Masonite International's (DOOR) CEO Fred Lynch on Preliminary Unaudited 2018 Full Year Results - Earnings Call Transcript

Masonite International Corporation (NYSE:DOOR) Preliminary Unaudited 2018 Full Year Results Conference Call February 1, 2019 9:00 AM ET

Company Participants

Joanne Freiberger – Vice President and Treasurer

Fred Lynch – President and Chief Executive Officer

Russ Tiejema – Executive Vice President and Chief Financial Officer

Conference Call Participants

Michael Eisen – RBC Capital Markets

Elad Hillman – JPMorgan

Michael Wood – Nomura Instinet

Alex Rygiel – B. Riley FBR

John Baugh – Stifel

Brian Barros – Thompson Research Group

Trey Grooms – Stephens

Kevin Hocevar – Northcoast Research

Operator

Good morning and welcome to Masonite’s Select Preliminary Unaudited 2018 Full Year Financial Results Conference Call. During the call, all participants will be in a listen-only mode. After management’s prepared remarks, investors are invited to participate in a question-and-answer session. Please note that this conference call is being recorded.

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

Joanne Freiberger

Thank you, Rob, and good morning, everyone. We appreciate you joining us today. With me on the call today are Fred Lynch, Masonite’s President and Chief Executive Officer; and Russ Tiejema, Masonite’s Executive Vice President and Chief Financial Officer. We issued a press release yesterday with our Select Preliminary and Unaudited 2018 Full Year Financial Results. The release is available on our website at masonite.com. Also note that today’s call does not include a slide presentation.

Before we begin, I would like to remind you that this call will include forward-looking statements. Each forward-looking statement contained in this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Additional information regarding these factors 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 in Masonite’s most recently filed Annual Report on Form 10-K and our subsequent Form 10-Q. Our SEC filings are available online at sec.gov and our website at masonite.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 preliminary earnings release in today’s discussion includes certain non-GAAP financial measures. Please refer to the reconciliations, which are in the press release. In addition, our expectations about the Select unaudited full year 2018 results are based on preliminary unaudited information about the full year, and are subject to revision. Although the fourth quarter is now completed, we are still in the process of our standard financial reporting closing procedures and audit of our 2018 full year financial statements by our independent auditors.

Accordingly, as we complete our normal quarter and year-end closing and review process, actual results could differ materially from these preliminary results. Factors that could cause actual results for the full year 2018 to differ materially from our preliminary results include, but are not limited to, inaccurate assumptions, unrecorded expenses, changes in estimates or judgment and facts or circumstances affecting the application of the Company’s critical accounting policies. The agenda for this call will include some brief remarks from Fred, followed by a question-and-answer session.

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

Fred Lynch

Thank you, Joanne and welcome everyone. As Joanne mentioned, late yesterday, we released Select preliminary unaudited financial results for the full year of 2018. We expect consolidated net sales for the full year of approximately $2.17 billion versus $2.03 billion in 2017, which is an increase of 7%. We expect adjusted EBITDA of approximately $268 million for the full year 2018, as compared to $255 million for 2017, which is an 5% increase. These results, specifically adjusted EBITDA, fell short of the updated annual outlook previously provided on our third quarter 2018 earnings call held on November 7th of last year. At that time, we expected to end the year near or at the low end of our original full year 2018 adjusted EBITDA outlook range of $280 million to $300 million.

During the fourth quarter, we experienced much lighter than expected sales volume across the business, particularly in our North American residential segment. As mentioned on the third quarter call, we saw wholesale volume growth in that business weaken meaningfully in October. And this softness continued into November and then worsened in the month of December and we saw wholesale volumes decline year-on-year. We had anticipated some pre-buy activity in December due to our price increases that took effect near the end of that month, but that did not occur. Consistent with expectations we outlined on our third quarter call, previously announced price increases were successfully implemented in late December, but did not meaningfully benefit our results in the fourth quarter.

