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Edited Transcript of MAS earnings conference call or presentation 25-Apr-19 12:00pm GMT

Q1 2019 Masco Corp Earnings Call

Taylor Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Masco Corp earnings conference call or presentation Thursday, April 25, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Chaika

Masco Corporation - VP, Treasurer & IR

* John G. Sznewajs

Masco Corporation - VP & CFO

* Keith J. Allman

Masco Corporation - CEO, President & Director

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Conference Call Participants

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* Adam Michael Baumgarten

Macquarie Research - Analyst

* Eric Bosshard

Cleveland Research Company - CEO

* Justin A. Speer

Zelman & Associates LLC - MD of Research

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kenneth Robinson Zener

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Mahesh Madhava Dass

Deutsche Bank AG, Research Division - Research Associate

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Glaser Dahl

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Michael Robert Wood

Nomura Securities Co. Ltd., Research Division - Research Analyst

* Peter Thomas Galbo

BofA Merrill Lynch, Research Division - Associate

* Philip H. Ng

Jefferies LLC, Research Division - Equity Analyst

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Stephen Kim

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team

* Susan Marie Maklari

Crédit Suisse AG, Research Division - Research Analyst

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Masco's First Quarter 2019 Conference Call. (Operator Instructions)

As a reminder, this call will be recorded today, Thursday, April 25, 2019. Thank you.

David Chaika, Vice President, Treasurer and Investor Relations, you may begin your conference.

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David Chaika, Masco Corporation - VP, Treasurer & IR [2]

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Thank you, Amy, and good morning. Welcome to Masco Corporation's 2019 first quarter 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 first 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 risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We describe these risks 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 measures. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations.

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

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Keith J. Allman, Masco Corporation - CEO, President & Director [3]

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Thank you, Dave, and good morning, everyone. Thank you for joining us today. Please turn to Slide 4.

We experienced a slow start in 2019 as a combination of factors impacted our results. Some of these factors were anticipated such as sales pull forward into the fourth quarter of 2018 and a large ERP implementation in our Windows business. However, other factors were external and not anticipated, such as inventory rebalancing in certain plumbing and decorative channels and softer end market demand early in the quarter.

Despite our slow start to the year, we saw sales trends improve in March and believe that markets are now performing as we expected. For the quarter, excluding the impact of currency and acquisitions, sales decreased 2%. Operating profit decreased $20 million principally due to lower volumes in our plumbing, decorative and Windows segments. These were partially offset by pricing actions we took across all segments. Our earnings per share decreased 2% due to the lower operating profit.

Turning to our segments. Excluding currency, plumbing sales were flat. Volume decline in North America was the biggest contributor to flat sales as volume was affected by the sales pull forward into Q4 of 2018 that we discussed last quarter and lower demand earlier in the quarter.

While plumbing sales worldwide were flat, we did see continued strong performance with our high-end Brizo brand in the wholesale showroom channel and good growth in Hansgrohe in both China and Germany, its largest markets. Watkins, our leading spa business, continued to see good demand for its products and achieved record first quarter sales.

In our Decorative Architectural Products segments, paint volumes were lower in the first quarter due to the $20 million of sales pull forward into the fourth quarter of 2018 that we mentioned on our last call, inventory rebalancing and lower end market demand. Paint volumes did accelerate in March, and this has continued into April.

We also continued to invest in our pro paint initiative in the first quarter by hiring additional employees to sell and service the professional painter. And we expect to gain -- to continue to gain share in the pro paint market in 2019. Our lighting business was also softer than expected, notably in landscape lighting, which was impacted by weather in the quarter.

Turning to Cabinetry. Sales grew 9% in the first quarter with growth in both our repair and remodel business and strong growth in our new construction business. Our repair and remodel growth was led by our new program with Menards, which we anniversaried in the first quarter of 2019. We're very pleased with this new business, and it is meeting our expectations.

In our Windows segment, sales were down in the first quarter as we went live with an ERP system at our largest window manufacturing facility, which caused us to stop taking orders for about a 2-week period, as planned. This implementation has gone very well. Additionally, our U.K. business continued to be challenged by softer market conditions for its products.

Turning back to Masco overall. We continued our disciplined capital allocation by repurchasing 3.5 million shares for $122 million during the quarter.

