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Masonite International (NYSE:DOOR)
Q4 2019 Earnings Call
Feb 19, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to Masonite's fourth-quarter and full-year 2019 earnings conference call. [Operator instructions] 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 -- Vice President and Treasurer

Thank you Donna. And good morning everyone. We appreciate you joining us today. With me on the call today are Howard Heckes, Masonite's president and chief executive officer; and Russ Tiejema, Masonite's executive vice president and chief financial officer.

We also have Tony Hair, president of global residential, joining us for our Q&A session. We issued a press release and WebEx presentation late yesterday afternoon sharing our fourth-quarter and full-year 2019 results. These documents are available on our website at masonite.com. 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 at sec.gov and on 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 earnings released in today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations which are included in the press release and the appendix of the WebEx presentation. Our agenda for today's call includes a business overview from Howard followed by a review of the fourth-quarter and full-year financial results from Ross, along with our 2020 financial outlook, followed by closing remarks from Howard and a question-and-answer session.

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

Howard Heckes -- President and Chief Executive Officer

Thanks Joanne. Good morning and welcome everyone. As Joanne mentioned late yesterday, we released our fourth-quarter and full-year 2019 financial results. Overall, I am proud of how we finished the year.

Net sales increased 1% year on year in the quarter, partially due to our U.S. residential wholesale business delivering low-single digit growth. Net sales benefited from continued mid-single digit average unit price growth across all segments. Foreign exchange had no impact on net sales in the quarter.

At a consolidated level, AUP benefited from both favorable price and mix, resulting in the fourth consecutive quarter of growth in adjusted EBITDA dollars and adjusted EBITDA margin. This was in line with the company's expectations provided in February of last year as part of our original 2019 outlook. Our year-on-year performance was primarily the result of favorable pricing along with the organization's focus on operational productivity. Russ will discuss the drivers of adjusted EBITDA in more detail later.

Another area of focus in 2019 was working capital. I'm pleased to say that we had our third consecutive year of free cash flow conversion exceeding 100% of adjusted net income. On the right of the slide, we have our business and operational highlights. 2019 was a great year for the organization's execution and continued deployment of the MVantage operating system.

We ended the year with a greater than 100% increase in the total number of Kaizen events held. It's important to note that this is not just the result of our continuous improvement team's efforts. This is the result of prior training and the MVantage operating system taking hold at a local plant level. We're seeing more plants at employees host events.

And as a result, roughly one-third of Masonite employees participated in a Kaizen event this year. We have seen this drive engagement and productivity and important means to offset the inflationary pressures we feel in our manufacturing and distribution operations. On prior calls, I have noted my interest and expectation in continuing the strong momentum our team is demonstrating in the area of continuous improvements and operational excellence. Part of achieving operational excellence is accountability and reducing unnecessary complexity where possible.

In an effort to achieve both, as of January 1, we integrated our internal components function into the corresponding existing business segments. The purpose of this previously stand-alone team was to operate our manufacturing facilities that supply the business segments with components needed to produce doors such as facings, door core and cut stock. By eliminating this group, we are aligning manufacturing of these components with the businesses they support. This reduces internal complexity, offers more control to the business segments over their supply chain and ultimately holds the segments more accountable for their performance.

I'm also happy to share that in 2019, we published our inaugural corporate responsibilities highlights report, as a company that was founded back in 1925 because of William H. Mason's desire to turn waste wood from the lumber industry into something of value. We have a long history of sustainability. Because of this history, coupled with the ever increasing focus from customers, employees, and investors and corporate ESG efforts, we felt it was important to summarize for all of our stakeholders how we integrate environmental, social, and governance considerations into our business across the globe.

We are committed to enhancing this reporting effort going forward. I invite you to review this report which can be found under corporate governance on the investor relations portion of the website. Moving to Slide 6, and our margin improvement initiatives. As mentioned, 2019 was a great year for the organization's execution, and continued deployment of the MVantage operating system.

The three key pillars of MVantage been training and standards which provides a toolset for our employees to drive continuous improvement programs. Pit crews which are the performance improvement teams routinely deployed throughout our operations to drive rapid improvement projects in specific areas. And finally, plant transformations which are broader improvement events utilizing multiple teams across a single site to evaluate and improve entire value streams. In the fourth quarter, we completed one plant transformation and initiated one more.

Following the successful completion of the transformation at our Haleyville residential door assembly plant, we achieved a new five day record for doors produced. Since then, we've been able to sustain production at slightly lower levels with only two shifts as opposed to the three that we were previously running. So some great results from our CI team and the local employees as they take ownership of driving continuous improvement in their facility. In total, we completed four plant transformations in 2019.

We completed three additional pit events in the fourth quarter. This brings the total number of pit events to 20 for the full year. As mentioned earlier, we more than doubled the number of Kaizen events for the full year. In addition to roughly one-third of Masonite employees participating in Kaizen events during 2019, I'm particularly encouraged to see that 2300 of these individuals were new participants.

We also had a greater than 100% increase in the number of lean certifications for the full year. It's worth noting that we've introduced additional levels of certifications for 2020. For those employees that have been lien certified, and are actively engaged in hosting Kaizen events, we want to provide them with the opportunity for additional training to strengthen those skills, benefiting both the individual and Masonite. In the centre of the slide, we have a brief update on our footprint optimization initiatives.

