pricing benefits in the quarter and we expect to see a similar level of pricing or a net pricing benefit versus a year ago over each of the next three quarters as well.

Despite these pricing actions, we continue to believe that we are a long way from achieving a fair value for the high quality of products and services we provide. As such, we will continue to look for opportunities to take pricing in the future and consistent with that practices plan to communicate any changes in pricing on a post mortem basis.

Turning to Slide 8, portfolio optimization is another area where we have been working over the last several years to positively affect top and bottom line growth. By focusing on and adhering for the five tenants of our discipline acquisition criteria, which were all designed to create shareholder value, we've acquired 12 business at attractive valuation which we believe have improved operating dynamics, create leadership positions in all seven targeted North American product categories and allowed us to profitably expand product lines in important geographies outside of North America.

Door-Stop, our most recent acquisition, is a great example of this. Door-Stop provides exterior fiber glass for the UK market, which complements our existing interior door business in the UK. Door-Stop is a high teens adjusted EBITDA margin business with strong cash flow that is growing share in a growing market by utilizing an innovative ordering process and route to market. So we are understandably excited about its prospects going forward.

We also continue to evaluate on a routine basis additional tuck-in acquisitions opportunities which we believe had the potential to strengthen our business further and plan to auction these items as appropriate.

The other aspect of portfolio optimization that we have not spent as much time discussing is how we think about potential exits from non-strategic markets. Markets are deemed to be non-strategic if, after careful study, we determine our market has limited growth potential due to some combination of unfavorable industry dynamics such as high levels to market fragmentation and poor cash flow characteristics because of low margins, antiquated production equipment, extended payment terms, high level of bad debt expense, etc.

Since 2010 we have exited several European markets such as Poland, Hungary, Romania, Ukraine and Turkey after we determined doing so would be in the best interest of our company and then of our shareholders.

Going forward, we planned to continue to focus our strategic tuck-in acquisition program on markets and products with high return potential whilst simultaneously continuing to critically evaluate markets, geographies and product lines for potential divestiture or closure if we believe they are likely to become dilutive to our top or bottom line growth.

Israel is an example of a market that based on our criteria is not strategic. As such, we are currently looking at various alternatives relative to the ultimate disposition of that business which represents approximately 1% of total consolidated net sales and is currently operating at a loss.

We believe that exiting unprofitable businesses like Israel will provide us with additional resources to support our key growth initiatives. For example, we have identified automation and product line leadership as two ways to drive further growth. We also are investing in electronic enablement and sales and marketing excellence so consumers can easily find the right door at the right price to match their needs.

We believe that strong execution across these strategic platforms when combined with a disciplined approach to portfolio optimization will solidify our position as the best provider of building products in the eyes of our customers, employees, shareholder suppliers and communities, and will help us to grow share and expand margins beyond the broader macroeconomic recovery.

Now before I turn the call over to Mark, I wanted to take a moment to comment on the explosion at our facility in South Africa in early June. Because our employees were well trained there were no fatalities in what otherwise could have been a life threatening situation and for that we are thankful. The employees in immediate vicinity that were injured are either back to work or currently recovering at home, and again we are likewise thankful for that.

At Masonite, we constantly strive to create and maintain a safe working environment for all of our employees. So we treat every accident very seriously. This discipline and caring approach is what has enabled us to reduce the number of reportable injuries by 26% since 2011 and more than 70% since 2006. The company's total incident rate for OSHA recordable injuries stood at 1.57 for the first half of 2014 and our goal is to continuously drive our injury level towards zero.

So with that, I will turn the call over to Mark to review our financial results. Mark?

Mark Erceg

Thanks, Fred, and good morning everyone. After an admitted slow first quarter which was impacted by uncharacteristically harsh winter condition and the lingering effects of the Lowe's business loss, which is now fully behind us, second quarter volume grew from 8 million to 8.5 million units, an increase of 6.3%

Net sales growth was nearly 200 basis points ahead of unit volume growth at 8.2% due to an increase in average net selling price of approximately $1 per unit. The combination of higher unit volumes, higher average selling prices and tight operational cost control drove a 31.6% increase in year-over-year quarterly adjusted EBITDA from $33.5 million to $44.1 million, which importantly is the highest quarterly adjusted EBITDA we have reported in five years.

