DOOR (2020 - Q2)

Welcome to Masonite's Second Quarter 2020 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. Thank you. You may begin. Joanne F

Thank you, Michelle, 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 Russell Tiejema, Masonite's Executive Vice President and Chief Financial Officer; and we have Tony Hair, President of Global Residential, joining us for our Q&A session. We issued a press release and Webex presentation after market closed yesterday, sharing our second quarter 2020 results. These documents are available on our website at masonite.com. Before we begin, I'd 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 titled Forward-Looking Statements in the press release. Additional 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, which are available at sec.gov and 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 release and today's discussion include certain non-GAAP financial measures. Please refer to the reconciliations, which are in the press release and the appendix of the Webex presentation. Our agenda for today's call includes a business overview from Howard, including an update on the impact of COVID-19; followed by a review of the second quarter results from Russ, along with some additional color on how COVID-19 may impact us in the back half of 2020; and then closing remarks from Howard with a Q&A session. And with that, let me turn the call over to Howard.

Thanks, Joanne. Good morning, and welcome, everyone. It's good to be joining you again and while we're still socially distant here in Tampa, I'd like to mention that this is the first time we're hosting an earnings call from our new corporate headquarters located in the Ybor City neighborhood of Tampa. We're proud to be part of this historic area of the city and its revitalization. Now let's move on to some other good news. I'm pleased to say that despite the impact of COVID-19, we performed exceptionally well in the second quarter of 2020. While net sales decreased 11% year-on-year this included the estimated impact of roughly $100 million of lost revenue from COVID-19 in the quarter. This impact was the result of both weaker end market demand due to the pandemic and our own production capacity. Even on lower sales, we benefited from the continued success of our previously implemented North American pricing strategy. This, coupled with the benefits of prior restructuring actions and the COVID-19 cost savings we implemented late in the first quarter, propelled us to adjusted EBITDA of $92 million in the second quarter, our highest reported since we listed on the New York Stock Exchange in 2013. This also marked the sixth consecutive quarter of year-on-year adjusted EBITDA margin expansion. It's encouraging to see the strategies we've implemented contributing to the success of the company, even in times of challenging top line performance. COVID-19 had a significant impact on our revenue.However, following a nearly 25% decline in April, we saw demand strengthen sequentially throughout the remainder of the quarter. Due to this resiliency, we not only curtailed some of the COVID-19 cost reductions we implemented, we also resumed investments in key areas of the business to allow us to quickly regain the top line momentum we had in the first quarter of the year. Shifting to the right of the slide, let's cover some business and operational highlights. COVID-19 impacted our capacity in the quarter, with the largest impact being felt from the closures of the UK and Ireland facilities. Beyond closures, capacity was also impacted by higher absenteeism and reduced overtime in the quarter. I'll speak about this in a little more detail on the next slide. Aside from the capacity impact we experienced, we are pleased to say that our operations are running well. Aided by the continuous improvement team, the organization held 30% more Kaizen events in the second quarter of 2020 compared to the same period last year. We were able to accomplish this despite the current pandemic because the organization has embraced the MVantage operating system at a local level, aided by the fact that most of our continuous improvement team members are located at the plants. Embedded in our operations to work more closely with factory floor employees. For those facilities that do not have the benefit of a local CI resource, their prior training, along with virtual support and centralized online tools have equipped them to continue deploying the MVantage operating system. Again, great work done by that group and the organization overall of leveraging MVantage to drive a culture of continuous improvement and productivity even when travel is restricted and remote work is a reality. The sourcing organization also continued to perform well. We are pleased to say that due to their efforts, our supply chain was largely uninterrupted. Our strategy of dual sourcing is working and allows us to shift the source of supply when potential concerns arise due to COVID-19. While this may at times drive higher costs, the team continues to do an excellent job identifying offsetting