During the quarter we successfully exited the three remaining North American facility closures that we announced early in 2019 bringing the total number exhibit to four. We also completed the relocation of our cut stock facility from Stockton, California to Verdi Nevada, with the goal of reducing costs and improving output. In addition to these closures we also recently announced the closure of a North American residential exterior door plant in Quebec, Canada. Well, these decisions are always difficult, we believe this was an important step to further optimize our manufacturing footprint in a way that reflects geographic demand and most effectively supports our customers.

Over the next several months, we plan to simultaneously phase out production as we transfer it to other plants that are well positioned to service our customers in that region with full closure of the facility targeted by the end of the second quarter. We are also taking steps to consolidate our North American residential customer service team from a number of plants to two locations. We believe the centralization and redesign of the customer service team will further our goal to provide an extraordinary customer service experience that differentiates Masonite from the competition. It also aligns with our new quality and service investment strategy which I'll talk about shortly.

Transition activities are already under way and will continue through the end of this year. Finally, our new Tijuana plant which began shipments in October continued to ramp up during the fourth quarter. Shifting to the right side of the slide and portfolio optimization. In line with our expectations, we successfully divested the third non core business in the U.K.

European margins have benefited from the divestiture of two non-core businesses earlier this year. This divestiture is also margin accretive for the segments. We continue to see the benefits of portfolio management in the quarter on AUP and margins. The realignment of our Mexico business toward higher value products has helped increase AUP and shed some margin diluted business.

We continue to focus the available capacity previously dedicated to the low margin SKUs in Mexico to service higher AUP business elsewhere in the North American residential segment. Last quarter, we mentioned the reduction of our North American entry door design offering by over 30% beginning in the first half of 2020. We believe that reducing existing designs and making room for more on trend and differentiated doors will ultimately lead to higher AUP and related margins. This reduction in SKUs is expected to have a minimal impact on customer demand and will simplify production as we focus on improving quality and service.

Overall a very good year for our margin improvement initiatives. The team executed well in a variety of strategic areas, allowing us to successfully complete all of our previously announced 2019 footprint and portfolio actions. Moving to Slide 7. In conjunction with our North American pricing actions, we announced our intention to invest an incremental $100 million over the next five years in three areas, service and quality, new product innovation, and marketing initiatives to drive improved down channel demand.

Since then, we've been sharing with channel partners where this investment will be focused, and how we believe it will benefit them to be aligned with Masonite in the long term by further enhancing the service and value proposition our products offered to end users. This slide represents an overview of those goals and potential benefits. Under each of the three areas of investment, we have our aspirational goal. For service and quality it's to achieve best-in-class lead time and quality.

This benefits our customers in two ways. First, higher quality construction leads to fewer returns and warranty items. Improved lead times shorten the length of time between order and delivery and can reduce inventory holding levels for our channel partners. As mentioned on the last call, we plan to focus on service and quality to start.

So I'd like to share a couple of concrete examples of our work and plans to-date. First, we are making purposeful investments in some material and components to improve overall product quality and performance. For example, we are upgrading some of our door styles to improve edge paint ability and finish quality. As we focus on the end customer, we're finding that they're willing to pay more for ease of use, aesthetics and durability.

This is an example of a simple investment in higher quality componentry that benefits the end customer and the entire channel by potentially reducing product returns. To achieve faster delivery and reliable inventory levels, we are working to implement make to stock capabilities for some of our highest demand SKUs, allowing us to more quickly respond to customer orders on our best selling products, reducing lead times and improving the responsiveness of our partners to their customers down channel. This is an example of where a modest, yet strategic investment in working capital can have the potential to deliver excellent returns by improving service levels in demand. In the centre of this slide, you'll see our aspirational goal for product innovation is to double the sales impact of new products.

This would allow both Masonite and our channel customers to be the first to market with differentiated products that homeowners desire. Well, our public commentary on this strategy will be limited ahead of new product launches, you should think about this objective as being focused on increasing the cadence of new product introductions, and more rapidly offering value enhancing features across a broad portion of our product line. We believe our team in the Masonite Innovation Centre in West Chicago can introduce innovations that allow us to grow revenue and profit through a better mix of differentiated products. Lastly, on the right through end customer marketing, we hope to drive homeowner demand for Masonite products.

We are not attempting to create broad general population awareness. Rather, we do want to be top of mind when consumers are considering a project that includes doors. We recently took an initial step toward driving targeted awareness as the door sponsor for a well known remodeling show that have it seasons premiere this past Sunday on HGTV. We believe our partners will benefit from this targeted awareness as it generates demand around doors that do more.

To ensure our distributor customers can fully capitalize on this increased demand, we plan to provide them with improved digital tools of configuration, quoting and ordering. A lot of good work has taken place already, some of which I can share with you and some of which I look forward to sharing at a future point as we continue to focus on delivering doors that do more. With that, I'll turn the call over to Russ to provide more details on our financial performance and annual outlook. Russ?

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Thanks Howard. And good morning everyone. Let's move to Slide 9 for a summary of our consolidated financial results in the fourth quarter. We had net sales of $531 million up 1% versus the fourth quarter of 2018.

Continued strength in average unit price across our three segments contributed growth of 5% which was offset by a 3% decline in base volumes and a 1% decline in sales volumes from the net acquisition-net impact of acquisitions and divestitures. There was virtually no impact from foreign exchange during the quarter at a consolidated level. The base volume decline was relatively in line with our expectation overall given the impact of divestitures and product line excess. We did however see some destocking in the North America retail channel.