On Slide 13, we present a summary of income statement of our second quarter results. While net sales increased 8.2% from $453.1 million to $490.2 million, gross profit increased to 21.5% to 16% of net sales. Moreover, while we continue to invest a new capabilities SG&A growth at 4.5% was held to roughly half the rate of net sales growth. As a result, SG&A has a percent of net sales decreased from 12.4% to 11.9% and our adjusted EBITDA margin expanded 160 basis points from 7.4% to 9%.

While we believe we are a long way from obtaining a fair value for the high quality products and services we provide, the chart on Slide 14 clearly illustrates the progress we are making. At 9%, our second quarter adjusted EBITDA margin is up 430 basis points sequentially and represents the highest margin we have achieved in five years.

We believe adjusted EBITDA margins will continue to expand over time as we pursue in a disciplined manner the balance set of growth strategies we have put in place which are designed to create lasting value for our shareholders and our channel partners.

Turning to Slide 15, we examine the change in our 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 7.5% or $26 million. This increase was driven by higher unit volumes which added $18.5 million of net sales and $13.7 million increase in average unit price driven in large part by previously communicated pricing actions partly offset by $5.5 million of negative foreign exchange.

Net sales in our Europe, Asia and Latin America segment increased 18.2% or $15.9 million compared to the second quarter of 2013. Higher unit volume increased net sales by $6.1 million primarily due to the Door-Stop acquisition while positive mix and targeted price increases, predominantly in the United Kingdom, increased average enterprise and net sales by $5.7 million. Foreign exchange increased net sales by $4.4 million during the second quarter.

Net sales in our South Africa segment decreased to 25.5% or $4.8 million due primarily to an explosion at our Estcourt mill in South Africa which Fred commended on earlier.

Since Fred has really made it very clear that our primary concern has been to the impacted employees and their families let me take a moment on Slide 16 to provide some additional information regarding the situation in South Africa. An explosion on June 6, 2014 in the mill's power plant reduced the site's ability to generate steam and heat the kiln which in turn required the production line to cease operating for several weeks.

Currently, the mill is running at approximately half of our desired output. Additional capacity is scheduled to come on line during August, 2014 which we believe will restore production to about 75% of pre-incident levels with a balance expected to be restored during the fourth quarter of 2014. The 2014 adjusted EBITDA impact before any potential insurance recovery is estimated to be between $6 million and $7 million with the vast majority of the impact expected to fall within the third quarter of 2014.

Importantly, the Estcourt mill is ensured against property loss and business interruption, we will continue to monitor the situation closely and keep you informed as our remediation efforts and the timing of insurance proceeds becomes known.

Turning to liquidity, cash flow and balance sheet metrics, available liquidity at June 29, 2014, including unrestricted cash and undrawn ABL and an accounts receivable purchase agreement, totaled $324.7 million or approximately 18% of Masonite’s trailing 12-month net sales. Total debt and net debt to trailing 12-month adjusted EBITDA stood at 4.7 and 3 times respectively. We would expect these numbers to continue to trend down as we fully realize the benefit of previously disclosed pricing actions, the Door-Stop acquisition and what we expect to be a multi-year recovery and construction activity in our largest market, the United States. Our trailing 12-month adjusted EBITDA interest coverage ratio was 2.9 times and our trailing 12-month fixed charge coverage ratio was 1.6 times.

Cash flow from operations year-to-date was $25.7 million compared to $2.5 million last year. The increase in cash flow from operations was driven primarily by improved business results and due to operational issues encountered during the implementation of a new accounts payable processing system which has temporarily extended payments beyond out normal trade terms.

Finally, before turning the call back to Fred, let's take a moment to put our second quarter results in context. Slide 18 shows that our second quarter results represented an important step forward. At $44.1 million, adjusted EBITDA more than doubled on a sequential basis versus our first quarter results of $19.7 million and was more than two times the $20.5 million achieved during the second quarter of 2011 which was just three years ago.

While we are encouraged by our second quarter results and believe they represent clear evidence that our balanced growth strategy and our focus on business execution is working, we acknowledge that we have a long way to go before we are generating an acceptable return on equity for our shareholders.

We would also be remiss if we did not point out as we did last year at the same time that while we believe future prospects are encouraging the second quarter is typically the strongest quarter of the year with historically the third quarter being flat to slightly down on a sequential basis due to seasonal influences like the countrywide slow down experienced in France each August. We believe this fact coupled with the incident at our Estcourt mill in South Africa bears mentioning.