Meanwhile, material cost inflation continued to accelerate in the quarter, reaching mid-single digits, inclusive of tariff impacts. And as a result, we saw material costs as a percentage of sales increase in the quarter by roughly 70 basis points year-over-year. During the fourth quarter, we reduced overtime throughout the organization. We began to eliminate second shift at a number of our sites and reduced total headcount across the organization. From the end of the third quarter to the end of the fourth quarter, we reduced company-wide headcount, excluding the impact of the BWI acquisition by roughly 3%. These reductions, however, largely occurred close to year-end following the holidays.

The timing of these headcount reductions, together with inherent difficulty in immediately flexing overhead spending with volume, yielded a higher year-on-year factory cost as a percent of sales. And in some cases, we took the opportunity presented by slower volumes and downtime in December to complete important maintenance work and facility repairs in a number of our plants. In the month of January, we continue to reduce headcount by a further 2%. We believe these reductions are structural in nature, as the lean manufacturing initiatives implemented in the second half of 2018 have simultaneously improved efficiency, as well as throughput.

Lastly, as noted on our third quarter call, our Architectural business completed an ERP conversion at the Northumberland, Pennsylvania plant at the end of the third quarter. This implementation was successful overall with the plant ramping up back to normal production rates through November. However, in an effort to work through the higher backlog created during the conversion and maintain customer service levels, we incurred higher than anticipated costs in the fourth quarter related to plant efficiencies from production schedule changes and higher distribution costs to meet delivery commitments.

Aside from this setback, our Architectural business appears to be recovering to match end-market demand. We experienced solid year-on-year sales growth in January. While we are expecting some impact from recent frigid weather in the Midwest, since we have a number of plants in the Midwest, we are encouraged by the demand profile for our Architectural business. At this point, we have no further ERP implementations planned during 2019 and are focused on consistently servicing our architectural customers.

As we look across the entire Masonite business for the first quarter of 2019, after a slow first week, sales improved through the month and preliminary indications show net sales up year-on-year. While that’s encouraging, we recognize the demand picture for 2019 remains uncertain. As we shared in our last call, we have been proactively working on optimizing our manufacturing footprint, product lines and business portfolio to better position Masonite for less predictable market conditions in the year ahead. And so we like to provide a brief update on our progress.

As disclosed on our third quarter call, we are now on schedule to start up our new automated cut stock plant in Verdi, Navada, and shut down our more manual cut stock operation in Stockton, California in the second quarter. We expect the new plant to deliver 40% more capacity with almost 20% lower headcount, allowing us to reduce both our cost on internally supplied material and higher priced third-party purchases. We also noted that investments in our Monterrey, Mexico door assembly plant have more than doubled the capacity of that site, allowing us to more cost effectively service demand across North America.

As a result of these and other investments we’ve made to improve the throughput and efficiency of our facilities, we are now positioned to begin a planned consolidation of certain manufacturing sites beginning in the second quarter. These actions in combination with initiatives already underway in the UK to streamline our distribution operations, consolidate additional manufacturing sites and exit non-core product lines in that region are expected to result in a reduction of greater than 10% in the total number of manufacturing locations across Masonite by the second half of 2020, while simultaneously increasing overall capacity on a lower cost to serve platform.

In our last call, we also shared that we announced the consolidation and restructuring of certain back-office desk in the UK to improve cost and efficiency. After a fulsome review of salaried staffing levels as part of our 2019 budgeting process and given the uncertain market environment, we expect to reduce indirect and administrative headcount in North America by roughly 5% in the first half of 2019 through a combination of attrition and focused restructuring efforts. And as a result of all these activities, we expect to take a restructuring charge in the first quarter of 2019. We plan to share both the expected size of and the expected benefits from these restructuring plans in our detailed 2018 fourth quarter and full call later this month.

And so with that, we’d like to open up the call to any questions you may have.

Question-and-Answer Session

Operator

Thank you, Mr. Lynch. [Operator Instructions] Our first question is from the line of Tim Wojs with Baird. Please proceed with your question.

Tim Wojs

Hey, everybody. Good morning.

