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Edited Transcript of MAS earnings conference call or presentation 11-Feb-20 1:00pm GMT

·52 mins read

Q4 2019 Masco Corp Earnings Call Taylor Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Masco Corp earnings conference call or presentation Tuesday, February 11, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Chaika Masco Corporation - VP, Treasurer & IR * John G. Sznewajs Masco Corporation - VP & CFO * Keith J. Allman Masco Corporation - CEO, President & Director ================================================================================ Conference Call Participants ================================================================================ * John Lovallo BofA Merrill Lynch, Research Division - VP * Justin A. Speer Zelman & Associates LLC - MD of Research * Keith Brian Hughes SunTrust Robinson Humphrey, Inc., Research Division - MD * Matthew Adrien Bouley Barclays Bank PLC, Research Division - VP * Michael Glaser Dahl RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products * Michael Jason Rehaut JP Morgan Chase & Co, Research Division - Senior Analyst * Michael Robert Wood Nomura Securities Co. Ltd., Research Division - Research Analyst * Philip H. Ng Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst * Seldon T. Clarke Deutsche Bank AG, Research Division - Associate Analyst * Stephen Kim;Evercore ISI;Analyst * Truman Andrew Patterson Wells Fargo Securities, LLC, Research Division - Associate Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to Masco Corporation's 2019 Fourth Quarter and Full Year Conference Call. My name is Regina, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. (Operator Instructions) I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin. -------------------------------------------------------------------------------- David Chaika, Masco Corporation - VP, Treasurer & IR [2] -------------------------------------------------------------------------------- Thank you, Regina, and good morning. Welcome to Masco Corporation's 2019 Fourth Quarter and Full Year Conference Call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President and Chief Financial Officer. Our fourth quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. (Operator Instructions) If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risk and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risk and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We've reconciled these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. Finally, please note that we have accounted for our Windows and Cabinetry businesses as discontinued operations for all periods presented. With that, I'll now turn the call over to Keith. -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'll begin with some brief comments on our fourth quarter before I turn to our full year results and conclude with our thoughts on 2020. As Dave mentioned, our financial results have been restated to reflect Cabinetry and Windows as discontinued operations for all periods presented. Turning to Slide 4. In the fourth quarter, our top line increased 1% excluding the impact of currency, driven by solid growth in North American plumbing and paint. In line with our expectations, operating profit was down and our operating margin was 15.7% in the quarter. As we've previously communicated, this was due to higher input costs due to the full impact of tariffs and an increase in variable cost as compared to the fourth quarter of 2018. Our earnings per share for the quarter matched prior year at $0.54 per share. Turning to our segments. Plumbing growth in the fourth quarter was led by our North American plumbing business, which grew 5%. This was driven by record sales for both Delta and Watkins. Delta experienced growth in trade, retail and e-commerce in the fourth quarter, and Watkins continued to outperform the market with its industry-leading portfolio of products across price points and channels. In our Decorative Architectural segment, Behr continued to perform well with mid-single-digit pro paint growth and low single-digit DIY growth. This was aided by increased year-end ordering that pulled forward sales from Q1 of 2020, similar to what we experienced last year. We saw good results from the recently reset color solution centers as well as other new innovations, such as our easy-pour paint can and our new BEHR ULTRA SCUFF DEFENSE paint. Our paint growth was offset by lower sales in our lighting business, an industry that has been significantly impacted by tariffs. Lastly for the fourth quarter, we made significant progress on our strategic plan by completing the sale of our Milgard Windows business for after-tax net proceeds of approximately $560 million and signing an agreement to sell our Cabinetry business for $850 million in cash at closing and preferred stock with a liquidation value of $150 million. We now expect the Cabinetry sale to close by the end of February. With the proceeds from the sale of Milgard and our strong free cash flow, we executed share repurchases of $456 million in the quarter and retired approximately $200 million of debt that was scheduled to mature in early 2020, further strengthening our balance sheet and reducing our interest expense. We were pleased with our fourth quarter performance, and it concluded a transformational year for Masco. Please turn to Slide 5. As we look back on the full year, we effectively navigated this challenging year while executing our strategy to transform Masco into a stronger, more stable, less cyclical and higher return building products company. For the full year, sales grew 2% excluding the impact of currency, largely driven by pricing actions as we mitigated the impact of tariffs and other inflation. Despite the challenges of increased tariff costs and slower end markets, Delta, Hansgrohe, Behr and Watkins each achieved record sales for the year. Delta gained share with bath fixtures at retail and its Brizo brand in showrooms while also expanding its line of voice-enabled faucets. Hansgrohe launched several new products early in 2019, helping to drive solid growth, particularly in Germany and China. Our innovation excellence was demonstrated at the recent Kitchen and Bath Industry trade show or KBIS as we earn 2 of the Best of KBIS Awards. Our Brizo brand won the KBIS Best of Show award for its new Kintsu bath collection, and our Hansgrohe brand won that KBIS Impact Award for its Rainfinity shower system. Watkins, our leading spa business, also had another outstanding year, driven in part by innovations such as its FreshWater Salt System. This unique water care system provides a maintenance-free disposable cartridge that uses less chemicals to provide a simpler and cleaner spa experience. Behr continued to perform well in 2019, driving high single-digit growth in pro paint. Pro paint is a large growth opportunity for us, and we will continue to invest in people and capabilities, along with our partner, The Home Depot, to gain share in the pro paint market. While we were pleased with our paint performance in 2019, the lighting category was one of the hardest hit by tariffs, and this impacted our results. The headwinds we experienced in lighting in the quarter will continue for the next 3 quarters as we exit certain private-label SKUs and expect some inventory reduction to occur in the retail channel. As we outlined in our Investor Day, we believe that our performance in lighting will stabilize by the end of 2020, and we will be positioned to return to growth at that point. Wrapping up our 2019 performance. We delivered on our commitment to drive shareholder value as we increased earnings per share by 6%, executed our strategy to make Masco a better company for the long term by completing the divestitures of our Windows businesses and signing an agreement to divest our Cabinetry business. And we deployed over $1.2 billion of capital by returning approximately $900 million to shareholders through