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

Fred Lynch

Thank you, Mark. So after an unusually harsh winter that temporarily impacted new home construction and repair, renovation and remodeling spending we saw business fundamentals improved during the second quarter of 2014. U.S. housing start to completion has both displayed modest growth in the quarter while North American pricing trend strengthen enabling us to grow second quarter adjusted EBITDA by 31.6% and achieve our highest adjusted EBITDA margin in five years.

In addition, we believe Masonite strong market position as one of only two vertically integrated residential molded door manufacturers in North America and the only vertically integrated residential and commercial to door manufacturer in North America positions us well for the future.

We intend to leverage our established leadership position in all targeted North American product categories by focusing on five areas to accelerate growth: automation, product line leadership, electronic enablement, sales and marketing excellence, and portfolio optimization via strategic tuck-in acquisition and market exits.

We believe that these five focus areas and the commitment and the dedication of our employees around the world will help us to drive top to bottom line growth above and beyond the broader macroeconomic recovery and creating lasting value for Masonite shareholders.

With that, I will now turn the call back to the operator and open the line for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Lynch. (Operator Instructions). Our first question is from Scott Levine of Imperial Capital. Please go ahead.

Scott Levine - Imperial Capital

So it seemed like there really wasn't any much impact from weather during the quarter and you elaborated a length regarding the demand environment in general in North America. I was hoping you might be able to provide may be a little bit more color and touch upon as well the RRR market in more detail and commercial architecture. Are you seeing or have you seen from a demand standpoint a slow down as the quarter progressed to the current time or may be additional color regarding the demand environment you see today?

Fred Lynch

Sure. I would say from the RRR perspective we are seeing that somewhat steady market in the mid-single digit type growth level. We anticipate that that will continue through the second half of the year; there is no reason to believe otherwise.

On the commercial market, clearly the commercial non-residential markets were difficult in the first half of the year. We believe that after effect of the government slowing down last year and on people the uncertainty with respect to funding projects has kind of past us now. And from an order entry perspective, we are clearly seeing a lot more projects being brought to this table. With that said, the timing of the impact of those projects moving from an LOI to actually actualization is usually anywhere from 6 to 18 months. So we are hopeful for the commercial non-residential market to continue to improve as we move forward to the second half of the year.

I think then just at a high level from if we look at our next two largest markets the UK and France, if you look at the data out of the UK right now it's relatively strong; starts are up about 14% as well as completions on a year-over-year basis. Housing starts in the UK for January and June was the highest they have been since 2008. So we had a good first half for the year. Some good incentives by the UK government to enable housing has been a positive there.

You have the opposite in France. In France, housing starts were down about 21% year-over-year. That's 10 consecutive months of decline, and housing starts in France have actually been at the weakest level since 1993. And we had the opposite government intervention in France that actually probably pushed things in the wrong direction.

So thankfully, with our acquisition of Door-Stop in the UK, we picked the right market to invest in and a market that is doing well for us overall. So that's kind of a high level overview of all of the different market segments that we participate in.

Scott Levine - Imperial Capital

Got it. And then (inaudible) you mentioned Door-Stop you talked about the portfolio review and then I guess a little bit more color perhaps on the acquisition landscape, the market as you see it and whether multiples are in line with expectations turning higher lower and additional detail on areas that you guys are targeting specifically for growth?

Fred Lynch

Yes, I won't get into areas we're targeting specifically. I will tell you that we take a very disciplined approach to acquisitions. I think Door-Stop is an excellent example, where we paid roughly 6.5 to 7 times trailing 12 months. That was a very good deal for us, we felt a very value. We do you see in North America the valuations tend to be higher. And so we are going to being very thoughtful and careful in any acquisitions that it needs to really make sense for our business for our strategy going forward for us to participate in those.

With that said, we do believe acquisitions are a important part of our strategy and we will continue to focus on that as we continue to grow both organically and inorganically.

Scott Levine - Imperial Capital

Got it. One last one if I may, I know its not your practice to provide specific financial targets but you did talk about the seasonality in 3Q. I'm guessing that's off of a 2Q that was generally unimpacted by weather. Any other things that we should think about and maybe some color with that accounts payable swing do you expect it to reverse in the third quarter maybe a little bit more detail on magnitude there?