Fred Lynch

Good morning, Tim.

Tim Wojs

Maybe just on the quarter and just kind of what we saw in wholesale. What – have you talked to some of your customers just in terms of inventory levels and kind of where they think they’re at? I know new construction is going to be slow at the start of the year. I’m just kind of curious if most of the destocking in your view has happened in kind of the fourth quarter or if you would expect kind of that choppiness to continue in the first half of the year?

Fred Lynch

Yeah. We’ve had a lot of conversations, Tim, with our customers. In fact, we’ve just had two major customers in this week from our wholesale channel. They’re seeing that that same level of choppiness, both lamented on the fact that lumber sales in particular were very tough in Q4. I would say that inventories – I think they’ve been very thoughtful about inventories. Part of the fact that we didn’t see a pre-buy prior to – I think the price increase was the fact that our customers are really trying to manage their inventories well, because of the uncertainty of what demand could look like.

With that said, I think on the positive note, the recovery that we saw in January would indicate to us that inventory levels are at the right place in our customers. It really was kind of an abrupt slowdown in the month of December, followed by a recovery to normal that we saw in the business in January.

Tim Wojs

Okay. And then maybe just – I know you’re probably not going to give specific 2019 guidance today. But I guess just qualitatively I mean should we expect EBITDA to grow in 2019? I just want to know if there’s any sort of qualitative parameters we can kind of think about for 2019?

Russ Tiejema

Yeah, Tim, it’s Russ. I’ll address that. You’re right. We’ll wait until our call on February 19th to talk in more specificity about our outlook on 2019. But as we actually commented I think in our release directly, we exit 2018 with all of our pricing increases now fully in place and a number of cost reduction initiatives that are underway. So that puts us in a position to feel good about our prospects for expanding the margin across 2019. We’ll clearly have to monitor the demand outlook very carefully and see what happens in the housing market and how that impacts top line. But from a cost perspective, we think we’re well positioned. Likely to be some continued commodity inflation, but we’re seeing that moderate slightly.

Tim Wojs

Okay. Okay, and then, I guess, the last one. I guess, the UK, obviously, a lot of noise, but it hasn't really been called out as a weak point here. I mean, did that business hold up relatively well? And I guess, just an update on that business would be helpful.

Russ Tiejema

Yes Tim Russ again. Relative to the UK business, base business in the UK was relatively flat. So in light of a lot of the cross turns that we are seeing in the UK around Brexit, that doesn't feel bad to us. We did see significant overall sales growth in that segment, and that was really driven by the DW3 acquisition early in the year.

Tim Wojs

Great. I appreciate the color. Thank you. And we’ll talk in a couple of weeks. Thanks.

Russ Tiejema

Thank you.

Russ Tiejema

Thanks Tim.

Operator

The next question is from the line of Michael Eisen with RBC Capital Markets. Please proceed with your questions.

Michael Eisen

Good morning everyone. Thank you for taking the questions.

Russ Tiejema

Good morning.

Michael Eisen

Just wanted to start off, in the past, when you guys have gone through some issues on cadence in the quarter, you'd given some color around weekly sales trends, gross margin trends, how they progressed on a more granular level. Can you help us better think of the margin cadence in the quarter and what that means as things start to rebound in January?

Fred Lynch

Yes. So I'd say, just I'll start at a high level, maybe turn to Russ, but as we sit here in January, only one month. So we want to be thoughtful that one month does not make a quarter. But as we said, we saw a recovery from a revenue perspective and a year-over-year sales perspective. So we're encouraged by that. And the fact is, again, as Russ said, we came through the fourth quarter working very diligently on all sides of the P&L. So driving price increases, which now have taken place, and many of the actions that we've been driving through our lean initiatives and then kind of refiguring our footprint are already taking place. So they were all already underway in the second half of 2018.

And while they didn't have the impact that was desired in the fourth quarter, we expect those cost actions to have that impact in the first quarter.