savings projects. Some more positive news on the North American Residential front. At quarter end, we entered into an agreement with Lowe's to buy the assets of their door fabrication facility located in Janesville, Wisconsin. This transaction is expected to close later this year and includes a multiyear supply agreement. We are pleased to say that we are planning to retain the existing workforce at the facility, and we look forward to welcoming those individuals to the Masonite team. Lastly, I'd like to highlight another addition to the team. The appointment of Jennifer Renaud as Masonite's Chief Marketing Officer. Most recently, Jennifer was the Vice President of Marketing at Vertiv, a leader in critical infrastructure for data centers. Prior to that she held a variety of marketing leadership roles at companies such as Oracle and Microsoft. Jennifer has a proven track record of driving growth for global brands. Her digital and content acumen, lead-generation expertise and strong analytical background will help us effectively position Masonite as we focus on growing our business. Now let's move to Slide 5, where I'll provide some more details on the impact of COVID-19 in the second quarter and how we are managing through these uncertain times. Nearly 1/2 of the estimated lost volume was in the Europe segment, largely due to the UK and Ireland operations being shut down for approximately half the quarter. Those operations reopened in mid-May reopened in mid-May, but market demand in the U.K., unlike the U.S., remained sluggish throughout the quarter. Another significant driver of COVID related revenue decline was reduced production output in our North American residential segment, particularly within our interior door business. We also experienced lower demand within our architectural segment, primarily due to slower commercial job site activity. While our operations are generally running efficiently, output is not back to pre-COVID levels. During the quarter, we experienced a number of temporary shutdowns in North America for varying lengths of time, ranging from less than a week to as long as six weeks.No one single facility shutdown had a material impact on production, but in total, these were meaningful headwinds. In addition to facilities which shut down in the quarter, we had higher absenteeism as well as lower overtime within our North American Residential segment. In April, during the onset of the pandemic, we saw absenteeism spike and then decline, yet remain at a higher-than-normal level throughout the quarter. We believe the initial spike was caused by employees adapting to personal changes, such as school cancellations caused by the pandemic. It's for this reason, we are considering what impacts the upcoming school year might present for our employees and ultimately, the business. The various approaches by different localities present a challenging landscape that we need to monitor, along with its potential ramifications for our employees. The uncertainty surrounding the impending return to school is one of several possible triggers for localized spikes in absenteeism. While we are taking extra precautions to prevent the spread of virus in our facilities, we may be impacted by events in the broader communities in which we operate. As discussed on the first quarter earnings call, we implemented swift cost reductions to help mitigate the impact of COVID-19 such as halting all travel and nonessential training, limiting hiring to critical open positions and implementing temporary wage reductions and merit deferrals for salaried employees. Inclusive of the savings from these actions, we estimate the negative impact of COVID-19 on adjusted EBITDA was just under $20 million in the second quarter. We saw demand stabilize as the second quarter progressed, which gave us the confidence to begin relaxing certain cost reductions. We implemented annual merit increases going into the third quarter, eased hiring restrictions and began to allow limited travel. While the uncertainty around the pandemic has not dissipated, given the resiliency of our business, we felt it was appropriate to resume customary spending for the health of the business. If you recall, as part of our North American pricing strategy, we announced our intention of investing an incremental $100 million over five years in service and quality, product innovation and down channel marketing, which we're now referring to as the North American investment plan, and we continue to invest in this during the second quarter. Furthermore, our growth and momentum team remained focused on potential emerging housing trends caused by the pandemic, a potential shift in preferences from urbanization to suburbanization, from open concept to more separation and from smaller to larger square footage could all be structural tailwinds for our business over the long term. With that said, we are keenly focused on near-term execution to help offset any potential challenges due to the pandemic. With that, I'll turn the call over to Russ to provide more details on our financials. Russ?