Before turning the call over to John, let me give you a brief update on our review of strategic alternatives for our Cabinetry and Windows businesses. We have engaged outside advisers to help us with this evaluation, and we are close to completing carve-out audits of the business units. We have made good progress and are on track to complete this review, as planned, by the end of June, and we will update you accordingly.

Now I'll turn the call over to John to go over our first quarter results in more detail. John?

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John G. Sznewajs, Masco Corporation - VP & CFO [4]

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Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and impairment charges, inventory step-up-related purchase accounting for the Kichler acquisition and other onetime items.

Turning to Slide 6, sales decreased 1% on a reported basis but grew 1% in local currency. Excluding the acquisition of Kichler, sales decreased 4% or 2% in lower currency. Foreign currency translation unfavorably impacted our first quarter revenue by approximately $33 million.

In local currency, North American sales increased 2% in the quarter but decreased 3%, excluding the Kichler acquisition. This performance was due to lower volume in all segments except Cabinetry as we experienced sales pull forward into Q4 2018, inventory rebalancing at certain customers and overall softer demand in January and February.

In local currency, international sales decreased 1% in the quarter driven by solid growth in China and Germany, which was more than offset by softness in other smaller regions.

Gross margins were 31.4%, down 120 basis points largely due to lower sales volume and the impact of a full quarter of Kichler. We expect gross margin to expand in the remaining 3 quarters of 2019.

Our SG&A as a percent of sales decreased 20 basis points to 19.3%, reflecting continued cost control.

We reported operating profit of $230 million with operating margins of 12.1%.

In the quarter, we booked 2 impairment charges. The first charge was a write-down of Kichler's tradename for approximately $9 million. This was driven by our revised look in our long-term growth forecast -- revenue growth forecast incorporating market softness we experienced late last year and in the first quarter of this year. The second charge was a write-off of the UK Window Group's goodwill balance for approximately $7 million.

Our EPS was $0.44 in the quarter, a decline of 2% compared to the first quarter of 2018 due to decreased operating profit, partially offset by the benefit of a lower share count. Finally, we are reaffirming our annual EPS estimate of $2.60 to $2.80. This guidance assumes that tariffs remain at the 10% level for the remainder of the year and a normalized tax rate of 25%.

Turning to Slide 7, our plumbing segment sales decreased 3% on a reported basis. Excluding the impact of currency, sales matched prior year. Foreign currency translation unfavorably impacted this segment's sales by approximately $29 million in the quarter.

Our North American sales decreased 1% in the first quarter as this segment's sales comparisons were impacted by approximately $20 million of onetime items. On our fourth quarter call, we discussed that approximately $10 million of sales were pulled forward into Q4 2018 from Q1 2019. Additionally, as you may recall, last year's first quarter sales benefited from approximately $10 million of sales that were pulled out of Q2 and into Q1 ahead of Delta's ERP implementation in 2018. North American performance was also impacted by inventory rebalancing in the wholesale channel, softness in our rough plumbing business and overall lower demand early in the quarter.

Our international plumbing sales increased 1% in local currency as Hansgrohe experienced solid growth in both China and Germany.

The segment's operating profit decline was due to lower volume, which also resulted in inefficiencies.

Mix negatively impacted the quarter due to lower inventory levels in the wholesale channel in North America and a mix shift down in our international markets. Segment results were also impacted by a trade show expense, which we discussed on our fourth quarter earnings call. These were partially offset by favorable pricing actions. For 2019, we continue to expect the plumbing segment sales growth to be in the 3% to 5% range with margins similar to 2018.

Turning to Slide 8. The Decorative Architectural Products segment grew 5%. This performance was driven by low single-digit growth in Behr's pro paint initiative and our acquisition of Kichler. Excluding the acquisition, sales declined 7%.

As we discussed on our last earnings call, the decorative segment results were impacted by approximately $20 million of sales pull forward into the fourth quarter of 2018 due to increased year-end customer purchases to achieve incentives. In addition, first quarter results were lower than expected due to inventory rebalancing and softer demand in the -- earlier in the quarter. Despite a slow start to the year, Behr did see improved sales trends in March, which have continued into April. In addition, Liberty Hardware experienced growth in the quarter with strength in both its retail and e-commerce channels.

Operating income in the first quarter declined versus the prior year due to lower volume, a full quarter impact of Kichler and the addition of employees servicing pro paint customers, partially offset by reduced spending.