Russ Tiejema

Yes. And I would just add, clearly, margins can be lumpy month-to-month. But generally speaking, you'd see the margin trend somewhat correlate to the top line trend. And so that unexpected slowdown that we saw in December from a top line perspective, clearly impacted margins in the month, particularly given the fact that it does take a little bit of time to flex out labor and overhead costs in line with that weaker top line environment.

Now I would say, because as we look forward into January, preliminary indications are that we did see solid margin growth year-on-year. One month does not make a trend. We need to carefully monitor what the impacts could be going into February around some of the weather conditions, particularly given a number of our plants are in the upper Midwest, particularly for the Architectural business. And we also need to carefully monitor what the demand environment is. But the business exiting 2018, again, on the heels of pricing fully in place and cost initiatives taking traction, as Fred mentioned, has us feeling good about the prospects for margin accretion as we proceed throughout the year.

Michael Eisen

Got it. And then that’s really helpful. And the correlation of the top line perspective and following up on one of the prior questions. There is a lot of uncertainty in the demand environment, and the orders trends we're seeing from the builders have been fairly disappointing. So just thinking about that correlation, if volumes are down in the year looking forward, would you guys still be able to expand margins with all the cost take-outs and restructurings that you guys are putting into place?

Fred Lynch

Yes. We believe we can. And importantly, I think, the fact is that the actions that we've been putting in place on the cost side are largely – have been largely underway. As Russ mentioned, if we add what we did in the fourth quarter and the first month of the year, it was actually down 5% headcount on an overall basis. So that would be in line with understanding that, hey, the business may be in that has the potential for the overall business to be in that kind of position. And let's not forget that were able to institute some important price increases as we entered into the year.

Michael Eisen

Understood. And one last housekeeping one for me. Fred, I think you mentioned pulling forward some maintenance CapEx into the quarter during the slowing period. Can you help us quantify what that is and whether that impacts your outlook for CapEx spend going into next year? Thanks and good luck.

Fred Lynch

It wasn’t Masonite CapEx, it was actually Masonite OpEx. So it was operating spend. So our overhead cost in the fourth quarter will be higher on a year-over-year basis and as a percent of sales as a result of doing that. As Russ mentioned, we did have – given the volumes that we had, we had excess headcount going into December. We shed that headcount at the end of December, but we utilized some of that headcount through the month to take care of facility issues and other things so we could get 2019 off to a great start.

Operator

Our next question is from the line of Michael Rehaut with JPMorgan. Please proceed with your questions.

Elad Hillman

Hi, this is Elad Hillman on for Mike Rehaut.

Fred Lynch

Good morning.

Elad Hillman

Good morning. I just want to delve into a little bit into the price increases that you said have been implemented as of now. Are those enough to offset the material price increases that you saw in 4Q that sort of continued throughout the quarter? Or would you need more pricing in order to offset those material price increases?

Russ Tiejema

No, at this point, we would view those as sufficient to offset.

Elad Hillman

Okay, great. And on the January revenue increase that you mentioned, just delving into the drivers here, you mentioned that volume the inventory levels are looking better in your customers. And then you also got price. So when I think about the drivers of that revenue growth, what – how can I kind of think about that from a volume and a price perspective and if there's any other drivers in that?

Fred Lynch

Yes again I think, as just as we look at, we feel that our customers, obviously, saw a slowing down in the quarter with the builders. And they likely took their inventory down in the fourth quarter, as we discussed. Right now, we feel like January just really is a display of the ongoing kind of regular market pace and cadence that we expect, which, as you said, for the year, we think is going to be somewhat uncertain. So we're not expecting a very robust year, given what we're hearing from the homebuilders. But we're encouraged by the fact that what we saw in the fourth quarter appears to be more of an abrupt reduction in demand in the month of December that appears to be corrected in the month of January.

Russ Tiejema

May be the only other – I'm sorry, it's Russ. The only other point of color that I would offer is recall in our north American Residential business, the volume declines that we've really seen over the last few quarters have principally been in the retail side, and it's been a result of a loss of some retail business effective in Q2 of this year. So through Q1, we will not have anniversary-d that.