Thanks, Howard, and good morning, everyone. Let's move to Slide seven for a summary of our second quarter financial results. We reported net sales of $500 million, down 11% as compared to the second quarter of 2019. The decline was due to 15% lower volumes as COVID-19 resulted in both weaker end market demand and production capacity limitations. The net impact of a divestiture and an acquisition, lower sales of components and the impact of foreign exchange contributed an additional 1% each to the year-on-year decline. These declines were offset by continued growth in average unit price, which increased by 7% year-on-year in the second quarter. This AUP growth was primarily driven by the continued success of our North American pricing strategy, which went into effect during the first quarter of 2020. Gross profit increased 6% to $136 million, driven by higher AUP, along with the benefit of cost savings from our previous restructuring actions. This was partially offset by the impact of lower volume and higher manufacturing wages and benefits. Gross margin expanded 440 basis points versus the second quarter of 2019 to 27.3%. SG&A spending was down $5 million or 6% compared to the prior year. This decrease was primarily driven by the COVID-19-related cost reductions we implemented late in the first quarter, although this was partially offset by higher legal costs. As Howard mentioned earlier, given the resiliency of our business, after a brief pause, we resumed spending on our North American investment plan. Some of this spending will impact SG&A, which, in combination with the fact we began to curtail our COVID cost reductions as we neared the end of the quarter, would lead us to expect higher SG&A spending in future periods. Net income for the second quarter was $34 million as compared to $24 million in the second quarter of 2019. Diluted earnings per share increased to $1. 38 from $0.96 in the second quarter of last year. Adjusted diluted earnings per share were $1.50, which excludes $3 million in charges related to the loss on disposal of a subsidiary and our previously announced restructuring plans. This compares to $1.09 of adjusted diluted earnings per share in the second quarter of 2019, which excluded the impact of $3 million in charges related to restructuring and the UK divestitures. Adjusted EBITDA increased 15% to approximately $92 million. As Howard mentioned, this marks the highest adjusted EBITDA we've reported in any quarter since becoming an NYSE-listed company in 2013. Adjusted EBITDA margin expanded 420 basis points to 18.4%. On the right-hand side of the slide, we've outlined the key drivers of this exceptional performance. I just spoke about the benefit of our tight cost controls and lowering SG&A in the second quarter. AUP was an even greater contributor. While volume was a headwind in the quarter, it was more than offset by higher price as well as slightly favorable mix. Material costs were flat in the second quarter compared to the prior year, despite increased costs related to utilizing some higher-grade components as part of our focus on quality. Our global sourcing team delivered another strong quarter of material cost savings projects. In total, these offset the impact of the quality investments as well as tariffs and commodity inflation, which both continue to run largely in line with our original expectations for the year. Factory costs were slightly higher in the second quarter, primarily due to wage and benefit inflation and spending on our investment initiatives, some of which involve additional factory resources to improve service and quality. These higher costs were largely offset by labor productivity and savings from our previously implemented restructuring initiatives, although a modest residual EBITDA headwind remain. Distribution costs were flat year-on-year as the benefits of lower shipping volumes were roughly offset by shipping lane changes in response to temporary plant closures and capacity constraints throughout North America. While we were able to ship production throughout our manufacturing network to continue serving our customers, this flexibility came with some additional logistics cost. Overall, an exceptionally strong quarter from an adjusted EBITDA standpoint. Turning to Slide 8 in our North American Residential segment. Net sales were flat compared to the prior year as a 9% increase in AUP was offset by an 8% decrease in base volume and a 1% negative impact from foreign exchange. As I mentioned earlier, we continue to see the effectiveness of our North American Residential pricing strategy in the second quarter. We saw a significant step-up in the year-on-year growth of AUP in the second quarter as compared to the first quarter due to the benefit of higher price for the full quarter. COVID-19 was the primary driver of base volume declines. Early in the quarter, we saw end market demand weaken with year-on-year sales declines in the low teens for the month of April. As the quarter progressed, we saw demand strengthen in both the wholesale and retail channels, returning to high single-digit growth in June. Given the impacts of increased absenteeism, reduced overtime and temporary plant disruptions, we were challenged to keep up with demand in the quarter. As we sit here in the first week of August, I'm pleased to say that we continue to make progress toward achieving pre-COVID capacity levels. Adjusted EBITDA and the North American Residential segment was $91 million in the quarter, a 44% increase over the same period last year. Adjusted EBITDA margin expanded 720 basis points to 23.9%. This represents the highest quarterly level for North American Residential since adopting this segment reporting structure in 2016. Margin expansion was primarily due to higher price, along with increased restructuring savings and COVID-19-related cost reductions. Despite the production constraints, this segment performed well operationally, with factory efficiencies once again offsetting the impact of wage and benefit inflation in the quarter. Lastly, as noted earlier, we've resumed investing in the business given the strengthening demand trend. These investments were all implemented in the North American Residential segment. Moving to Slide 9 and our Europe segment. Net sales decreased by approximately 63% year-on-year, driven by a 54% decline in base volumes, primarily due to the impact of the UK door business and Ireland components facility being shut down for approximately half the quarter. Following the reopening of the UK and Ireland facilities, we saw the contractor channel recover relatively quickly, whereas the homebuilder channel remained soft. AUP was slightly lower in the quarter, falling entirely to mix, which is impacted by lower sales of complete interior door sets to the builder channel and weaker product mix in the remodeler channel. The divestiture of Window Widgets in the fourth quarter last year contributed 5% to the decline in net sales, while reduced sales of components and foreign exchange each contributed a 1% headwind in the second quarter compared to the prior year. Given the breadth and length of the closures due to COVID-19, the Europe segment incurred a slight adjusted EBITDA loss in the quarter. The results could have been worse had it not been for the quick work of the European team to minimize losses. Even as we ramped back up, they exercised extreme care in bringing back personnel and layering our costs in line with slowly recovering demand. Lastly, we are pleased to note that subsequent to