In full year 2019, we expect the decorative architectural segment sales growth will be toward the lower end of the 4% to 6% range, including the benefit of the Kichler acquisition, and margins to be in the range of 17% to 18%.

Turning to Slide 9. In the Cabinetry segment, sales increased 9% in the quarter. The strong performance was driven by solid growth in both our repair/remodel and new home construction businesses through increased volume and favorable price. Additionally, our performance was supported our program win at Menards, which we anniversaried in the first quarter of this year.

Segment profitability increased in the quarter by $16 million principally driven by lower spending due to the ramp-up costs related to Menards win in the first quarter of 2018, favorable pricing actions and increased volume. This increase was partially offset by unfavorable mix resulting from our growth at Menards and the double-digit growth in our new home construction business.

While growth was strong in the first quarter, we continue to expect sales growth will be between 0% and 3% and segment margins to be similar to 2018 as comps get tougher now that we've anniversaried the Menards win, particularly in the second quarter due to the significant ramp-up at Menards in Q2 of 2018.

Turning to Slide 10. Our Windows segment sales decreased 16%, and excluding the impact of currency, decreased 14% in the quarter. Foreign currency translation unfavorably impacted this segment's sales by approximately $2 million. This performance was driven by lower volume offset by favorable pricing.

As we discussed in our fourth quarter earnings call, Milgard executed on the implementation of an ERP system in its largest facility during the quarter. As expected, the plant did not take orders for approximately 2 weeks, which impacted Milgard's volume. The implementation went very well, and that facility has returned to normal production levels.

The segment's performance was also impacted by continued market softness in our U.K. window operation. Segment profitability in the quarter decreased $7 million driven by lower volume and inefficiencies, partially offset by favorable pricing actions.

For 2019, we continue to expect sales growth for this segment to be in the 1% to 3% range, excluding currency, with modest margin improvement.

And turning to Slide 11. Our balance sheet remained strong with net debt-to-EBITDA at 2x, and we ended the quarter with approximately $1.2 billion of balance sheet liquidity.

In the quarter, we further improved our liquidity and flexibility by entering into a new 5-year credit agreement, which increased availability from $750 million to $1 billion. Working capital as a percent of sales improved 150 basis points versus prior year to 16.5%. For the full year, we expect working capital as a percent of sales to be approximately 14%, which is similar to where we ended 2018. Lastly, during the quarter, we continued our focus on shareholder value creation by repurchasing 3.5 million shares valued at approximately $122 million.

And with that, I'll now turn the call back over to Keith.

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Keith J. Allman, Masco Corporation - CEO, President & Director [5]

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Thank you, John.

The fundamentals of our business and our core repair and remodel market are healthy. Consumers remain confident and wages are growing. This increases our consumers' willingness to invest in their home. Home prices continue to appreciate. This is highly correlated with repair/remodel spending. The age of the housing stock is increasing with 15 million owned homes greater than 30 years old. This drives increased remodel spending. And household formations have steadily increased throughout 2018 driven by the millennial demographic. This trend is projected to fuel housing demand for the next decade. We believe these fundamentals are supportive of good, long-term growth.

We are also positive on our current markets. While we had a slow start to the year, we're encouraged by our recent trends and the acceleration of demand we saw coming out of the quarter and continuing into April.

Given the strong fundamentals, improving market conditions and our ability to execute our plans for 2019, we reaffirm our expectation to achieve 2019 adjusted earnings per share in the range of $2.60 to $2.80. With our strong balance sheet and expected full year 2019 cash flow conversion of over 100%, we intend to deploy approximately $600 million towards share repurchases for the full year of 2019, consistent with our balanced capital allocation strategy. With our focus on executing our strategy, coupled with our strong balance sheet and liquidity, we will continue to create shareholder value.

Lastly, please save the date for our planned Investor Day on September 17 in New York City where we will update you on our progress towards our previous goals and our long-term strategy.

With that, we'll open the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Nishu Sood with Deutsche Bank.

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Mahesh Madhava Dass, Deutsche Bank AG, Research Division - Research Associate [2]

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This is actually Mahesh in for Nishu. A question about rough plumbing. I think over the last 6 years, when you called out rough plumbing, it was always a driver of growth. And this time around, you're saying there was softness in rough plumbing. And I was just wondering if you could give us a little bit more insight into that.