I'll provide some additional color on those items when discussing each segment. We experienced another quarter of strong gross profit and gross margin expansion primarily due to higher AUP partially offset by the impact of lower volume. Gross profit was up by over 16% in the fourth quarter, with gross margin expanding 290 basis points versus the prior year to 20.9%. SG&A spending was $77 million in the fourth quarter up $15 million compared to the prior year.

Approximately $4 million of the increase was due to year-on-year variance in incentive compensation, while an additional $3 million was related to non-cash stock and deferred compensation expenses. The remainder of the increase was largely due to general wage and benefit inflation and professional fees, principally associated with legal costs related to the previously disclosed for a lawsuit. Net income for the fourth quarter was approximately $2 million. This was a decrease of roughly $11 million in the prior year, largely explained by a $6 million after tax increase in charges related to previously announced restructuring plans and a $4 million after tax charge related to an anticipated pension settlement, as noted on our third-quarter earnings call.

Diluted earnings per share was $0.06 as compared to $0.46 per share in the fourth quarter of 2018. Excluding the impact of restructuring and pension related charges our adjusted diluted EPS was $0.69 compared to $0.68 in the fourth-quarter 2018. As Howard noted earlier, we delivered year-on-year increases in our adjusted EBITDA and adjusted EBITDA margin for the fourth consecutive quarter. Adjusted EBITDA increased by approximately 8% to $62 million, while adjusted EBITDA margin expanded 80 basis points to 11.7%.

As you'll see in the adjusted EBITDA bridge, on the right side of the slide, the net impact of volume and AUP primarily AUP this quarter were significant contributors. Materials were a net positive in the quarter, largely due to the great work our global sourcing team did to deliver savings projects to offset what was still a slightly inflationary environment, particularly in the European architectural segments. Tariffs continued to be a headwind, but the year-on-year impact was lower in the quarter, as we have fully lapped the initial 10% implementation of the Section 301 tariffs in late September 2018. Factory costs were higher in the quarter primarily due to a year-on-year variance and healthcare accruals for our factory employees and start-up and ramp up costs for our new factories.

Absent those impacts, factory costs were roughly flat as we continue to deliver productivity improvements sufficient to offset wage and benefit inflation and the impact of lower volumes. Distribution costs remained higher in the quarter virtually all due to the shipping lane changes that we noted on our third-quarter call to better service existing retail customers on the West Coast. Turning to Slide 10, and our North American residential segment, net sales were up 3% compared to the prior year driven by growth of 4% from AUP and 1% from our acquisition of BWI in the fourth quarter of 2018. These gains were partially offset by a 2% decline in base volumes primarily due to our retail customers taking inventory levels during the quarter.

However, it is worth noting that point of sale data indicates the sale of our products at retail were actually up year-on-year and the quarter. Our wholesale business was relatively flat year-on-year with low single digit growth in our U.S. business being offset by continued weakness in Canada and the impact of our previously discussed Mexico portfolio actions. Despite the negative impact of the top line, the rationalization of our product lines in Mexico is supporting adjusted EBITDA margin improvement by freeing up manufacturing capacity for higher value business elsewhere.

Improved mix along with our December 2018 pricing actions drove 4% higher AUP growth in the fourth quarter. This marks the segments 12 consecutive quarter of AUP growth The North American residential segment also delivered-another strong quarter of adjusted EBITDA performance, with adjusted EBITDA up 36% compared to the prior year and margins improving 360 basis points on the benefits of higher AUP coupled with supply chain optimization and factory productivity. Within the North American residential segment, our global sourcing team successfully executed savings projects to offset both material inflation and tariffs during the quarter. Meanwhile, our operations team continue to deliver improved labor productivity, sufficient to offset wage and benefit inflation and reduce overhead absorption due to lower production volumes, as well as incremental costs related to ramping up new plants.

We also began to see initial savings from our 2019 restructuring actions launched earlier this year. As inventory and equipment transitions were completed and savings from closed facilities were realized. Moving to Slide 11 in our Europe segment. Net sales decreased by approximately 11% year-on-year in the fourth quarter driven primarily by a 9% decline from our divestiture of non-core U.K.

businesses. As Howard mentioned earlier, we completed our third planned U.K. divestiture during the fourth quarter. Lower base volumes contributed another 8% to year-on-year declines due to the previously lost share in the U.K.

builder channel, along with generally weak demand in the broader U.K. market. We attribute this market softness at least in part, the continued uncertainty of Brexit ahead of the U.K. General Election held in December.

We continue to see a negative year-on-year impact from foreign exchange in the quarter, but at a much lower rate than previous quarters in 2019, a headwind of approximately 1% to net sales. This is a result of the British pound our largest currency exposure in this segment, strengthening via versus the U.S. dollar to ultimately end the quarter roughly flat year on year. These declines were partially offset by growth from AUP of 6%.

The Europe segment continue to deliver solid adjusted EBITDA growth of 14% in the quarter compared to the prior year, with adjusted EBITDA margins, increasing 320 basis points to slightly north of 15%. This margin improvement was primarily the result of the divestiture of non-core U.K. businesses which were margin dilutive to the segment as a whole, along with continued strength in our U.K. entry door business that supports the repair and remodel market.