the end of the second quarter, the U.K. government announced steps intended to stimulate the economy and support investment in both new housing and home renovations. A stamp duty land tax holiday is being introduced in an effort to stimulate home buying activity, while the Green Homes Grant program is designed to subsidize the cost of green upgrades to existing homes. It remains to be seen what impact these government actions will have on housing market, but we remain cautiously optimistic that the pace of recovery could improve in the second half of 2020. Turning to Slide 10 and the Architectural segment. Net sales decreased by 12% in the second quarter, with base volumes down 14% due to slowing activity on commercial job sites, associated with safety protocols and state and local government orders related to COVID-19. Some regions, such as the northeast and parts of the midwest were the most stringent on construction limits. In addition to job site slowdowns, we noticed a significant deceleration in our shorter-cycle business as well, particularly within our Quick Ship and stock door offerings as customers held off on tenant improvement work. Lower sales of components contributed another 3% to the decline in net sales. A partial offset to these volume declines was continued strength from AUP, which increased 5% in the second quarter compared to the prior year. AUP benefited from roughly equal contributions of price due to higher pricing on quoted projects and mix, largely driven by the declines in our stock business, which is generally comprised of lower priced products. Adjusted EBITDA margin expanded by 30 basis points to 13.4%, primarily due to higher AUP and material cost savings. As you may recall, last year, we mentioned that we experienced higher cost on purchased mineral core used in certain fire-rated doors. We have subsequently increased our internal production in order to in-source more of this product and alleviate that cost pressure. The Architectural segment also benefited from COVID-19 related cost reductions, but those savings were more than offset by higher factory maintenance costs in the quarter. Lastly, we continue to monitor leading indicators for this business, such as the Architecture Billing Index and the Dodge Momentum index. These indicators point to continued softness of the business in the back half of 2020 and into 2021. Accordingly, we are looking at all aspects of the business as we go forward and intend to tightly manage costs as we head into a potentially challenging demand environment. Slide 11 summarizes our liquidity and cash flow performance for the quarter. Given uncertainty related to the COVID-19 pandemic, preserving liquidity has remained a priority. Our second quarter results and proactive cash management improved an already-strong balance sheet. Total available liquidity, including unrestricted cash and accounts receivable purchase agreement and our undrawn ABL facility, was $397 million or approximately 19% of our trailing 12-month net sales as of June 28, 2020. Net debt was $594 million, and we ended the second quarter with a net debt to adjusted EBITDA leverage ratio of 1.9 times. Cash flow from operations was $97 million in the quarter, up significantly from $70 million in the second quarter last year due to higher net income. Capital expenditures were approximately $11 million in the quarter. Free cash flow conversion continues to be strong and stands at 109% through the first 6 months of the year. As a result, our balance sheet and liquidity remained very robust, providing us a strong platform for uncertain business conditions in the near-term as well as dry powder for future growth opportunities and returns to shareholders. Now let's turn to Slide 12 and our thoughts on the back half of 2020. While we're extremely pleased with our performance in the second quarter, we continue to operate in a highly uncertain environment due to the pandemic. We see two distinct areas of potential risk for our business as we go into the second half of the year with continued uncertainty around our end markets and potential operational challenges associated with running our plans. We were fortunate to see demand for our North American Residential business return quickly in the second quarter after an initial decline, and we're encouraged to hear positive comments from homebuilders regarding order rates. With that said, we cannot ignore the downturn in U.S. housing starts in the second quarter. While there was improvement sequentially in June, housing starts for the overall quarter were down 17%. This would indicate that housing completions could see a downturn in the third quarter and the fourth quarter, which could be a headwind to demand for residential doors. Similarly, leading indicators for demand in nonresidential construction markets/warning signs throughout the second quarter. Coupled with the decline we are already facing in the short-cycle portion of the Architectural business, we remain concerned about market demand overall. The Architecture Billing Index experienced a historic drop of over 20 points from February to March. While the index recovered later in the quarter, it still suggests contraction in demand for nonresidential products in the back half of the year. And with respect to Europe, as Howard mentioned, market demand in the UK for our products remained sluggish in the second quarter. We're encouraged by recent steps the UK government has taken to stimulate housing activity, but the impact that may have on demand for our products this year remains to be seen. In the face of market uncertainty, we also acknowledge the challenges of efficiently operating under the overhead of COVID-19. While we've implemented a significant number of safety protocols to prevent the virus' spread in our workplace, we cannot ultimately control what's happening in the community at large. As case counts rise in certain areas in North America, localized outbreaks could impact specific facilities. Additionally, as we approach the beginning of the school year in the third quarter, uncertainty surrounding return-to-school policies in various districts could impact some of our employees and further influence attendance in our plants. Given this backdrop, we don't believe we have sufficient visibility to reinstate our 2020 outlook at this time. We can instead provide a couple of key guardrails to help you think about the second half of the year and the third quarter specifically. The momentum exiting the second quarter has continued through July. Barring a meaningful production impact that could materialize, we believe net sales in the third quarter could be roughly comparable to the prior year. Because we have removed many of the COVID-19 cost reductions, we expect to see these costs return, albeit more slowly as items like travel spending will be muted by continued safety concerns. We also plan to increase spending related to our North American investment plan. This increased spending, coupled with our expected top line performance will put pressure on adjusted EBITDA margin sequentially, although we would still expect solid year-on-year margin growth in the second half. Again, barring any meaningful production impacts, we believe that our strong operational performance, variable cost structure and continued momentum in the North American Residential business can allow us to maintain mid-teens adjusted EBITDA margins at a consolidated level during the third quarter. And with that, I'll turn it back to Howard for closing remarks.