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Keith J. Allman, Masco Corporation - CEO, President & Director [3]

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When you look at our plumbing segment and you compare where we have particular concentration in new construction, rough plumbing tends to be a little bit more skewed towards new construction than repair and remodeling. And that really is a primary driver of some softness that we've seen.

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Mahesh Madhava Dass, Deutsche Bank AG, Research Division - Research Associate [4]

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All right. And then given the combination of a slow start and the fact that you're maintaining your full year guidance, does that imply that you expect to come at the lower end? Or do you anticipate that the second half of the year will make up for the slow start?

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Keith J. Allman, Masco Corporation - CEO, President & Director [5]

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Well, we did expect a slower Q1 due to the pull ahead that we mentioned in a couple of segments. But I would say that the quarter was a little softer than we expected. We didn't expect the inventory rebalancing, and I would say that, that was probably a little worse than expected. But we did see things pick up in the back part of the quarter and into early April here. And it looks like the 25% tariff is coming off the table. So that could help us with volume a bit. So all in, we feel good about our ability to execute and achieve our plans, and that's why we're reaffirming our range of $2.60 to $2.80.

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Operator [6]

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Your next question comes from the line of Stephen Kim with Evercore ISI.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [7]

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So just want to clarify on the tariff guide. You are now assuming 10%, and you said that could provide a little bit of a lift. But just wanted to make sure that in your guidance, you are incorporating a -- 10% is maintained and doesn't go to 25%. Just want to clarify if that is different from what you were assuming last quarter.

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Keith J. Allman, Masco Corporation - CEO, President & Director [8]

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Yes. So if you may recall that we assumed that it was 25% for the year as we started out the year. So that's correct, Stephen, that we're assuming that it's 10% and that 10% stays throughout the year.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [9]

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Okay. And you had also assumed, I think, that you were going to recover the bulk of that through pricing actions. So the EPS impact probably wouldn't be that meaningful, I assume. It's -- in particular ...

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John G. Sznewajs, Masco Corporation - VP & CFO [10]

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And Stephen, I -- excuse me, Stephen, I should also point out when we assumed that we were going to recover in price, we also assumed, because of those pricing actions, that we may have some reduced volume as a result of those pricing actions. So just make sure you're clear on that.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [11]

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Yes. Thanks for that clarification. On Kichler, you talked about landscaping lighting being impacted by the -- by weather in the quarter. We also know there are obviously some other issues there at Kichler. So my question overall is can you give us a sense for how much of the Kichler sales decline you thought was impacted by weather? And how much was related to other issues? And when do we think we can see sales grow on a year-over-year basis in Kichler?

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Keith J. Allman, Masco Corporation - CEO, President & Director [12]

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When you -- we're off-plan a little bit on the revenue side with Kichler. We've took a fresh look at our long-term revenue forecast, and we have seen some softness in the lighting market overall going back to, let's say, the last quarter, 1.5 quarters of '18, and that softness has continued into the early part here in 2019, as I mentioned, probably some weather related due to landscaping. But also, I -- we believe that the industry is digesting the impact of tariff pricing, and we need to get through that. This industry has more of an impact from tariff as a proportion than most of our other segments for sure. We're also applying more discipline to our pricing as it relates to retail and wholesale programs. This is consistent with how we run our other businesses, and we think that's -- has an impact on the overall revenue in this business.

In terms, Stephen, specifically of growth in '19, we'll be challenged to achieve growth in 2019 at Kichler due to the slow start to the year and, as I mentioned, our discipline around pricing in both retail and wholesale programs. And with that impact on tariff, that will be a factor as well. We are confident that as we get through this rough start to '19, that lighting will grow in a similar trajectory to repair and remodel over the long term, and we're working on some exciting new programs to get after that. But in terms -- specific to '19 growth, it's going to be challenged in Kichler.

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John G. Sznewajs, Masco Corporation - VP & CFO [13]

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Yes, Stephen, I would supplement Keith's comments with this. On the operational side, I think we made some good improvement there, and there are some further opportunities for us to go after by implementing our Masco Operating System. So if I may, from a bottom-line perspective, we are -- we see good opportunity there, too, to continue to improve that business.