Turning to Slide 12 in the architectural segment. Net sales increased by 4% in the fourth quarter due to growth with 8% from AUP which continue to benefit from higher pricing on projects quoted beginning in early 2019, and improved mix due to those projects skewing toward higher value products. This growth was partially offset by a 2% decline in base volume and a 2% decline in the sale of components and other products. Adjusted EBITDA was $6 million in the fourth quarter, a 10% decrease compared to the prior year primarily due to factor productivity shortfalls and unfavorable inventory adjustments.

These results were well short of management expectations for the quarter, and clearly disappointing. As poor operational performance became evident during the quarter, we quickly took action to identify root causes and make changes as necessary to address them going forward. First, we initiated leadership changes in operations, finance, and plant management. A new VP of operations for the architectural segment has joined Masonite, and she brings deep experience in both building materials manufacturing and supply chain management from several world class companies.

Recently, a new segment finance leader was appointed, a very seasoned Masonite finance professional with extremely deep manufacturing experience, who most recently served as the finance leader for our components function. We believe these personnel changes, coupled with new plant managers at two key facilities will help drive improved results and increased accountability. We also deployed our continuous improvement team to review specific operational issues in our largest architectural plants and supplemented their efforts by engaging a consulting firm that knows our operations well. Through this work, we identified bottleneck areas that were constraining production throughput, and invested in equipment upgrades where necessary to improve them.

We are making progress. Our largest architectural plant recently achieved a double digit percentage increase in weekly production rates as compared to the fourth quarter. Bottom line we were disappointed in the segment's performance and have taken swift actions that we've been believe we'll address the issues. On Slide 13, we summarize our full-year financial results for 2019.

Net sales were up only modestly compared to 2018. AUP contributed growth of 5%, and the net impact of acquisitions and divestitures contributed another 2%. These gains were offset by a 5% decline in base volumes and a 1% negative impact from foreign exchange, as well as a modest decline in our sale of components and other products. Gross profit of $478 million represents an increase of 10% over the prior year, while gross profit margin expanded 180 basis points to 21.9% for the full year, due primarily to increased AUP and improved operational performance, partially offset by lower volume and higher materials cost driven in part by tariffs.

Adjusted EBITDA increased 6% to $283 million for the full year, while adjusted EBITDA margin expanded 70 basis points from the prior year to 13%. Our balance sheet and cash flow performance both ended 2019 strong as illustrated on Slide 14. Total available liquidity including unrestricted cash and accounts receivable repurchase agreement and our undrawn ABL facility was $377 million or approximately 17% of our trailing 12 months net sales as of December 2019. Net debt was $624 million, and we ended the year with net debt to adjusted EBITDA leverage at 2.2 times.

During the fourth quarter, we repurchased approximately 22,000 shares under our share repurchase program at an average price of $70.77 per share, totaling approximately $2 million in the quarter. This is lower than preceding quarters of the year due to continued share price appreciation in the fourth quarter. For the full year, we repurchased approximately 1.2 million shares at an average price of $51.20 per share for a total of $60 million. Since we initiated our share repurchase program in February 2016, we have repurchased nearly 25% of the shares outstanding at that time for an average price of $61.58 per share.

As of year-end, we had $144 million remaining for purchases under the existing programs. As Howard mentioned earlier, we achieved our third year of free cash flow conversion in excess of adjusted net income. Our conversion performance was notably strong in 2019 at 149%. Free cash flow increased 15% year on year, and operating cash flow increased 9% year on year on solid improvements across all areas of working capital.

Capital expenditures were slightly higher than our annual outlook of $75 million to $80 million, falling largely to the timing of payments related to capital projects. On Slide 15, we outlined a number of external market factors we expect to see in 2020, as well as key company initiatives that we believe will contribute to our performance. With respect to the U.S. housing market, the largest end market that we serve, we expect to see continued growth in housing starts and completions continuing the strengthening trend of housing that was reported in a second half of 2019.

In 2020, we are planning for low-to-mid single digit growth in U.S. housing, and low single-digit growth in the U.S. RRR market. Elsewhere in North America, we are planning for virtually no end market growth, particularly in Canada, where single family housing starts data have trended down the last two years and show no immediate signs of improvement.

In the U.K., we are anticipating an uncertain macroeconomic environment overall as a country resets trading relationships following its exit from the EU. While, the uncertainty of the Brexit decision is now officially behind us, feedback from our key customers in the U.K. suggests they expect the housing market to remain under pressure in the near-term. And so we anticipate demand that a slight flat to slightly negative versus 2019.

Meanwhile, we expect labor inflation to persist as a tight U.S. labor market is expected to drive low-to-mid single digit wage and benefit inflation again in 2020, as we continue to compete with other companies for talent. Labor inflation is also anticipated in the U.K. as recently increased minimum wage thresholds in that country are expected to result in upward pressure and pay scales more broadly.

Inflationary pressures are expected to moderate slightly yet still persist in commodities. While Section 301 tariffs on China source product did not increase to 30% in late 2019 as originally anticipated, we are planning for tariffs to remain at current levels throughout 2020 and represent a slight headwind year on year given implementation timing of the various product lists. It is also worth noting that current health concerns in Asia have the potential to disrupt supply chains if the flow of goods is impacted for an extended period. Our global sourcing team is developing strategies to diversify our supply base in ways we believe protect us from supply disruptions albeit at higher cost.