Elad Hillman

Okay. And then just on the wholesale piece of it. So even though volumes are down, you called out in the past some tailwinds on mix as the wholesale has been kind of mixing up the portfolio products. Did you see any offset to volume from mix in wholesale trends? Or are those – if you can update on that, it will be helpful.

Russ Tiejema

Yes we’ll talk a little bit more about mix during the call and the full year call in three weeks time.

Elad Hillman

Okay, great. Thank you.

Russ Tiejema

Thank you.

Fred Lynch

Thank you.

Operator

Our next question is from the line of Michael Wood with Nomura Instinet. Please go ahead with your questions.

Michael Wood

Hi, good morning. I think is it 5% headcount reduction, 10% fewer plans and some restructuring. Are you able to give us an overall cost impact that’s expected in 2019?

Fred Lynch

At this point, we'll hold until we get to our full call on the 19th, Michael, to go through those details. And just to be clear, much of the 5% reduction in headcount that has occurred at this point is not – would not be part of the restructuring charge. That's our normal reduction in headcounts. A portion of that would be – it's related to plant closures. But majority of that is just simply shedding the costs associated with volume.

Russ Tiejema

Correct.

Michael Wood

Yes. And typically, when we see a prebuy that doesn't materialize, the resulting price increases that's attempted is successful. Do you think this time will be different than that? And I guess, what kind of confidence do you have at this point based on feedback that, that price will stick?

Fred Lynch

Yes, we feel confident that, that price will stick at this point.

Michael Wood

Okay. And are you able to give any update in terms of – you gave the wholesale color. Just in terms of general remodeling retail demand in the U.S. And any update on architectural and where that's coming in versus your expectation?

Fred Lynch

Yes. I'd say, from a retail perspective, we continue to track with a market. As Russ mentioned, we did have a loss of retail business that will anniversary at the end of the first quarter. So we'll have that impact. And on the architectural side, the demand is – we're seeing, at least for the early part of the year that we're matching what we believe to be market demand which is mid- to low – or low to mid-single-digit demand improvement. So right now, we feel from a demand perspective across all of our businesses we're essentially matching market conditions.

Michael Wood

Okay. Thank you.

Fred Lynch

Thank you.

Operator

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

Alex Rygiel

Thank you. Good morning. You mentioned a number of times that January has experienced positive growth, is that on a reported basis or is that on an organic basis?

Russ Tiejema

That's on – in overall basis both organic and including the impact of acquisitions. If you were to back out the impact of acquisitions and foreign exchange Alex, you would still see slight growth year-on-year in the month. Now again those are preliminary results but they are somewhat encouraging following the downturn that we saw in December.

Alex Rygiel

And is that true for both North America and the UK and Europe?

Russ Tiejema

It certainly is for North America.

Fred Lynch

It certainly is for architectural.

Russ Tiejema

For architectural. I think we're still seeing a little bit of weakness in the UK. Again we're working through the details of the month since the month is literally just closed and that's our preliminary look right now.

Alex Rygiel

And are you kind of surprised that there was no pre-buy in early December in advance of the price increase, but yet there is strong demand now in January? Seems somewhat odd from an order pace…

Fred Lynch

Yes, it's not typical what we would have seen in the past. I do think that many of our customers as they came into December were trying to understand what was happening in the market. And the fourth quarter was uncertain. There was a lot of questions regarding the outlooks they were hearing from the builder community and I think like most companies, when you hear that and the forecast, we certainly kind of take a step back and say, let's just think about and let's get more information before we make any major decisions here.

So I think the general uncertainty in market led to that. In the end of the day that won't be a bad thing for us, because that pre-buy didn't occur, which means we'll get the buy at higher prices.

Alex Rygiel

It's helpful. Thank you.

Fred Lynch

Thank you Al.

Operator

The next question comes from the line of John Baugh with Stifel. Please proceed with your question.