share repurchases, increasing our dividend for the sixth consecutive year and reducing our outstanding debt by approximately $200 million to finish the year at a net debt-to-EBITDA of 1.7x. With our effective capital allocation strategy and strong operational performance, we achieved a return on invested capital from continuing operations of 29% in 2019. Before closing the book on 2019, I'd like to thank all of our employees, especially those at our Cabinetry and former Windows businesses, for all of their hard work and perseverance that made 2019 another successful year for Masco. Now turning to 2020. I'd like to share with you our view of our markets. For the repair and remodel market, which is approximately 90% of our revenue, we expect market growth to be in the [range of] 3% to 4% in 2020, with growth accelerating in the second half of the year. For the paint market, a subset of the repair and remodel market for us, we expect the DIY paint market to be flat and the pro paint market to grow low to mid-single digits. For the new construction market, which is approximately 10% of our revenue, we expect mid-single-digit growth as we have seen an improvement in both starts and permits, particularly in the single-family sector. As for our international markets, principally Europe, we expect a flat to low single-digit growth environment. Based on these assumptions, we expect full year sales growth to be in the range of 2% to 3% excluding currency, margins to be approximately 16% and earnings per share to be in the range of $2.35 to $2.55. With our strong balance sheet and the $645 million in after-tax net proceeds from the sale of Cabinetry expected to be received in February, we will continue our balanced capital allocation strategy to drive shareholder value. We will likely deploy $500 million to $600 million of the Cabinetry proceeds towards share repurchases shortly after closing. And with our expected strong free cash flow conversion of approximately 100%, we will look to deploy up to another $600 million towards M&A or share repurchases throughout the remainder of 2020, subject to market opportunities. Now I'll turn the call over to John to go over our fourth quarter, full year and 2020 outlook in more detail. John? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance from continuing operations excluding the impact of rationalization and other onetime items. Turning to Slide 7. We finished the year on plan. Fourth quarter sales matched the prior year and increased 1% in local currency. Currency translation unfavorably impacted sales in the quarter by approximately $7 million. In local currency, North American sales increased 1% in the quarter, driven by pricing actions and volume growth in our plumbing and paint businesses. This was partially offset by lower volumes in our lighting business. In local currency, international sales decreased 1% in the quarter, driven by unfavorable mix, partially offset by pricing actions. We reported operating income of $257 million with operating margins of 15.7%. Operating profit was impacted by mix and unfavorable price-cost relationship and higher variable costs. For the fourth quarter, our EPS matched prior year at $0.54 per share. Please note that this performance is based on a normalized tax rate of 26% versus the previously guided 25% tax rate prior to discontinued operations. Due to the move of Cabinetry and Windows segments to discontinued operations and a change in the tax rate, we have provided restated adjusted EPS numbers for 2018 and the first 3 quarters of 2019 in the appendix on Slide 22. Turning to the full year 2019. Sales increased 1% and grew 2% in local currency. Currency translation unfavorably impacted the full year by $77 million. In local currency, North American sales increased 2%. This performance was driven by disciplined pricing actions across both segments, partially offset by lower volumes. In local currency, international sales matched prior year. While we experienced some international market softness in 2019, Hansgrohe continued to drive share gains in its home market of Germany and in China. Our SG&A as a percent of sales increased 10 basis points to 18.9% for the full year. And for the full year, operating income decreased $60 million or 1% with operating margins of 16.5%. Lastly, our EPS increased 6% to $2.25 for the full year. Turning to Slide 8. Our plumbing segment grew 3% in the quarter excluding the impact of currency, driven by strong growth in North America. Foreign currency unfavorably impacted sales by approximately $9 million in the quarter. North American sales increased 5% in local currency as we experienced improved demand from our wholesale, retail, dealer and e-commerce customers. This growth was against an 8% comp in the fourth quarter of 2018. Growth was led by Delta as they achieved another record sales quarter through increased volumes across their product categories. Additionally, Watkins, our spa business, continued to outperform by also achieving another record quarter with its innovative new products and industry-leading brands. Our international sales in the fourth quarter decreased 1% in local currency due to lower sales in Germany as Hansgrohe faced a difficult comp with sales growth of 7% in Germany in the fourth quarter of 2018. This was partially offset by strong growth in China. Operating profit in the quarter decreased $5 million due to higher variable costs, partially offset by incremental volume. Turning to the full year 2019. Sales increased 2% in local currency. This solid growth was driven by record years at Delta and Watkins. North American sales grew 2% in local currency as a result of early and aggressive pricing actions taken to mitigate the impact of tariffs, offsetting lower volumes. Our international plumbing sales matched prior year in local currency as Hansgrohe's solid growth in Germany and China was offset by softness in other regions. Full year operating profit matched prior year due to a favorable price-cost relationship as we priced ahead of feeling the impact of tariff costs in certain instances, partially offset by higher spending, unfavorable currency translation and mix. For 2020, we expect the plumbing segment sales growth to be in the 2% to 4% range excluding currency, principally due to our low growth expectations for the European plumbing market. As a reminder, 35% of the plumbing segment sales are outside of North America. We anticipate full year margins will be similar to 2019 as we experience the full impact of the List 3 and List 4 tariffs in 2020. We expect the tariff impacts will be the greatest in the first half of the year, and we anticipate operating margins will be down roughly 100 basis points in the first half of 2020 before recovering in the second half of the year. Also, given current exchange rates, we do not expect currency to materially impact our 2020 revenue. Turning to Slide 9. The Decorative Architectural segment declined 3% in the fourth quarter. This performance was driven by strong paint sales, which were more than offset by lower sales in our lighting business due to the loss of a portion of our private label business and inventory rebalancing with a key customer which impacted volumes in the quarter by approximately $20 million. Behr's solid mid-single-digit growth in Pro and low single-digit growth in DIY products was aided by approximately $20 million of sales pulled forward from Q1 2020, similar to the pull forward we experienced in the fourth quarter of 2018. Operating income declined due to lower volumes in lighting and an unfavorable price-cost relationship, driven by the impact of tariff costs and higher incentives, partially offset by lower spending. Turning to the full year 2019. Sales grew 3%, driven by our pro paint initiative as we achieved high single-digit growth and continue to grow share with the Pro. Growth was also aided by the acquisition of Kichler in March of 2018. This performance was partially offset by lower