Thanks, Russ. In summary, we are extremely pleased with our second quarter performance and the incredible efforts by the Masonite team. Our continued adjusted EBITDA margin expansion, coupled with reporting our highest quarterly adjusted EBITDA since becoming an NYSE-listed company in 2013 was a testament to the effectiveness of our strategy and the ability of our employees to excel during challenging times. With that said, the pandemic did impact us in the second quarter as we saw net sales meaningfully decrease year-on-year due to its effect with volume headwinds more than outweighing the positive impact of pricing in North America. The overall resiliency of our business led us to resume investing in key growth areas as well as curtail certain cost reductions. However, we remain cautious about continued COVID-related impacts to demand and the potential for operational disruptions. Accordingly, the team remains keenly focused on managing the near-term challenges of operating in a pandemic. At the same time, we are optimistic about our future growth potential. We believe the impact the pandemic is having on consumer preferences may ultimately play into our favor as we are investing and we are investing in ways to capitalize on the trends. We believe the home is a winner in this crisis and expect that trend to continue longer term. Our goal is to help make homes and buildings as safe and comfortable as possible by providing doors that do more. And with that, I'd like to open the call to questions. Operator?

[Operator Instructions] And with that, our first question comes from the line of Tim Wojs with Baird.

Maybe just my first question, I'd be curious, just as you think about what you've seen in North America, is there a way to kind of characterize how you see both your kind of retail channel as well as your wholesale channel in terms of inventory levels? And do you think there's a possible kind of rebuild opportunity in the back half of the year there? Or do you still think your channel partners are going to manage inventory pretty tightly here?