John Baugh

Thank you. Good morning. I just wanted to see if you could provide clarity – you answered one of the questions by saying your volume matched or there was no loss of market share. And you mentioned also that you had talked recently with two large customers. Were those – is there any way you could break out sort of the retail home center commentary from the builder commentary, it sounds like the builders were as weak, but I don't want to read into something if that's the wrong conclusion.

Russ Tiejema

Yes, John, it's Russ. I'd have aligned it this way. If you look at the breakdown between wholesale and retail in the quarter, retail was down, but it was virtually all explained by that loss of retail business that I commented on earlier. Otherwise, the retail business was essentially flat. The decline really was on the wholesale side.

John Baugh

Okay. So it's primarily what you're seeing is obviously housing construction weakening in the second half of 2018, further weakening data points in, I don't know, the fourth quarter. But that's where the primary inventory reductions and/or panic, if you want to put that word on, had occurred?

Russ Tiejema

Yes. I wouldn't put the word panic, and I think it was just a systematic decision by our customer base entering into 2019 and the best position they could be.

John Baugh

Great, thanks for that color. Appreciate it. Good luck.

Operator

[Operator Instructions] The next question is from Steven Ramsey with Thompson Research Group. Please proceed with your questions.

Brian Barros

This is Brian Barros on for Steven Ramsey. Thank you for taking my question. You called out the North American Residential for December slowdown, of course. Was there any slowdown that felt in resi repair or commercial at all? Or was it strictly just the new resi side?

A – Fred Lynch

So as Russ has mentioned, on the repair and remodeling side it was largely -- other than the loss of business that we heard that had not yet anniversaried, that business was essentially a market. I think, on the commercial side, we continue to see improving demand on the commercial side. The challenge we have in the fourth quarter is we did have an ERP implementation. We were able to make sure that we met our customers' needs during that time, but it took a lot of work and extra costs in order for us to do that, just given the fact that there were some disruptions associated with the ERP.

So from a pure demand perspective, as we said on a number of times on this call, we feel that we are operating at a point where we're keeping up with the market and all of our market segments.

Brian Barros

Got it. And on the North American geographies, is there anything to call out that saw results on the extreme, either low or high?

A – Fred Lynch

No.

Brian Barros

Kind of consistent across the board?

A – Fred Lynch

No.

Brian Barros

Okay, got it. Thank you.

A – Fred Lynch

Thank you, thank you.

Operator

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

Trey Grooms

Hey, good morning gentlemen.

Russ Tiejema

Good morning Trey.

Trey Grooms

Quick, two questions actually from me. One is you mentioned the 5% fewer headcount, that it's really shedding the costs associated with volume. And I think, also, you mentioned some of the expectation of low to mid-single-digit demand. Just trying to reconcile those two comments with your outlook.

Fred Lynch

Yes, so I think the important point is we think that a lot of that shedding that has occurred up to this point has really been a function of the structural changes that we're making within the business. So we talked about the fact that we've been able to expand our throughput in some of our lower-cost operations. That allows us to reduce headcount by reducing the number of shifts we had in other locations. And in addition to that, our lean manufacturing teams have done a really nice job, particularly with respect to some of the new product that we've introduced that grew pretty rapidly in 2018, to improve the efficiencies of those manufacturing operations.

Those efficiency improvements really came through the second half of the year. And we got ourselves, as we started to look into the month of even December, where we found ourselves with excess headcount in the plant because our operating efficiencies had improved, in addition to the fact that we had lower volume.

So as we've come into the early part of 2019, while we're disappointed with the fact that the markets might not be as robust as one would like, we feel that we've been able to get the pricing, which was needed in place, and that the structural cost improvements that we're putting in the business and have already put in the business and will continue to put in the business throughout 2019 as we gain traction on our restructuring activities will actually position us even better for the year.

Trey Grooms

Understood, thanks Fred. And then last one for me is -- and apologies if you touched on this. I did drop off for just a second. But you mentioned that you've seen an up January. Your customers are talking about up as well, and you guys are up in January. So just to be clear, so that inventory restock that's happening in January is at the higher price that you guys realized from the increase you put in place in late December. Is that the right way to think about what we're seeing with inventory build in January?