Mark Erceg

Yes, on the accounts payable side I think we have looked at our June 30 position, we would tell you that there is probably somewhere between $15 million and $18 million of exit cash that we accrued that we do think we will release back out during the third quarter as we get that system operating the way it was in design to, but an optical character reading system and it hasn't been reading the characters as we had intended. So we are working through all that and that we will address itself here in relatively short order.

As far as the seasonality effects, I think we talked about the larger elements things like France typically having a full month shout down clearly impacts our business. I think Fred very clearly upfront talked about the difference between competitions that we saw in the first half of the year versus starts in the first half of the year.

So logically, it would follow that there should be a little less unit volume in the second half versus the first half, that's historically that three to six month lag comes to play and then of course we talked about the major incident in South Africa. We think that will be $6 million to $7 million, the vast majority which will impact the third quarter. It's important to know we are fully insured just like we were for the Marshfield incident and we made very large recoveries against that.

So we are very confident about that, but the accounting rules are set that we can't actually record any gains until that money is actually remitted. So that might make things that were choppy going forward.

Operator

Thank you. Our next question is from Al Kaschalk of Wedbush Securities. Please go ahead.

Al Kaschalk - Wedbush Securities

I wanted to follow-up on the additional disclosures that you are providing, it's very helpful. But in particular, in Europe and Asia area I think volumes kind of fired up $6.1 million. How does the acquisitions fit into that analysis? Because I believe Door-Stop was running around $38 million, $40 million per year. If we strip that out --

Mark Erceg

When we have released the information, we have been putting Door-Stop into unit volume. So when you look at that unit volume growth, a goodly portion of that is in fact Door-Stop. In fact, if you look at the Q2 results, net sales for Door-Stop contributed about $12 million of sales and the EBITDA was little bit over $2 million in the quarter.

Al Kaschalk - Wedbush Securities

Does that mean that the strength in the core business was negative?

Mark Erceg

When you look at the Europe, rest of world segment what you would see is that we did very well on an organic basis in the UK as well, but Franc, as Fred indicated, has been a drag. Year-over-year housing starts are down over 20%, as he indicated, and that's a fairly sizeable business for us.

Al Kaschalk - Wedbush Securities

All right. Okay. Thank you. And on the weighting of the business RRR and new commercial, have you seen anything in Q2 that was disproportional than your historical trends from a mix perspective?

Mark Erceg

No, no.

Al Kaschalk - Wedbush Securities

Okay. Thank you. That was brief. In terms of the Door-Stop, could you talk about the automation process and the adoption there on new business generation?

Fred Lynch

Yeah. When we look at Door-Stop, I think what was interesting in Door-Stop model is not so much the automation. It's more the electronic enablement on how they go to market. Door-Stop has a very unique order entry system, web-based order entry system that allows us to provide product to our channel partners, in this case typically installers in a very, very quick timeframe, lead times within three to four days. And we actually have a policy, if you don't receive the door three days after you order it, the door is free. And I think in the last five years there was one door that was provided for free.

So it's a unique business model. It works very well in the UK market, which has a very dense population and very easy logistics relatively speaking. And it's one that we are happy to see and learn from.

Mark Erceg

The only other thing I would add to that is your 90 plus or some of the orders come in online directly and the vast, vast majority of the payments are made with credit cards. So the cash flow characteristics of that particular business model are very attractive.

Al Kaschalk - Wedbush Securities

All right.

Fred Lynch

Now, with that said, it's a relatively small portion of our portfolio today.

Al Kaschalk - Wedbush Securities

Sure. Just I was looking at the longer term here that maybe there is some transition to other markets where the electronic portion can be benefit to rest of your portfolio?

Fred Lynch

I think in general -- I think it's important in general, we look at the market in general. We at Masonite believe that consumers in the future will continue to shop and buy products differently. We are investing in electronic enablement and it is a -- it's significant portion of our strategy to ensure that we have the capability from an electronic and IT infrastructure to be able to compete most effectively in the market going forward. So it will remain an important part of our strategy and will be an important part of our investment thesis.

Al Kaschalk - Wedbush Securities

All right. Finally, if I may, on the acquisitions you have done -- and you addressed it on the slide today, I think with Israel, exiting certain markets, where are we -- where are you in terms of those acquisitions and the review process, which I know is ongoing all the time, in terms of businesses where you think there is some additional attention that may need to be spent, absent some of the end market dynamics?