Yes. Tim, it's Tony. Great questions. We saw a steady progression. After we described a low-teens decline in April, we saw progression through the course of the quarter, both in retail and in wholesale, pretty happy with the retail demand. And I think we saw people in homes and deciding to do projects in their homes, and that played through in the POS and retail. Wholesale was impacted a little more strongly early. We're starting to see that come back, and we're excited about the trend that, that is on as people start to resume building on plots that were open, and you've seen some of the builders what they're reporting and try to get more aggressive as they go forward. Relative to inventory, we have really good visibility, obviously, in the retail inventory. That inventory did hit during the quarter, still below prior year. So there is some opportunity for inventory build in the retail channel. And we maintain a retail, or a view of inventory with our wholesale partners, the largest ones. And for the most part, they are lower on inventory than they would like to be. So we think there's an opportunity to build inventory with them as well as we go forward.

Okay. Okay. That's helpful, thanks. And then, Russ, maybe on the third quarter, the comment about kind of mid-teens adjusted EBITDA margin. Is that kind of in a range of scenarios? Or is that kind of assuming the kind of flat revenue outlook that you mentioned was possible in the quarter?

Yes. Good morning, Tim, thanks for the question. That was generally in the context of this flat revenue picture. Clearly, as we remarked during the prepared portion of the call, there is some uncertainty relative to what could turn into facility disruptions. Barring any significant outages that we have in some of our larger plants, that would be our viewpoint on revenue and the kind of margin that we could deliver against it. And I guess maybe just to step back and give you a bit more context on how to think about margins, over the last couple of years, you'll typically see a 50 to 100 basis point sequential step down anyway from the second quarter to the third quarter. If you look at Q2 this year in isolation, clearly, really pleased with the margin performance at 18.4%. COVID had a big impact. If you were to adjust out the revenue and profitability impact and add back some of the costs that we expect to now layer back into the business into Q3, you could say it's kind of a circa $100 million EBITDA into circa $600 million of revenue. So that's a high 16% EBITDA margin on kind of a normalized run rate basis. And so from there, you think about some natural degradation quarter-to-quarter. And certainly, that would be contributed by the cost actions that we have now resumed as the business has proven more resilient than we would have anticipated.

Okay. That’s helpful. Thanks a lot. Okay that’s what I had. Appreciate the color here and good luck on second half, guys.

Thanks Timothy.

Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Please proceed with your question.

Hi, good morning everyone. Let me brought some results. I wanted to shift towards the sales side and appreciate the 3Q guidance around potentially being flat year-over-year in terms of sales. I was hoping to get a sense for -- you mentioned the strength, obviously, rebounding throughout the quarter, particularly in North America. I was hoping to get a sense of July trends, if possible, by segment and where -- and then in particular, with North America, if you feel that on the retail side, sell-in is equal to POS at this point?

Yes. Hey Mike, it's Russ. Let me take that, and then if Tony has anything he wants to chip in relative to POS and the retail side specifically. If you look at July, as we mentioned, the momentum that we had ending the quarter did continue into July. So we actually saw our sales up, call it, mid-single digits in July. And that was really on the strength of North American Residential. The Europe and Architectural segments were still down slightly. Now it's worth pointing out that in Europe, we did have a divestiture, and we have had some FX headwind. So if you peel those effects out, Europe actually would have been up slightly in July. So the general trend continues. Again, in our mind, it becomes a matter of what risk lies ahead, and this is more of a North American Residential comment with respect to the downturn that we saw in housing starts early in Q2. And when does that lead through to potentially weaker completions in Q3 and Q4. So Tony, is there anything you want to add on the retail front?

I think just as we said before, we're pleased that unit POS remains positive in the retail channel, and we're serving and supporting that right now.

And then on the Lowe's transaction, found that pretty interesting. And I was hoping to get a little bit more color on that in terms of number one, when you do you expect to close? And then if you could help with any type of comments around what this might represent from a revenue and EBITDA perspective?

Yes, Michael, so we're excited about that as well. We don't expect to close until very late in the year, right before year-end. And after that, we'll use the facility to continue to serve stores in the Midwest with Masonite products. And as we get closer to that and to the closing, then we'll give more color in terms of what that will mean appreciably in 2021.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

First question, just a follow-up on the Lowe's transaction. So is this a fabrication facility that you already supplied? And did that facility, as it currently operates, is that selling, is that 100% Lowe's business that you're looking to kind of continue servicing Lowe's but also expand to non-Lowe's customers or just any other color around that?