volumes in our lighting and builders hardware businesses as a result of our disciplined pricing actions in 2019. Full year operating income decreased 1%, principally due to lower volumes and increased commodity costs, partially offset by selling price increases and lower spending. In 2020, we expect low single-digit growth in DIY paint and mid-single-digit growth in pro paint. We also expect revenue in this segment will be impacted by the loss of a portion of our private label program and inventory rebalancing at a Kichler customer. The revenue impact of these items will be approximately $15 million each in Q1 and Q2 and approximately $5 million in Q3. This volume loss and the full impact of tariffs will depress operating -- segment operating margins by approximately 300 basis points in Q1 before recovering in the balance of the year. For full year 2020, we expect sales growth in the segment will be in the 0% to 2% range with operating margins between 17% and 17.5%. And turning to Slide 10. Our year-end balance sheet was strong with net debt-to-EBITDA at 1.7x, and we ended the year with approximately $1.7 billion of balance sheet liquidity. Working capital as a percent of sales finished the year at 15.7%, an improvement of 10 basis points over prior year. During 2019, we repurchased 7% of our outstanding shares for approximately $900 million, and we increased our annual dividend by 13% to $0.54 per share. We took further action in 2019 to strengthen our balance sheet by reducing our debt by approximately $200 million, and we initiated a plan to terminate and annuitize our U.S. qualified defined benefit pension plans. We should complete this plan by the end of 2021. This will reduce our ongoing pension expense and contributions once completed. Lastly, we expect the sale of our Cabinetry business to close in February, and we expect net proceeds from the sale of approximately $645 million after taxes and expenses. Going into 2020, our disciplined capital allocation strategy is unchanged. We will continue to prioritize investment in our businesses to drive organic growth. We will balance acquisitions with the right strategic fit and returns with share repurchases. And we will maintain an appropriate dividend. Including the expected net proceeds from the sale of our Cabinetry business, we expect to deploy up to $1.2 billion for share repurchases in 2020, subject to market conditions. This activity will bring our expected 2020 average share count to between 265 million and 270 million shares. We generated $660 million of free cash flow in 2019, and we expect 100% free cash flow conversion rate in 2020. Lastly, for the full year 2020, we expect annual revenue growth of 2% to 3% with operating margins of approximately 16%. And as Keith mentioned earlier, our 2020 EPS estimate is $2.35 to $2.55, which represents 9% EPS growth at the midpoint of the range. With that, I'll now turn the call back over to Keith. -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- Thank you, John. 2019 was a dynamic and transformational year for Masco. We mitigated significant tariff headwinds faced by our plumbing, lighting and hardware businesses. We continued to grow our plumbing segment with record sales at Delta, Hansgrohe and Watkins. We continue to gain share in pro and DIY paint with our leading Behr brand. We simplified our portfolio with the divestitures of our Windows businesses and signed an agreement to sell our Cabinet business, and we continue to execute on our capital allocation strategy. As we enter 2020, the fundamentals of our business and our core repair and remodel market are healthy. Consumers remain confident, and wages are growing. Home price appreciation is increasing. Housing stock continues to age. Existing home sales have improved. And household formations have steadily increased. With these favorable fundamentals and our continued focus on executing our strategy, coupled with our strong balance sheet and liquidity, we will continue to create shareholder value in 2020 and are well positioned to deliver on our 2021 EPS target of $2.80 to $3 that we put forth at our Investor Day last September. With that, we'll now open the calls up for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will come from the line of Stephen Kim with Evercore ISI. -------------------------------------------------------------------------------- Stephen Kim;Evercore ISI;Analyst, [2] -------------------------------------------------------------------------------- Appreciate all the detail here. I guess first question really relates to the margin guidance that you've given. I'm curious, first of all, when you look at the Kichler business, I guess, within Dec Arc, can you give a sense for what kind of a margin impact you think the -- this private label program being discontinued at your retail partner? What that is representing and how much do you think some of the other -- the margin guidance you're looking for, particularly here in the first quarter, is being driven by other impacts to the margin? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [3] -------------------------------------------------------------------------------- Yes, Steve. It's John. I think the margin impact from the loss of the private label business is relatively modest because it is indeed a private label program. I think the bigger impact on the margin in the segment is due to us absorbing the full cost of the tariffs here in the first part of the year. -------------------------------------------------------------------------------- Stephen Kim;Evercore ISI;Analyst, [4] -------------------------------------------------------------------------------- And then, I guess, might as well stay on the Dec Arc segment and particularly Kichler. I'm curious, as you look at that business -- obviously, there's a lot that's happened. The tariffs coming in shortly after the acquisition was an unfortunate event, and there's continuing to be issues in China due to the coronavirus, one can imagine, affecting your supply chain. I'm curious -- I guess, number one, you didn't -- I don't believe you mentioned anything about the coronavirus. If you could maybe talk about how that might be factoring into your outlook, if at all. And then two, if you believe that there is any adjustment -- or has there been any adjustment in your improvement plan in Kichler in light of what's happened? As you've watched things develop over the last 3 months since the last time we spoke to you, has there been any change in your strategic thinking around how to approach improving the results in that business given the changing world? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- Stephen, this is Keith. I'll take that, and we'll talk about the coronavirus first. When you think about the revenue that we have in China, it's about 3% of our revenue. So I want to keep that in perspective. Obviously, China plays an important role in our supply chain, so it's important to us and it represents about 3% of our revenue. As of now, and it is a fluid situation, without a doubt, we are not expecting a material impact on our performance from the coronavirus. It is a fluid situation, as I mentioned. When you think about, first of all, in terms of our factories and where we stand, I guess most importantly, none of our employees, as we know sitting here this morning, have been infected by the virus. And we're very thankful for that. We've instituted significant precautions, travel restriction, hygiene guidelines. We've eliminated gathering and meetings. We have a small manufacturing force that started -- about 15% of our biggest factory that started yesterday, and we'll be ramping that up throughout the week. So that represents about a 1-week delay from what we had anticipated due to the Lunar New Year, so not a significant delay but definitely a slower ramp-up than we anticipated. From a supply chain perspective, a very similar story with our biggest suppliers, where they are ramping up, they are