Fred Lynch

Yes, I don't think you can separate the end market dynamics from the attention on the business. And we are a continuous improvement company. So from a Lean sigma perspective we spend a significant amount of our time in constantly trying to make our processes better. And automation has become a big portion of that, because we believe ultimately automation will make us a stronger, more capable, more competitive company and be able to differentiate us from rest of the competition.

On an ongoing basis, it's really that combination of markets. I think clearly, Israel is an area and a market that we talked about in the past that we believe is one that requires us to pay more attention to, and we have been doing that. And we have not been shy in the past of taking actions. Over the last seven years, I think we have shutdown between 50 and 60 operations due to non-performance. I can tell you going forward we don't have a list of that many clearly, because we have taken and done a lot of the work. But if we have a business that doesn't make sense our focus and approach is to fix that business or make a determination to no longer participate in it.

Operator

Thank you. Then next question is from Bob Wetenhall of RBC Capital Markets. Please go ahead.

Bob Wetenhall - RBC Capital Markets

Hey. Good morning. And congratulations on a really good quarter.

Fred Lynch

Thanks Bob.

Bob Wetenhall - RBC Capital Markets

Yes. Great start. Nice to see the progress. Could we get little insight on pricing trends, because it looks like pricing decelerated from 5.5% or 5.6% growth to 4%? And I wanted to get your view on the outlook for pricing, do you see pricing flattening out? And how do you see pricing evolving across channels in the back half of the year?

Mark Erceg

I think it's important to note, Bob, that part of what we are reporting on the AUP line is price but then, also mix effects as well. So things like the stile and rail acquisition in the business growth that we are seen there and other things coming into play where we walked away for some unprofitable product lines and some unprofitable customers is all playing into that.

Now, having said that, we have talked very openly about the price increases that we have taken to-date and the fact that we have taken three of those over the course of the last five quarters. We talked very openly about the fact that we thought there would be $10 million of net pricing benefit accruing to us in this quarter. And I think Fred indicated that we expect to see that for the next three quarters as well. We have consistently said that we don't believe we are getting fair value for our products and services and so, we'll continue to look for opportunities to take price as appropriate towards that end.

Bob Wetenhall - RBC Capital Markets

And some recent changes at one of your competitors, can you talk about the competitive response that you've seen in the marketplace? And is there any updates in the home-center channel with Depot and Lowe's on retail price points?

Fred Lynch

Yes. I think I'll start with the later. As we mentioned in the last call, we had seen changes from a retail pricing perspective as all of the large retail suppliers in the -- in our space. I would say that that continues. We continue to see a positive trend with respect to retail pricing, and so we are encouraged by that.

We are not in a position to say what we plan to do with pricing. We want to stick to our policy in talking about pricing on a postmortem basis, on a specific nature. With that said, it think Mark was very clear that we continue to feel that there is opportunity for us to ensure that we are getting fair value for our products, which we don't think we are getting today.

Bob Wetenhall - RBC Capital Markets

All right. And one final question. North American incremental margin was 45%, which is really strong. Besides the pricing gains and the benefit of favorable operating leverage, was there anything else in there helping you get to that 45% incremental? Was there any cost reduction activities or manufacturing efficiencies that you picked up? Thanks and good luck.

Mark Erceg

Yes. What I would say is that our Lean sigma programs continue to play out throughout the year. It wasn't one specific item that came through in Q2 that relates to that. Obviously, the pricing benefit which was largely falling into the North American states would make the pass through rates fairly high. But we do believe we have high operating leverage as well, which we talked about in the past.

In the company view, we have talked about it being an excess of 20%. Places like North America where we have larger scale operation it should be higher to your point with other parts of the world kind of pulling that down a little bit, which is also why I think Fred made the point about us managing the portfolio aggressively going forward.

Bob Wetenhall - RBC Capital Markets

Modeling that out further, what do you think the right number is we should be using for an incremental quarter?

Mark Erceg

Well, what we said consistently is that we believe the incremental pass through rate, all things being equal, is in excess of 20%.

Bob Wetenhall - RBC Capital Markets

Got it. Thanks very much.

Fred Lynch

Thank you, Bob.

Operator

Thank you. (Operator Instructions).

And the next question is from Seth Yeager of Jefferies. Please go ahead.

Unidentified Analyst

Hi, this is actually Lennie calling in for Seth. I was wondering if with the shift in housing starts being driven more by multifamily activity, you could articulate how that has impacted your margins year-to-date.