Yes. Good question, Mike. It is a fabrication facility, much like our network of what we call door fabs that build pre home units and supply to retail. We are not currently supplying products to that Millwork facility. So it will be incremental to us, and we'll take that over and as Howard mentioned, we're excited to have those folks join the Masonite family, and be part of the network we have supporting retail. And It will support Lowe's stores throughout the Midwest that it is traditionally done with Masonite products.

I guess as a follow-up, is there, I know it's early, and you said it will be later in the year. But is there ultimately any additional costs we should be thinking about related to any sort of buyout of existing suppliers or anything like that around the transaction?

I think, Mike, that any time we go through transitions, there are some capital costs changing displays and doing some things in store to represent the brand and do new merchandising and try to help consumers that are in those stores, make the selection of the right door solution for them. There's nothing appreciably different than any other transition that we see in terms of this transaction and changing those stores and that Millwork shop over to Masonite.

And if I could just squeeze one more in. When you're thinking about the North American Resi rebound, obviously, price played a big part in 2Q and in the more recent trends, getting back to positive. When you think about the contribution to 3Q, do you think volumes could end up being flatter in the quarter? Or would you still expect volumes to be down modestly, but still getting that strong benefit from price carrying the top line?

Yes. Mike, it's Russ. I think when you look forward to the back half of the year, clearly, the effectiveness of the North American pricing strategy is providing a firm tailwind to our revenue. So it's entirely possible that you could see volumes down a little bit, and we would still see that flat growth. Now I think I'm going to keep pointing people back to the fact that there is still uncertainty, not only with respect to end market conditions as we get into the back half. I talked a moment ago about the potential lag effect of a weak housing starts environment earlier this quarter. But also, there's still a lot unknown with respect to how COVID is going to impact our plant's ability to operate once the school year restarts. We saw absenteeism spikes early in the pandemic as people were adjusting to children returning to home and having to learn in a virtual environment. We're seeing a very, a broad array of return to school policies across various districts, particularly in the regions of the country where there have been more significant spikes related to COVID, and so we're, I think we're taking a prudently cautious approach on how much volume growth we can support in light of any potential disruptions to the manufacturing operations. I just want to keep that front of us.

Yes, Mike, we mentioned that, this is Howard. We're certainly cautiously optimistic and really pleased with the resiliency of the market so far. But as Russ said, we have to be realistic as well because we're certainly not through this pandemic. And there are inherent risks associated with operating in it during the quarter. So we feel good about how the business is running. We're running very efficiently. We've been able to continue to operate generally. And so we're pleased with that, but we're just trying to be realistic as well.

Our next question comes from the line of Kevin Hocevar with Northcoast Research.

Can you, I was hoping to get a little more color on the cost side of the equation moving sequentially. How much of the costs that weren't in 2Q come back in 2Q? Because I think you said last quarter something in the range of $15 million, $20 million was the type of cost savings you were taking out that would impact the second quarter. So how much of that comes back. Of the North America investment plan, $100 million over 5 years, so $20 million a year, I don't know if it's $5 million a quarter. Like how much of that was spent in 2Q versus how much more will be in 3Q? And then also on raw materials, some things have moved up like resins, steel is still down. And I know you've said in the past, lumber isn't a strong correlation to your wood purchases, but curious on that side, too. Just curious to all the moving pieces as we think of cost sequentially from 2Q to 3Q.

Okay. Yes, Kevin, it's Russ. So several pieces in that question. Let me try to unpack them. First of all, with respect to the cost actions, we took specifically in response to the COVID-19 pandemic last quarter, we estimated that, that would be approximately $15 million worth of savings. Now as you've heard us talk about, we did relax some of those cost controls as we got deeper into the quarter and saw that demand was holding up better than we feared that it might. We still delivered a majority of that $15 million of savings, though. But with the actions that Howard mentioned earlier, now taken to restore salaries and put in merit increases, restore hiring, some limited travel to support our customers, I would not expect those cost savings to continue at all as we get into the back half. With respect to the reinvestment plan for North America, the $100 million over five years, we have guided previously that majority of that would be on the operating expense side as opposed to the CapEx side. And then all else being equal, you could think about it as roughly linear across that five years, recognizing it could be lumpy here and there depending on the lay-in of certain resources, engineering resources, people and plants, et cetera. We did pull back on that late in the first quarter and early in the second quarter, given uncertainty, but we started to restore investment. If you take a look at what we spent in the second quarter, it was circa $3 million, but we're planning to accelerate spend again as we get into the back half of the year, assuming that the business continues to be resilient, and we don't see a dramatic pullback in demand for volume again. And then I think the third piece that you asked about is on the material cost side. We came into the year expecting to see a point to two points worth of gross commodity inflation. And that's generally what we're seeing. We're running within that range. There are no particular areas where we've seen specific or significant spikes. We have absorbed a little bit of higher cost as I mentioned on the call in certain areas just to improve the quality of some of our products.