Taking all of these factors into account, we anticipate material cost inflation could run into 1% to 2% range again in 2020. Note that this outlook excludes the impact of any potential new trade actions, an example being recently filed countervailing duty and anti-dumping petition which targets molding and millwork products from Brazil and China and could impact the building products industry broadly. Aside from the sourcing strategies and the ongoing operational initiatives that we've been discussing throughout 2019, the area we believe will be most impactful to our results in 2020 is the implementation of our North American residential pricing strategy disclosed last November. I'll talk about the expected impacts of that strategy on the next page.

Turning then to Slide 16, we've outlined our current outlook for consolidated full-year results in 2020. Given that our new pricing went into effect just two weeks ago, there remains a degree of uncertainty for how this strategy will read through to financial results in the North American residential segment this year. As a result, we are providing a wider than normal range in our annual outlook at this time. With that said, we currently expect consolidated net sales growth of 2% to 7% versus 2019 with negligible impact from foreign exchange throughout the year.

Growth dynamics are expected to differ meaningfully across our three segments. In our Europe segment, we are planning for net sales to be down modestly with AUP gains more than offset by a mid-single digit headwind from the impact of our divestitures in 2019 and end markets that are expected to remain weak in the U.K. In the architectural segment, we are planning for a low single digit net sales increase on a combination of modest end market growth, as well as continued AUP gains albeit at reduced levels from 2019. In the North American residential segment, we are planning for mid-single digit net sales growth with a number of moving pieces.

Based on the U.S. residential end market drivers, I cited earlier, we expect low single digit market growth overall, partially offset by an approximately one point headwind from the impact of our product line exits in Mexico initiated during 2019. At this time, we are planning for a mid-single digit decline in base volumes in response to our price increases. Let me unpack our expectations around this further.

If you recall last November, we disclosed that we plan to implement price increases across the North American residential product lineup that yielded a weighted average percentage increase in the mid-teens, effective for orders placed February 3. Those increases have been implemented as planned, although we would not expect to see a significant benefit prior to the second quarter given timing of shipments and the impact of pre-buy activity we witnessed in January. Our net realization will likely be impacted somewhat by mix as we anticipate volume losses will be more concentrated with products having the highest price increases. Additionally, there are limited situations where we've honored pricing for large projects quoted in advance of the price announcement.

And we recognize that some customers existing growth incentives may be triggered at increased levels due to the higher pricing. Taken together, these factors suggest a high single-digit AUP increase may be expected in the North American residential segment in 2020. Against this net sales growth outlook, we expect adjusted EBITDA to be in the range of $310 million to $345 million. The largest variable impacting adjusted EBITDA growth versus 2019 is expected to be the net benefit of our new North American residential pricing strategy.

Depending on the magnitude and timing of volume losses, we would expect the decremental impact on margins to be higher than our normal pass-through rate until we are able to adjust up operations accordingly. This adjusted EBITDA outlook includes costs associated with the planned incremental investments we announced in conjunction with the pricing strategy that Howard discussed in detail earlier, partially offset by operational savings from restructuring that ramps up in 2020. The effect of these investments and restructuring savings are expected to be realized largely in the North American residential segment. We would expect a minimum margin expansion in Europe as benefits of AUP and our divestiture of lower margin businesses are likely to offset by the risk of lower volumes in the near term and higher wage inflation.

We anticipate margin improvements in the architectural segment driven by recovery from the operational issues we've discussed and higher AUP. We expect that adjusted earnings per share in 2020 will be in the range of $4.25 to $5.25. This range incorporates an assumed tax rate of 24% to 27% and an average diluted share count of roughly 25.6 million. Relative to key cash flow drivers.

We expect cash taxes to increase from $13 million in 2019 to a range of $18 million to $22 million in 2020. With respect to capital expenditures in 2020, we currently expect to reduce spending from 2019 levels to a range of $70 million to $75 million. This reflects our intent to focus our team on executing fewer projects with the potential to deliver higher returns and be more accretive to our return on invested capital performance. This in combination with continued type management of working capital leads us to anticipate free cash flow conversion in excess of 100% again in 2020.

In addition to providing a wider than normal range for our 2020 outlook, we are electing to hold off for providing an updated long-term growth framework until the second quarter. By that time, we would expect to have better visibility into the outcome of our North American residential pricing and investment strategies and we'll plan to share additional information about our objectives for improving our future financial performance. Now, I'll turn the call back to Howard for some closing comments.

Howard Heckes -- President and Chief Executive Officer

Thanks Russ. I am proud of the organization's continued commitment to operational excellence and delivering results. We saw our fourth consecutive quarter of year-on-year adjusted EBITDA growth and related margin expansion and a consolidated level. We executed exceptionally well in 2019 as it relates to the continued deployment of our MVantage operating system.

We completed four plant transformations in the year and exited the year with one in progress. Kaizen events more than doubled for the full-year 2019 and we had over 2,300 new participants. We successfully completed all of our previously announced 2019 footprint and portfolio actions. These actions allowed us to achieve our previously stated goal of a 10% reduction in our total number of manufacturing locations by the second half of 2020 early.

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

Questions & Answers:


Operator

[Operator instructions] Our first question is coming from Tim Wojs of Robert W. Baird. Please go ahead.

Tim Wojs -- Robert W. Baird and Company -- Analyst

Hey everybody. Good morning.