Russ Tiejema

Yes, Trey. It's Russ. Any orders placed subsequent to the end of the year would be in with the new pricing, that's correct.

Trey Grooms

Great, thanks a lot guys.

A – Fred Lynch

Thank you.

Russ Tiejema

Thank you.

Operator

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

Kevin Hocevar

Good morning everybody. I’m wondering -- so the pricing actions taking effect in December, is that across all the -- is the pricing action in place across all the segments in Europe, architectural in North America? And does North America include the wholesale channel as well as the retail channel?

A – Fred Lynch

Yes. So the price increases that we discussed specifically in the fourth quarter were related to the North America Residential business. I will say this is the first time since I've been at Masonite after 12 years that we simultaneously put a price increase in place every single customer in our North American Residential business at the same time.

So every customer had received the price increase in North American Residential business. We have price increases again going across a number of and have been going across a number of our businesses, and we continue to do that. But the ones that we specifically were discussing were the North American Residential price increases, and yes, they affected every customer.

Kevin Hocevar

Got you. So did that imply then that we continued acceleration in pricing -- the year-over-year growth in pricing in 2019 versus what we saw in 2018?

A – Fred Lynch

We'll talk a little bit more specificity, as I commented earlier, on 2019 when we get to our full call on February 19. So let us hold the specifics on what to see on the price cost dynamics until that time.

Kevin Hocevar

Sure. And the on the raw materials side, you mentioned that raws were up mid-single-digit in the quarter. I think, last quarter, you said it was up 4%. So it sounds like maybe that picked up a bit. But some of the indicators have come down. I know resins have come down throughout the quarter, and steel has -- I know you have some collars around the steel purchases that can differ from what we see out there in the spot market. So wondering, is it really the tariffs the main things that bumped up the material inflation? Was there anything else? And how that's been trending something, again, like resins coming down, do you expect that to abate to some degree as we move forward?

Russ Tiejema

Sure, Yes, Kevin, its Russ I can provide a little bit of color over there. So just to remind everyone, we came into the year expecting 3% to 3.5% commodity inflation. And by the time we hit mid-year, we thought we were going to be at the top-end of that range. And for the full year, that is what played out. Now, mathematically, that would have inferred inflation rates greater than 4% in the second half, and we did see an excess of 4% in the third quarter. And when you include the impact of tariffs, we actually crusted 5% in the fourth quarter.

And to your point around steel contracts with collars, while we do have long-term contracts in place that help our pricing in steel, they do reset upwards. Other areas that we've seen inflation, obviously, have been in resins, which are levered to oil feed stocks. The thing to remember is that as oil comes down, there is a delay for that material cost actually come through our inventory and come into the P&L.

So while we do see a moderating commodity environment generally as we move into 2019, and again, we can comment more on this in a couple of weeks when we talk further about our outlook, we still do expect some inflation as steel contracts reset and as we see a delay in some other commodity moderation comes to the P&L.

Kevin Hocevar

Yes, got it. Okay, thank you very much.

A – Fred Lynch

Thank you.

Operator

At this time, I'll turn the floor right to Mr. Fred Lynch for closing remarks.

Fred Lynch

Great, thank you, and thank you all for joining us today. While the business did not perform as we expected, particularly in December, we believe the actions we've been developing and communicating with regards to our business portfolio, price cost dynamics, footprint and staffing levels will position Masonite to effectively navigate the uncertainty in 2019 and still deliver year-over-year adjusted EBITDA improvement.

We look forward providing you with more details on 2018 performance and our 2019 annual outlook during our February 19 call. And so this concludes our call for today. Operator, could you please provide the replay instructions?

Operator

Thank you for joining the Masonite International preliminary unaudited 2018 full year financial results conference call. This conference call has been recorded. The replay may be accessed until February 15, 2019. To access the replay please dial 877-660-6853 in the U.S. or 201-612-7415 outside the U.S. and please enter your Conference ID number 13687155. Thank you.