Okay. Perfect. Very helpful. And then second question, I've noticed that door skin imports seem to be rising here in 2020, albeit from a very low base from some foreign players. So curious your take on what's driving this? What type of impact, if any, do you expect that to have on Masonite or the market dynamics? And do you have a sense for what the delivered cost of door skins are that are imported versus domestically made?

Yes, Kevin, it's Tony. Certainly, there have always been imports and to your point, they probably have -- there's been some increase in the recent time in terms of the quantity of the -- I think historically, the styles have been different in North America than have been used in Europe and in Asia. And so there have been some limitations around it. I think it's always been a part of our calculus knowing that it's out there, and that's an element of the market. Our focus is the door skin is an element but you have to provide doors to be the best service provider to the customer in the market. And so we feel like given our footprint and what we provide, we do that really effectively. So it's always been a part of our calculus and our understanding. We don't see it as a substantial threat because what we're providing is that service of the full door.

Okay. Perfect. Thank you very much.

Thanks Kevin.

Thank you.

Thank you. Our final question comes from the line of Jay McCanless with Wedbush. Please proceed with your question.

Hey, good morning, thanks for taking my questions. First, just the commentary you guys gave around the cost thus far this year, input costs being in line with what you're expecting. Just want to get some commentary on the lumber spike we've seen in July and presumably into August. How you all are thinking about that? If the lumber prices stay at these levels for the rest of the year, what type of impacts are they going to have on EBITDA margins?

Yes, Jay, it's Russ. Good morning. Thanks for the question. Well, remember, I'll just remind everyone that we're -- the wood that we use in our supply chain, our input source is really not indexed at all to dimensional lumber. We're typically using sawdust, chips, raw logs, in some cases, for the production of the wood fiber that we use in our door facings. And then we're, in some cases, purchasing from third parties, style and rail framing components around which you assemble the door. So many of the wood products that we would buy from the outside would be more of the off cuts from the mill process, not the dimensional lumber itself. So we see very little correlation with dimensional lumber pricing and our input cost on the wood side.

And then the second question, just broader about the UK if demand or, especially from the building societies doesn't start to come back, what's kind of the plan B there? Because it sounds like things got a little bit better, but not really fully recovered yet. So what, if anything, is the longer-term plan for that part of the world?

Yes, Jay, this is Howard. I think that as we said, sequentially, demand has improved. It was more sluggish than the U.S., certainly. Coming out of the full closure for six weeks on the interior side, seven weeks on the exterior side, the ramp was pretty significantly slower. However, as Russ said, when you look at July, if you take out FX and acquisition divestiture, we're slightly up. So I think there is some pent-up demand in the UK We feel good that the contractor channel has rebounded nicely. So our exterior business is strong. Certainly, the housebuilders are a bit slower. But again, I think that, hopefully, those, as they start swinging their hammers again, they'll end up putting doors in. So the country essentially shut down much more stringent than the U.S., but I would expect a lot of that demand to pop back here in Q3 and Q4. Thank you, Michelle, and thank you all for joining us today. We appreciate your interest and continued support during these challenging times. Stay well and stay safe, and this concludes our call. So operator, will you provide replay instructions.

Yes. Thank you for joining Masonite's Second Quarter 2020 Earnings Conference Call. This conference call has been recorded. The replay may be accessed until August 18th. To access a replay, please dial (877) 660-6853 in the U.S. or (201) 612-7415 outside of the U.S. Enter conference ID number 13706346. You may now disconnect your lines, and have a wonderful day.