Howard Heckes -- President and Chief Executive Officer

Good morning Tim.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Good morning Tim.

Tim Wojs -- Robert W. Baird and Company -- Analyst

Maybe just to start on, maybe if we think about the EBITDA guidance, is there a way to maybe break out some of the moving pieces for us in terms of, how you kind of build up, pricing, maybe first. And then how should we think about some of the volume headwinds as well as the factory consolidation or productivity savings we should see in 2020?

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Yeah. Good morning Tim. It's Russ. Let me kick that one off.

During our prepared remarks, we took a shot at giving a little bit of color on some of the specific backdrops in each of the segments on market driver. So, I would just point to that, as how we think about market growth right. If you look at the North American residential segment, that's where the greatest variability arguably could be within the wider range that we provided this year. But when you model out, a low single-digit market growth, a high-single digit AUP and the mid single-digit headwind that we have projected on volume losses related to the pricing strategy that brings you in line with that mid single-digit revenue growth that we are expecting, that we've outlined as being our expectations for North American residential.

Once you get below that, think about some of the key drivers around how that volume detrimental will look. We typically have guided in the past that incrementals on volume are about 25%. In this case, given the uncertainty around when volume comes out of the business, how quickly and to what degree, it's going to take us a little bit of time potentially to react operationally, if we see very rapid volume loss in any particular region or any particular plant. And so, we would expect that the decrementals on that volume loss could easily be 2x what we would typically see on incrementals or decrementals on small volume changes.

Once you get beyond that, a lot of it is around the reinvestment. We've talked about the $100 million of reinvestment that we're making in the business over five years. Howard spent some time during his prepared remarks discussing some examples. We still view that as largely lead linear across that five year period.

So that, all else being equal could be circa $20 million of headwind that you would expect in the P&L and that would largely be operating expense in 2020. Commodities and tariffs, we commented to the fact that we still see about a point or two there, and I view that as about a point worth of gross inflation and about a half a point worth of tariffs. Remember the tariffs did not fully come into effect at current rates until May of 2019. So particularly in the first quarter even into the second we'll have some headwinds around tariffs.

Broader SG&A inflation in the business probably in the 3% to 4% range against the total SG&A base of the company this year of-about $310 million and then, offsetting that you've got the improvement from our restructuring initiatives. Recall that our guidance was approximately $20 million in savings from all of our restructuring actions. That will begin to ramp up. We saw a little bit of it in the fourth quarter of 2019, that will begin to ramp up in 2020.

Now, we do have some additional offsetting costs this year because we have announced some incremental actions. And while a lot of the costs associated with centralizing customer service and closing an additional plant will become restructuring charges. As we discussed before, there is also some a little bit of drag along of operating costs as we recommission equipment or move inventory. So that will be a bit of a headwind.

So maybe you could think about it, say half of that total restructuring savings is being materialized into P&L in the 2020 timeframe. Does that help?

Tim Wojs -- Robert W. Baird and Company -- Analyst

Yeah. No, no, that's helpful. No, I appreciate all that. That's good detail.

And then I guess maybe just on the on the volume piece, in terms of just the conversations that you've had with your customers around pricing and kind of volume have you-how was that gone relative to your expectations in terms of pricing traction? And then also, I guess of any sort of projected volume loss and-sorry for the complex question, but I guess from it from a volume loss perspective, is that going to be loss volume or is that just a we might lose some volume. And so we want to make sure that we have appropriate contingencies in our guidance to kind of assume that?

Howard Heckes -- President and Chief Executive Officer

All right. Thanks, Tim. This is Howard let me start and then I'm going to turn it over to Tony for more specifics on customer conversations with. As you know, it's early days on our pricing action.

We're only a couple weeks in, and customer conversations are ongoing. And we expect that there's going to be some level of uncertainty and fluidity if you will in the market for a good part of the year as the situation unfolds and potentially changes throughout the year. I've been involved in a number of conversations myself. Tony's been involved in more so I'm going to let him comment maybe on some of the specifics.

Tony Hair -- President of Global Residential

Yeah. And after we initially shared the strategy with customers, our conversations have really been focused around the planned incremental investment of 100 million over the next five years. And what we're already actively working on in service and quality improvements and you heard Howard highlighted a couple of those in his prepared remarks that-we think will drive value for them. And as you would expect, in some cases customers have decided to diversify their supply base of doors and others partners have said no.

We think this is going to benefit us and we're excited about what the investment profile looks like and they've committed to stay with us.

Howard Heckes -- President and Chief Executive Officer

I think it's important Tim that we anticipated that there would be potential for business shifts when we made this price increase decision. We evaluated the impact of those shifts or potential losses with the price increase and decided that this was the best course of action for our business. And so the losses that we expect to incur are well within the modeling that we did prior to initiating the strategy.

Tim Wojs -- Robert W. Baird and Company -- Analyst

OK. OK, that's helpful. Good luck on 2020. Thank you.

Howard Heckes -- President and Chief Executive Officer

Thanks. Thanks Tim.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Thanks Tim.

Operator

Thank you. Our next question is coming from Michael Rehaut of J.P. Morgan. Please go ahead.

Unknown speaker

Hey. This is Elad on for Mike. Congrats on the quarter.

Howard Heckes -- President and Chief Executive Officer

Good morning Elad.