Fred Lynch

Yes. I think the impact that we are moving toward multifamily is not so much of a margin issue as much as it is a unit volume issue. So we participate in both the single -family market and the multifamily construction both to the same extent. And so, we really believe the impact is is the fact that a multifamily unit has about half the number of doors as a single-family unit and as such, growth rate should be adjusted for that. On a margin basis, there might be some slightly lower margins in multifamily houses but it really depends on the type of multifamily home.

Unidentified Analyst

Great. And for SG&A is roughly 10% to 11% a reasonable run rate on the business and with the plant outage aside from the EBITDA impact you noted, will you incur any cash costs that aren't covered by insurance?

Mark Erceg

For the insured property, I mean there is a small deductible on the property side $100,000, $200,000 something to that effect. So we don't believe there will be a lot of cash exposure as it relates to that.

As it relates to SG&A, going forward we do believe that there are some additional capabilities we want to develop. But having said that, we do think that that will be a source of margin accretion to us as we invest less in that than the overall growth rate. You saw in this past quarter SG&A grew at 4.5%, which was considerably below the rate of sales increase, despite the fact that we continue to invest in lot of capabilities Fred mentioned that.

Unidentified Analyst

Great. And just one last question. You have experienced a nice growth and your outside margins are still lagging. And I know you have talked about how France's markets have been super grade lately. But could you talk about just overall profitability in that area? And then, also at what point do you think markets outside United States start to absorb additional pricing? Thank you.

Mark Erceg

Yes. Okay. You're welcome. With respect to pricing we have, as we noted earlier that we have been gaining pricing in the UK market which is growing. The UK margins are expanding. We don’t specifics on each component of that space. France is down. When housing starts are down 20% our volumes are down. When volumes are down that flows through at a variable basis. So what we're basically seeing in that market is a very strong and robust UK operation that’s adding value to the company. What we're gaining there is partially being offset by what we're losing in France right now.

And until we start to see some changes in the way that the French government is dealing with housing related incentives and housing related law I think we're going to be challenged somewhat in the French market. And we don’t see anything occurring over the next six months to change that, albeit there is a significant amount of pressure on the Hollande government to fix the situation.

Operator

Thank you. The next question is from Philip Volpicelli of Deutsche Bank.

Philip Volpicelli - Deutsche Bank

First question regards to South Africa. How soon do you think you'll get the insurance recovery there? Obviously, you probably made the claim, but is there an estimate of time when you might get that money back?

Mark Erceg

At this point, we'd be completely speculating. You'll recall that between the time we had the incident up in Marshfield and the actual recovery of the BI was in two pieces. We had a $3.3 million recovery in fourth quarter of '12 and $4.5 million recovery in the first quarter of '13 for an incident that happened I think half way through 2011. These things typically have a fairly long tail associated with them. That’s probably because really bringing the forensic accountant and really do the BI the business interruption loss analysis, you need to get back to a normalized trend rate. So I would expect it to be a number of quarters before any recovery is made against BI claims in South Africa.

Philip Volpicelli - Deutsche Bank

Okay. And Mark, is there going to be an increase in CapEx partly because of rebuilding?

Mark Erceg

At this point, as we continue to assess the situation we don’t think that’s the property claim will be that material in scope or size. You may recall that for the total Marshfield incident the total claim recovery was roughly $20 million. The BI was roughly $8 million of that. At this stage, we think that BI will be vast preponderance of it but its still early days.

Philip Volpicelli - Deutsche Bank

And CapEx for the year we're still thinking around $40 million?

Mark Erceg

Yes, yes. What we typically say is we're targeting to be at 3% or less of sales. So for us, in a given year, I would probably say its like in the $45 to $48 million range, but $40 million would probably be a little bit low for us right now.

Operator

Thank you. We have no further questions in the queue at this time. I would like to turn the floor back over to Mr. Lynch for any closing comments.

Fred Lynch

Great, appreciate everyone’s participation on today’s call. We appreciate and thank you for your questions. And thanks for joining the call and we look forward to speaking with you soon. Operator, will please provide the replay instruction?

Operator

Certainly. Ladies and gentlemen, thank you for joining the Masonite International second quarter earnings call. This conference call has been recorded. The replay may be accessed until August 21st. To access the replay please dial (877) 660-6853(877) 660-6853 in the U.S. or (201) 612-7415(201) 612-7415 for outside the U.S., and your Conference ID number 13586620.

This does conclude today’s teleconference. Thank you for your participation and have a great day.

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