bringing people back from the countryside where they were out on Chinese New Year. And they're coming back, and there is a planful ramp-up. So right now, as I've talked to our biggest suppliers and to our own factories, we are cautiously optimistic, but it is a fluid situation. In terms of the demand over there in China, again, that's 3% of our volume. As you may know, a lot of the building products are sold through retail malls and small dealers. Most of those are still closed, and they will start to open up over the course of the next 10 days. Our sales teams are all working from home. We're reviewing the revenue and the orders as they come in. We've reserved spots in terms of premium freight to help us maintain our delivery performance as we ship some of our products back -- to a large degree, back to Germany. So my point is we're taking precautions. We're thankful that none of our employees have contracted the virus. It's a serious situation, and we're taking it seriously. We have contingency plans developed. And at this point, where we stand, we don't expect a material impact on our business. With regards to Kichler, no question about it, Kichler has been growth-challenged in 2019. I mean the overall lighting industry was significantly impacted by the tariffs. And we were firm on our pricing and we were aggressive, one of the first out in the industry in building products in terms of pricing for these tariffs. And we did suffer a loss of a portion of our private label business. And as John mentioned, there is an inventory rebalancing at one of our large customers that we expect to take place. And we've outlined the impact across the quarter. So certainly, the tariffs were not expected when we made this acquisition. In terms of your direct question regarding if we've changed our improvement approach, we really haven't. Certainly, there was a change as it relates to pricing for tariffs, but I've already discussed that. But fundamentally, we had a work plan to drive what we thought would be improvements in our cost structure and in our total cost productivity. We've done that. We're ahead of that plan, and we're going to continue to drive that. And we expect to continue to outperform our plan as it relates to productivity and costs. With regards to the top line, it's really about having the right products and the right commercial programs and relationships in the industry. And the Kichler brand is very strong, and we have, in some cases, 2 and 3 generations of customers that we continue to serve. And we're focused on new products, and we've invigorated our new product development process. We just executed a launch in January, and we're receiving very positive feedback on that. We've looked at and we've tweaked our dealer programs to simplify and incentivize our dealers, and our Kichler team is very focused on executing this plan. So without a doubt, there were some volume challenges in 2019. They're going to continue through the first 2 quarters and then a little bit into the third quarter. And then as we exit 2020, we're going to be on solid footing to return this business to growth. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question comes from the line of Matthew Bouley with Barclays. -------------------------------------------------------------------------------- Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [7] -------------------------------------------------------------------------------- I wanted to follow up on the decorative side just around that Q1 guidance for the 300 basis point decline. It sounded like you're saying that that's largely reflective of the tariffs flowing through. And obviously, your full year guidance suggests that the margins will recover through the balance of the year. So I guess my question is more cadence-wise. Are you expecting kind of a steady improvement sequentially through the year? Or is that margin improvement kind of more weighted to the end of the year as you anniversary those tariffs? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [8] -------------------------------------------------------------------------------- Sure. Stephen -- Matt, let me give you a little bit of color here. So if you think about how the tariffs impacted us starting in 2019 and how they phase through our P&L through the course of -- the tail end of 2019 and going into 2020, we had about $60 million of incremental tariff costs in -- impact to P&L in 2019, and we expect another incremental $90 million to impact the P&L in 2020. And most of that $90 million should be in the first half of the year. I mean if you consider that $60 million started to flow through our P&L kind of in the middle of the third quarter and really hit us -- the full effect hit us in the fourth quarter of 2020, so we should experience the full impact in the first 2 quarters of the year and then it -- continue a little bit into the third quarter and then should dissipate as we get into the fourth quarter of last -- of this year. So we've implemented the pricing to mitigate the full $150 million of tariffs, but we're also continuing to work on margin recovery efforts through cost-out opportunities, supplier negotiations and looking at other resourcing opportunities that we may have. The one thing that I should point out is we might face a little bit of margin compression because what we are experiencing is cost recovery on these tariffs. So we don't have necessarily margin dropping to the bottom line. That said, we should expect to resume some margin expansion in the back half of the year once these tariffs work their way through the P&L. So I -- hopefully, that's helpful to you. -------------------------------------------------------------------------------- Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [9] -------------------------------------------------------------------------------- It is. And then, secondly, just kind of bigger picture around Kichler. Just hoping you could elaborate a bit around kind of the longer-term growth plans. I mean kind of how you envision this business positioned from a channel perspective or what, I guess, needs to change that you think would allow this business to kind of return to growth after you've moved past some of these near-term losses? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [10] -------------------------------------------------------------------------------- Similar answer to how I answered Stephen's question. I think there was specific events that occurred in this business as it relates to tariffs and some losses on private label business and inventory rebalancing by a significant customer. As those things, particularly the tariffs, begin to -- or the loss of the private label rather begins to flow out through the year, this business will be on solid footing to return to growth. In terms of the specific strategies, it's really about leveraging the strong brand and the deep channel relationships that we have in Kichler. And though -- Kichler is one of the few businesses in this industry that have a broad presence across all channels, so it is a multi-channel strategy for us. And fundamentally, at the root of that strategy is good products and great service. And we're working through different programs, as I highlighted earlier, in terms of new product launches and commercial programs to drive incentives and to align -- not unlike what we did as we revamped several years ago when we were down at Delta and went through this process to revamp our product development, shore up our assortment and make sure that our incentives were aligned to the specific needs of the channel. A little bit unique here in lighting is the movement to the e-commerce channel, and we have put in a leadership team -- actually several players from Delta Faucet Company that were instrumental in driving our share leadership in e-business down to Kichler. We have a great team down there, and we're focused across all channels: e-business, landscape, retail and showroom. So it really is a multipronged approach, but at the core of it, it's commercial programs. It -- I've said it but I'll say it again. Everything we do here at Masco is focused on productivity and cost productivity, and that will continue as Kichler as well. That's a component of the plan that we're outperforming, and we intend to continue that. So as I mentioned on my earlier answer, no significant change to the strategy. There were some defined events that happened to this business, and we're going to get through it. And at the end of the year, we're going to be on solid footing and we're going to continue to grow. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Your next question comes from the line of Michael Wood with Nomura Instinet. -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- I wanted to see if you can elaborate a bit more on the incentives that you called out impacting paint profitability in the presentation. And what are you seeing in terms of consumer reaction to these incentives? And if you could just talk about maybe what's changed in the industry in terms of how competitors are behaving with pricing incentives in paint? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [13] -------------------------------------------------------------------------------- Mike, I think there might be a slight misinterpretation. It's incentives between ourselves and our retail partners. It's not necessarily consumer-based incentives. -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [14] -------------------------------------------------------------------------------- Understand. So just to clarify that you're saying that the actual price and incentives offered at the store have not necessarily changed. This is between you and large customers. -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [15] -------------------------------------------------------------------------------- That's correct, yes, largely due to volume rebates that we have with our major customers. -------------------------------------------------------------------------------- Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [16] -------------------------------------------------------------------------------- Great. And in terms of the market share gains that we should expect going forward for the business overall, if I do just rough back-of-the-envelope math for the end market assumptions, overlay to your business, I get a roughly 2% growth rate, and you're calling for 2% to 3%. Is that the typical share gain that you'd expect? Or is there something kind of impacting that that's preventing it from being larger? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [17] -------------------------------------------------------------------------------- No, I mean it's -- the share gains we're expecting -- as you recall, we've got now a pro paint business that's now $0.5 billion. And so it's harder as -- when you get to the law of large numbers and it's harder to gain share off of that base at the same rate that you were gaining share at when it was a much smaller business. But we continue to invest behind that business. Our channel partner, Home Depot, continues to invest behind that business. We think we have established a very successful and winning model to attract the pro contractor into their stores and to buy paint. It's -- and to focus them on one of the highest-ranked quality brands in the industry. So between ourselves and Home Depot, we think we've established a terrific business model here. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Your next question comes from the line of Mike Dahl with RBC Capital Markets. -------------------------------------------------------------------------------- Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [19] -------------------------------------------------------------------------------- John, just to pick up on that last question. If we think about the paint business, I think that pull forward into Q4 looks like it was probably a couple of cents and maybe that's borrowing from 2020 by the same amount and 1 point of top line in that segment, I think. So if you think about paint specifically, when you have DIY as a market flat; pro, low single to mid-single, flat; you've got that 1 point headwind, I guess, do you expect to perform in line then with the broader paint market even with that comp headwind? Or do you still think you can outperform those overall numbers? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [20] -------------------------------------------------------------------------------- Yes, Mike. So to react to your comments you have, one, I think your math is largely right on the pull forward and the bottom line impact. As we think about the growth in both DIY and pro, we do think we can outpace the market in both instances. We're still -- even though we're a $0.5 billion business now, we still have a relatively light market share, and we still think there's further share to be gained in the pro. And as we look at our performance on the DIY portion of the business, again, because of our alignment with the key -- our channel partner, The Home Depot, and the growth rates that they're experiencing and the folks that they draw to their stores, we think we can outpace the DIY market growth as well here in 2020. -------------------------------------------------------------------------------- Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [21] -------------------------------------------------------------------------------- Okay. That's helpful. Second question, also following up on another question earlier about the kind of price, tariff margin impact. I think you were answering the question in aggregate, including plumbing and lighting, talking about that pace of margin and kind of the recovery on tariffs. But just to clarify, is that also specifically true for plumbing? And it looks like, within plumbing, second part of this is your second half margins have to be up year-on-year to get to that flat full year if you're down 100. And so is that incremental actions around price, supply chain, raw materials benefiting you? Or is that just pure volume leverage to get you to that? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [22] -------------------------------------------------------------------------------- Yes, Mike. So again, you're right. My prior comments were about enterprise-wide and not specifically with respect to any single segment. As you break down the plumbing segment, you're right, the margin expansion that we expect in the second half of the year is required given the margin headwinds in the first half of the year due to the impact of the tariffs. What we expect in the back half of the year, that's largely volume-driven. We don't expect any further pricing actions or anything else incremental outside of volume to drive that margin expansion in the back half of the year. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from the line of Seldon Clarke with Deutsche Bank. -------------------------------------------------------------------------------- Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [24] -------------------------------------------------------------------------------- Just continuing on the last question. How should we think about volume and price within your revenue guidance for plumbing and decorative? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [25] -------------------------------------------------------------------------------- So as you think about -- I would consider most to be volume. As we indicated earlier, with the impact of the tariffs flowing through, we kind of laid out our top line estimates. I would expect modest pricing, very low impact on pricing because of the pricing we put through on the tariffs back in 2019 -- early in 2019, I should say. And so most of that is all -- most of the growth that we have outlined for you today both with the Decorative Architectural segment as well as the Plumbing segment and therefore, the company in total, is volume-driven. -------------------------------------------------------------------------------- Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [26] -------------------------------------------------------------------------------- Okay. And then just kind of continuing onto 2021. You reiterated the expectation for $2.80 to $3 of earnings, and I think you guided to something like a 16.8% underlying margin, which obviously implies another 80 basis points improvement on top of this year. What's like the right bridge to think about as -- on how to get there? Is that still going to be volume-driven? Or are there some cost actions that you can -- you see down the line or pricing actions that you see down the line a little bit longer term? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [27] -------------------------------------------------------------------------------- A couple of things that would be driving our 2021 performance. Firstly, we anticipate that the tariff headwinds are behind us. In terms of the overall market, when we think about R&R, as we mentioned in the earlier remarks, we expect an acceleration through 2020, and we believe that will hold into 2021 based on improving fundamentals, increase in our supply and a strong consumer. So with the tariffs behind us; the market improving; and continued growth, as we've talked about, in terms of market share gain in pro, DIY paint and our plumbing business, with that drop-down -- together with our planned repurchase -- share repurchases in 2021, that's what gives us confidence in that $2.80 to $3 range for 2021. -------------------------------------------------------------------------------- Seldon T. Clarke, Deutsche Bank AG, Research Division - Associate Analyst [28] -------------------------------------------------------------------------------- Okay. So is 16.8% still kind of the right number to think about roughly? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [29] -------------------------------------------------------------------------------- Yes, I think so. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question comes from the line of Michael Rehaut with JPMorgan. -------------------------------------------------------------------------------- Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [31] -------------------------------------------------------------------------------- First question I just had, I just wanted to break down the tariff impact. And I guess, John, you've said earlier that you estimated there's about a $60 million impact in 2019, an incremental $90 million in 2020. I'm just trying to get a sense for the offsetting actions to those headwinds through price, cost. Specifically, productivity, I think, is -- if you want to throw that in there, if you feel that, that was -- either supply chain or other things that you did specifically to offset. But just trying to get a sense of the offsetting actions there to get to like a net headwind or such. How do you see that flow -- how did you see that flow through in 2019? And how do you expect 2020 to shake out when you think of those offsetting actions? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [32] -------------------------------------------------------------------------------- In round numbers, Mike, I'd say, let's call it, 90% of our mitigation actions were through price. So that was the biggest lever that we pulled in 2019. So that leaves about 10% in terms of the cost of the tariffs mitigated through supply chain resourcing, negotiation with the suppliers and that sort of thing. We'll continue to do that. The majority of our movement out of China is our existing suppliers that have established production in other low-cost countries, and we'll be ramping that up. We'll be moving some to -- in some limited cases, to some new suppliers, but that's a longer-term play for us and is going to take a while to do that. So fundamentally, when you think about the mitigation, it was mostly price, and we've put that through aggressively early in 2019. And hence now, with the combination of the timing of the tariffs and when they hit and, more importantly, the flow of inventory through our system into the P&L, that's why we have that overhang in -- that $90 million headwind heading into 2020. -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [33] -------------------------------------------------------------------------------- But Mike, I guess, as we -- maybe to supplement Keith's comments here. As we exit 2020, we don't think there's going to be a net headwind. We think we've got -- between the pricing actions and the supply chain actions that Keith mentioned, we think we've got the impact of the tariffs fully covered. -------------------------------------------------------------------------------- Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [34] -------------------------------------------------------------------------------- All right. That's helpful. Secondly, I just wanted to circle back to Kichler for a moment. And apologies, I know you've answered a bunch of questions, but I'm just trying to make sure I have some of the numbers right in how to think about the business as it is by the end of this year. John, I think you said that private label and inventory rebalancing would each be $15 million in the first couple of quarters, going to $5 million in the third quarter. Was that right? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [35] -------------------------------------------------------------------------------- Maybe just to be clear, collectively, the private label and inventory rebalancing will be $15 million in each of Q1 and Q2. So total impact in the year, Mike, of $35 million from both of those actions. -------------------------------------------------------------------------------- Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [36] -------------------------------------------------------------------------------- Okay. So I was just trying to get a sense of, as the business has -- and I assume you had maybe a $15 million hit in 4Q. So you're talking somewhere in the range of $50 million to $100 million -- $50 million to maybe $75 million, depending on how things traversed in 2019, of a hit to revenue from your original purchase. You've also talked a lot about the different types of cost actions that you've done to improve the business. I was just trying to get a sense of, with all the moving pieces, how you would characterize the margins today or by the end of 2020 rather, I think, is more importantly, for that business relative to where you purchased it. Are you kind of in line, still a little bit behind or even ahead given some of the company-specific actions? And how do you think about any potential further improvement in '21? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [37] -------------------------------------------------------------------------------- Yes, Mike. So with respect to the margins, we don't break out margins by individual company. I can appreciate the question. As Keith mentioned in his comments a couple of minutes ago, we continue to work and successfully work on the supply chain and cost-out initiatives at Kichler. Clearly, the volume has been a little bit more of a headwind than we would have anticipated when we bought the company. But that's about as much as we can say on that topic. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from the line of John Lovallo with Bank of America. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [39] -------------------------------------------------------------------------------- Just sticking with lighting here. And I don't mean to beat a dead horse here, but just from a broader industry perspective, I'm just curious. There's been a number of headwinds obviously, and you guys have handled them fairly well. The question is though, is there any concern that there's something structurally changing in the lighting industry, similar to maybe what we're seeing in cabinets and flooring as it pertains to consumer preference that is creating a headwind here? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [40] -------------------------------------------------------------------------------- No, we don't view it as a structural change. If there was anything that would be approaching a structural change, it would be the shift to e-commerce. But that's really -- we're seeing that, honestly, pretty broadly across a number of our product categories. So no, it's not a -- we don't view it as a structural hit. It was definitely a significant change when you talk about an industry that's, by and large, imported from China, and we have the kind of tariffs that we had come into there. So it's -- that's more of a onetime event as it relates to the change versus a structure. There's -- it's a significant component of the remodel process, and it continues to be that. It certainly is a design cue. It's very design-forward. The -- what it takes to win in this industry as it relates to consumer intimacy and understanding design trends and having a product -- a new product introduction process that's solid, those things haven't changed. So we know how to compete in this industry, and the change really has been that tariffs that came in. And we're going to put that behind us throughout the course of 2020, and then we're going to return to a growth footing. -------------------------------------------------------------------------------- John Lovallo, BofA Merrill Lynch, Research Division - VP [41] -------------------------------------------------------------------------------- Okay. And then, John, just on the SG&A front, $310 million in the quarter, that was up fairly meaningfully on a dollar basis and also as a percentage of sales. Can you just help us understand maybe some of the key drivers under that, please? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [42] -------------------------------------------------------------------------------- Yes. Sure, John. As you may recall, last fourth quarter was actually one of the lightest quarters we had in SG&A in a long time. So maybe it was more of a low SG&A comp that we were up against. The one thing that you may recall that we called out in the fourth quarter call of last year is we did have a $4 million gain on the sale of a building, which did not occur, which would be a headwind against that comp. But I think it was more just extremely tight or low SG&A last year on kind of a one-off basis as opposed to anything else. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from the line of Justin Speer with Zelman & Associates. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [44] -------------------------------------------------------------------------------- I just wanted to unpack some of your margin forecast. You mentioned the 300 basis point headwind in the first quarter being more -- out of the Decorative Architectural segment being more tariff-affected, but then I'm trying to reconcile that with the fact that you obtained price. Are you just saying that it's volume deleverage? Or is there something else? Is there a lag in your pricing relative to the cost rolling through? Maybe help me understand that. And then also, on top of that, just any tailwind from lower raw material costs across your business or lower -- and [even] transport costs? Or any other factors that are offsets that we need to be aware of? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [45] -------------------------------------------------------------------------------- Yes. So Justin, a couple of questions in there. Let me -- let's try to address those. So in terms of the margin degradation from the fourth quarter to Q1, there's a couple of things going on there. One is lower volumes, right? We referenced the fact that we lost a portion of the private label program. Also, with the pull forward in paint, that $20 million obviously comes out -- well, that should indicate we have lower volumes in Q1 -- or anticipating lower volumes, I guess I should say, in Q1 in the Decorative Architectural segment that would help drive that operating profit margin lower. In terms of raw material costs -- and the third thing I should -- I guess I should say is -- on the margin side is the tariffs. Because it's cost recovery, that will drive margins lower as well. On the offset side, obviously, we always work on cost productivity. In terms of commodity costs specifically, the input costs to paint have moderated here in the -- since a year ago. But recall, the way things work with -- particularly with our paint business is that we tend to be price-cost neutral over time, and so that may have an -- that would impact margins. So there's really -- as prices moderate -- input costs moderate, there may be some impact on pricing as well. So I think that puts it all together. Did I hit all your questions? -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [46] -------------------------------------------------------------------------------- Well, I guess I'm just trying to understand it because I know there's a lot of unevenness with the paint because, last year, I guess in the first quarter of 2019, your comps were down 7%. I know some that was Kichler, but that was because you had pulled forward the prior year. So I would have thought that those would have kind of evened out such that you wouldn't have as much of an impact there from the coatings side and, obviously, on the Kichler business. But I'm just trying to reconcile your comment that it's mostly tariffs that are hitting you. Is it -- it's not the tariff cost that you're trying to get price and you've lost share as a result of that or losing business and that's affecting your margin profile in the Decorative Architectural segment? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [47] -------------------------------------------------------------------------------- No. I don't know if you -- maybe I didn't communicate it right. But I think, as you go into Q1, I'd say there's going to be lost volume. We talked about the lost programs. And so that's going to be the main contributor to the margin degradation, followed by the tariff impacts. Of the 2, volume has a much greater impact than the tariffs on the margins in Q1. -------------------------------------------------------------------------------- Justin A. Speer, Zelman & Associates LLC - MD of Research [48] -------------------------------------------------------------------------------- That makes sense. And then lastly for me is, just who are you losing share to in the lighting business? Is there perhaps another player that doesn't source from China that's advantaged post tariffs? Because I was under the impression that everyone was kind of in the same sandbox, so to speak, in terms of the supply chain. Or is it something else? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [49] -------------------------------------------------------------------------------- Well, I think the industry is down. I think the impact of the tariffs industry-wide has been an effect. We're not -- we haven't really identified any single competitor that's particularly taking more share than another one across the board. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Your next question will come from the line of Keith Hughes with SunTrust. -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [51] -------------------------------------------------------------------------------- Yes. Can you give us, in 2019, what was North American plumbing growth? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [52] -------------------------------------------------------------------------------- North American plumbing growth was 2%, I think, for the full year, Keith. -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [53] -------------------------------------------------------------------------------- Is that all volume? Or is there pricing in there? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [54] -------------------------------------------------------------------------------- There was a little bit of pricing in there. Well, yes, I mean if you consider the tariffs actually, a fair amount of pricing in there because we put in price to offset the tariff impact, Keith, probably in Q1 and Q2 of last year. -------------------------------------------------------------------------------- Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [55] -------------------------------------------------------------------------------- Okay. And so you're not expecting -- and I think you said this earlier. You're not expecting any price in this plumbing guidance that you've given us for -- again, let me ask it this way. In North America, you do not expect any price coming in, in 2020 in plumbing? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [56] -------------------------------------------------------------------------------- Not much, Keith. There might be a little bit that we put in, but not a ton, no. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Your next question comes from the line of Phil Ng with Jefferies. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [58] -------------------------------------------------------------------------------- Can you give us a sense how we should think about the pace of the buybacks as you layer that in 2020? And then any update on the M&A pipeline? -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [59] -------------------------------------------------------------------------------- Yes. In terms of -- I'll take the share repurchase question, Phil, and I'll let Keith talk about the M&A pipeline. In terms of the way we're thinking about it is, I think we mentioned, we'll probably do a large portion, maybe a good chunk of the proceeds that we get from the Cabinetry transaction shortly after the proceeds are received. So -- and then through the balance of the year, we look to deploy the balance of the $500 million to $600 million that we discussed. And -- but we'll be -- that will probably be more opportunistic, depending on how the market plays out. In terms of M&A pipeline, Keith, why don't you take that one? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [60] -------------------------------------------------------------------------------- Yes. Phil, our pipeline remains solid. We continue to drive it. Overall, I would say that the M&A activity was a little bit slower in '19 than I expected with the global trade uncertainty and some of the business valuations being in flux because of that. But it seems to pick up -- have picked up lately. We like some of the things that we're looking at. Most of them are fairly small. I would say that seller expectations still remain high so we're going to be patient, but a solid pipeline. -------------------------------------------------------------------------------- Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [61] -------------------------------------------------------------------------------- Got it. And just one last one for me. On the lighting stuff, I mean, obviously, there's some tariff dynamic and share loss. As we think about 2021, when you work through some of these issues and you kind of -- as Keith mentioned, you expect to return to growth. Should we expect margins in that segment, decorative, to kind of get back to that 18% to 19% range? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [62] -------------------------------------------------------------------------------- Well, we're going to continue with that growth. We have a good drop-down on that incremental volume, and we'll continue to drive that. So I would expect that margins would be improving as we compare '20 to '21. -------------------------------------------------------------------------------- John G. Sznewajs, Masco Corporation - VP & CFO [63] -------------------------------------------------------------------------------- Yes. Phil, you may recall we laid out 17.5% to 18% margins in that segment for -- at our Investor Day in September. And we -- our thought process around that has not changed since September. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- Our final question will come from the line of Truman Patterson with Wells Fargo. -------------------------------------------------------------------------------- Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [65] -------------------------------------------------------------------------------- First one, to touch on the coronavirus again. Could you dig into that a little bit more? What portion of Plumbing Products have a component piece sourced from China? And Keith, I believe you mentioned contingency plans as well. Just trying to understand what's going on there. And it does seem like it's intensifying. Could you discuss your current inventory balances and maybe an update of your supply chain? If plants actually remain shut for another week or 2, will that actually impact the product that you can get on shelves? -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [66] -------------------------------------------------------------------------------- Our factories are coming up to speed. Really, that represents about a week of delay over what would normally be -- have been a delay related to the Chinese New Year. So they're coming up. They're coming up a little bit slower than what they would normally. We have about 15% of our workforce in our biggest plant, for example, and that's going to be coming in through the course of the next week, 1.5 weeks. As I said earlier, from a volume perspective, a lot of the retail home improvement malls and dealers remain close, and they'll be opening. Anticipated -- again, there's a lot in flux here. But they'll be opening over the course of the next week or 2. So with China representing 3% of our revenue, as I said in an earlier answer on the Q&A session here, we're not anticipating it to have a material impact on us. In terms of contingencies, as I said, we're looking at premium freight to help us with some of the delivery so that we can maintain our outstanding fill rate and lead time proposition to the customers. And we're continuing to keep an eye on it. We're most keenly paying attention to the health of our employees, and we've got different procedures and policies to make sure that we're paying attention to that first and foremost. It's a fluid situation. We're watching it closely. And as I said, we're not anticipating it to have a material impact on our results at this time. -------------------------------------------------------------------------------- Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [67] -------------------------------------------------------------------------------- Okay, okay. And then on the R&R side, pretty slow in 2019. It looks like your guidance has R&R picking up a little bit here. Are you actually seeing activity start to recover early in 2020? And if so, do you think weather has had any impact on that? I'm just trying to understand how sustainable any kind of near-term green shoots are. -------------------------------------------------------------------------------- Keith J. Allman, Masco Corporation - CEO, President & Director [68] -------------------------------------------------------------------------------- Yes. I think the weather has been pretty good, all things considered, and what it could have been. We're calling R&R at that 3% to 4% growth range, and we see it accelerating towards the back half. When we're looking at the numbers, the economic indicators that we look at, generally, there's a lag from those numbers to R&R. So we feel confident in that 3% to 4% R&R with acceleration in the back half. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Ladies and gentlemen, that will conclude today's conference call. Thank you all for joining, and you may now disconnect.