Unknown speaker

Thanks. Just wanted to dive in a little bit more color again on the pricing and maybe if you just talk to the pre-buy activity that you mentioned in January. And what you're seeing from competitors I think things like some of them might be following the move as well?

Tony Hair -- President of Global Residential

Yeah. Elad, this is Tony. This could be a highlight. When we look at Q4, we didn't have any appreciable pre-buying that we could identify in the volume that we saw there in North American res.

We have seen some pre-buying as we expected probably low single-digit percentages increase in our January business ahead of the February 3rd, pricing announcement and affectivity of that pricing. So in line with what we had expected.

Unknown speaker

OK, great. And then can you also give us a sense of sort of what you're expecting for 1Q in terms of sales growth and margin expansion?

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Yeah, Elad. It's Russ. So I'll take a little bit of a shot at just giving you some qualitative color there. First, I would say that, just given the timing of the pricing announcement timing of shipments, the pre-buy activity that Tony just mentioned, we wouldn't expect to see a significant benefit in our P&L until about the second quarter.

So as you think about margin progression through the year, we think that the margin improvement that's implied by our full-year guide we think there's an opportunity, certainly to drive margin improvement across all quarters in the year, but it would be much more pronounced starting in the second quarter simply due to timing of shipments under the new pricing. You do have a few moving pieces in the first quarter. As I mentioned earlier, when I was talking about kind of walk to our guide and the role that material cost plays, you will have a continued year-on-year headwind for tariffs in the first quarter even into the second quarter just because we've not fully lapped the last round that was implemented on China source. You also will have some costs associated with investment on the reinvestment programs, beginning ahead of actually realizing pricing from the products.

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

Unknown speaker

OK, great. Thank you.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

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

Kevin Hocevar -- Northcoast Research -- Analyst

Hey good morning everybody.

Howard Heckes -- President and Chief Executive Officer

Good morning Kev.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Good morning Kev.

Kevin Hocevar -- Northcoast Research -- Analyst

Russ I think you called out high single-digit pricing realization in North American residential. But it's still little early days to determine exactly where that will shake out. Just wondering if you could just give a little more color on what that means exactly. Does that mean, you expected to be in that high single-digit range you suppose to be at the low end and high end of that or is it possible that, it's in the-something better than that, like the low double-digits or something? Just trying to get a sense of what you know at this point in terms of how this will shake out versus, how much variability is there in terms of where that could ultimately shake out?

Howard Heckes -- President and Chief Executive Officer

Yeah. I think Kevin, the point of variability here is not necessarily price, it's volume, right? You can pretty readily walk from, what we commented on back in November, as being roughly in the mid teens down to a high single-digit just by taking into account several factors. First of all, the fact that we don't see any significant benefit to the P&L until into the second quarter as a result of timing shipments, I mentioned that a couple of times. That's probably knocks three to four percentage points off right there on a 2020 basis.

And then, we also commented on the fact that, in certain cases, it's on a limited basis, certainly, but we've got certain customers who are committed to working with Masonite that had bid some specific projects, well in advance of the pricing announcements. And in those cases, we have agreed to work with them to mutually honor those pricing toward to the end customers. That in addition to the fact that you've got some growth incentives in place, think about those as tiered volume rebates that we believe are likely going to trigger a slightly higher level simply because of the impact of the higher pricing. And then finally, we are taking into account that for the volume that we anticipate losing, it's probably likely that's going to be lost more in the product categories that had the highest percentage increase in price.

And so there's a natural mix headwind, if you will against our price realization. Those are all the factors that if you kind of take into account three to four percentage point drag off of a mid-teens level, just for timing of realization in the P&L, and then a few points for the other factors that I suggest that's how you get into that mid-I'm sorry that high single digit AUP realization, but the pricing has been implemented at stated rates. That's not the issue here. I think the point of variability is where will customers ultimately land on moving volume and how much do we absorb in the P&L from volume losses.

Kevin Hocevar -- Northcoast Research -- Analyst

Yup. Make sense. OK. And then why do you think there was destocking in the retail channel in the fourth quarter seems kind of odd that, there'd be some destocking ahead of a big price increase like this.

So curious your thoughts on why that happened and do you expect any type of restock going forward?

Tony Hair -- President of Global Residential

Yeah. Kevin, this is Tony, I don't know that we can speak to the strategy on the destocking we certainly saw it play out, and keep in mind in retail very, very difficult because we shipped direct to store for them to do any kind of pre-buying, so we don't traditionally see a pre-buy ahead of price increases from a retail standpoint. And we did start to see some recovery of the destocking as we got into January. So I think they'll get back in the right inventory positions as they move forward.

Kevin Hocevar -- Northcoast Research -- Analyst

Gotcha. OK, thank you very much.

Tony Hair -- President of Global Residential

Thanks Kev.

Operator

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

Michael Wood -- Nomura Instinet -- Analyst

Hi. Good morning.

Howard Heckes -- President and Chief Executive Officer

Good morning.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Wood -- Nomura Instinet -- Analyst

Hoping to just drill down one of the pieces of the plan volume fall from the pricing strategy. Can you sort of parse out what portion of-what you're planning is just a demand elasticity or what portion is related to potential share loss. And after you see how things shake out, would you be planning for more SKU rationalization if you determine that the altered mix make certain products just not profitable to manufacturer?

Howard Heckes -- President and Chief Executive Officer

Yeah. Michael, this is Howard. First of all, I'm just going to repeat again, it's really early days. Here, we're just two weeks into this.

So we're modeling and planning as we see things evolve. And as I said earlier I think when it does settle out, we'll certainly take whatever actions necessary to ensure that we're optimizing our business model. I don't expect that we'll be in a situation that would have to eliminate SKUs. But if it came to that, we certainly wouldn't-we wouldn't be opposed to doing so.

But it's early days. We're going to let this thing play out. And as I said earlier, we expected some shifting in business and what we expect to incur is well within our internal expectations.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Mike, it's Russ. If I can just jump in and add. Remember when we announced our pricing strategy, we've also commented on some of the research that we've done that highlights what consumers believe door should cost in a renovation project. And the data suggests that people ascribe a lot more value to an interior door, then in many cases, they're currently transacting the marketplace.

So that alone would suggest that elasticity is not necessarily a key factor here. You know, the other thing that we need to bear in mind is that we are seeing trends on a new build side toward smaller footprint homes, more to service the entry level and as you might recall from some analysis that we shared back in the first quarter of last year and that is having a volume headwind on the business. So we have to take that into account. But we see those as-that is more of a market factor around what the size of the structure is being constructed not elasticity before the actual door openings in a home per se.

Michael Wood -- Nomura Instinet -- Analyst

Great. And I'm just switching gears in architectural, the operational issues you called out-are these more kind of tactical shorter term changes that need to be made or are there bigger footprint or flow changes needed like what you experienced in North America Residential?

Howard Heckes -- President and Chief Executive Officer

Yeah Michael. We're very disappointed with the performance of the segment in the quarter. Margins were short of our expectations and so we took some pretty swift actions, we made some management changes. We dropped our continuous improvement team into our largest plan there.

We hired some third-party consultants that we've used in the past to supplement our internal resources, and they found a variety of things actually, some of which are more tactical in nature that we can fix quickly. Others required for example some capital investment on some equipment to eliminate some bottlenecks in the operation. So, I wouldn't say it's anything major, but maybe some slightly more than tactical, if you will. And we're addressing those issues as swiftly as possible.

And we are seeing some improvements. Although it's early days, we're certainly not ready to declare victory there yet. But we're seeing some improvements based on those actions and we're optimistic that this thing will turn around.

Michael Wood -- Nomura Instinet -- Analyst

OK. Thank you.

Howard Heckes -- President and Chief Executive Officer

Thank you.

Operator

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

Unknown speaker

Hey. It's actually Chris on from Mike. Thanks for take my questions.

Howard Heckes -- President and Chief Executive Officer

Hi Chris.

Unknown speaker

Hi. How's it going? Just going back to the top-line guide. Are you able to quantify what the mix benefit you are expecting this year from the new product launches? And is that separate from your high single-digit pricing commentary?

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Well, no. We always comment about-this is Russ by the way. On average unit price is being a combination of price and mix. So everything associated with a product portfolio actions would be incorporated into that AUP outlook for 2020.

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

Unknown speaker

Got it. That make sense. And then just secondly, do you have an initial estimate at all of what the rebate headwind could be this year?

Howard Heckes -- President and Chief Executive Officer

Hard to say. I'm assuming that you're talking about the rebate headwind associated with the new pricing strategy and the pushing growth incentives into higher tiers.

Unknown speaker

Yeah, exactly.

Howard Heckes -- President and Chief Executive Officer

Yeah. I wouldn't view that as material at all. But at the margin, it is one of the factors that would drive the price utilization down slightly in 2020, per my comments earlier on how to think about that high single-digit AUP in the North American residential business.

Unknown speaker

Got it. Appreciate the color.

Howard Heckes -- President and Chief Executive Officer

Thank you.

Operator

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

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning and congrats. Real quick, could you remind us-I think you had some kind of pre-buy cap or limit and then how do you think volumes relative to your 5% or mid-single digit, I guess down for the year. How does it play out in North America in Q1 in light of January being stronger with the-I assume a pretty good fall off in February and March.

Thank you.

Howard Heckes -- President and Chief Executive Officer

John just a quick follow on your initial part of your question on pre-buy. We look at historic run rates for our customers and try to help them manage to pre-buy levels that we could manage, as I mentioned earlier with mid-single digit impacted pre-buy in January which we anticipated we didn't see a substantial pre-buy in December. Yeah. And so the pre-buy, I think was right in line with our expectations John, and Russ already commented on our first quarter expectations.

So everything is evolving sort of as we expected.

John Baugh -- Stifel Financial Corp. -- Analyst

Great. Thank you. Good luck.

Howard Heckes -- President and Chief Executive Officer

Thanks John.

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Thanks John.

Operator

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

Howard Heckes -- President and Chief Executive Officer

Thank you Donna. And thank you all for joining us today. We appreciate your interest and your continued support. And this concludes the call.

Donna, if you would please provide replay instructions.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Joanne Freiberger -- Vice President and Treasurer

Howard Heckes -- President and Chief Executive Officer

Russ Tiejema -- Executive Vice President and Chief Financial Officer

Tim Wojs -- Robert W. Baird and Company -- Analyst

Tony Hair -- President of Global Residential

Unknown speaker

Kevin Hocevar -- Northcoast Research -- Analyst

Michael Wood -- Nomura Instinet -- Analyst

John Baugh -- Stifel Financial Corp. -- Analyst

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