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Operator [14]

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Your next question comes from the line of Matthew Bouley with Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [15]

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I wanted to ask about the strategic review, kind of understanding there's different potential outcomes there. How do you guys think about capital deployment upon completion of these transactions? Is the expectation that you may buy back additional stock? Or are there, I guess, acquisitions that might be closer to the vest in paint or plumbing? Just kind of any thoughts there.

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Keith J. Allman, Masco Corporation - CEO, President & Director [16]

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Yes, in terms of use of proceeds, if we go in that direction, we really do not see a change in the capital allocation strategy that we've articulated and consistently executed against, that being consistent with regards to funding our business. We would use -- we've talked about the $600 million of share buyback in 2019. We certainly are continuing to look at acquisitions. We have a solid and strong pipeline that we're continuing to evaluate. But as I've said consistently, we'll be patient as it relates to acquisitions to ensure that we're deploying capital to businesses that have the right strategic fit and can give us the right return. So no real change to our capital allocation strategy.

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John G. Sznewajs, Masco Corporation - VP & CFO [17]

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Yes. And Stephen -- or Matthew, I'm sorry, maybe to give you a little bit more clarity, we will probably focus a little bit more on share repurchase activity if we were to go to the sale route, acknowledging the fact that we -- our balance sheet is in good shape now. So if an acquisition were to come along, we could use our balance sheet to help fund any acquisition that were to come along. So we wouldn't be afraid to deploy a little bit of those -- a fair amount of those proceeds, if that's the way it goes, to share repurchase activity.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [18]

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Okay. I appreciate that detail. And then secondly, just back to decorative. You mentioned the trends around sales pace accelerating in March and April in paint, but you changed the revenue guidance slightly. So is that simply just, as you mentioned, the slower expectations around Kichler? Or is that just a reflection of the 1Q results? I guess ultimately, is the expectation that sales growth 2Q to 4Q is going to be a bit slower than what we had previously envisioned?

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John G. Sznewajs, Masco Corporation - VP & CFO [19]

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Yes. In terms of the segment growth, I would say that probably it comes down to the 2 factors, as you mentioned. One, the Kichler revenue is -- was a little bit softer here in the first part of the year. And then also, we had a little bit softer first part of the year in our other businesses in that segment. And so that's why we're kind of guiding down to the lower end of that range here in -- for 2019.

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Operator [20]

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Your next question comes from the line of Michael Rehaut with JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [21]

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First question I had was on the improvement in trends that you saw during the year. You said that you started off the year a little softer due to weather. I was -- and then March kind of more met your expectations. I was wondering if you could give us a sense specifically by month how the sales progressed on a growth basis. How bad was it in January, February? And what type of rate did you finish the last months of the quarter in? And so far in April, are you seeing similar to March or perhaps a little stronger? Any color on the progression would be helpful.

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Keith J. Allman, Masco Corporation - CEO, President & Director [22]

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Mike, first to reset, just keep in mind, as you know, that Q1 is our smallest and most volatile quarter, often impacted by weather and some time -- the timing of purchasing from the prior year-end, et cetera. So we're encouraged by the turn in the trends that we saw in March. Volumes picked up noticeably for many of our products, including plumbing and paint. We're seeing a strong backlog. And reports from the field, for example, in our spa business, which we think is a great barometer for consumer spending, so that's going very well. So along with the macro fundamentals and what we're actually seeing in terms of orders and backlogs, we're also hearing anecdotal evidence from our customers and channel partners that the consumer is healthy, that there's spots of very good traffic in fact. And we're positive for the remainder of the year and feel that we're well set up for the $2.60 to $2.80 guidance that were given. In terms of specific month-by-month breakdown, I'll steer away from that but just tell you that we're -- we've seen at the end of the quarter nice pickup.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [23]

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No. That's helpful, Keith. I appreciate that color. I guess secondly, appreciate the transparency on Kichler. And obviously, there's sometimes growing pains, and it seems like you're doing a few things that are impacting the performance this year. I just wanted to get a sense -- and, kind of, recognize perhaps you'll have a greater, more detailed review at the Analyst Day, but ahead of that, just trying to get a sense of what landscape lighting represents as a percent of the overall sales, number one. And, number two, in terms of some of the proactive actions that you're taking from a pricing discipline standpoint, and I assume that's perhaps also you're reducing lower-margin SKUs or customers perhaps, what that might do to the overall margin profile of the business over the next year or 2 to the extent that you're able to fully implement that shift.

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Keith J. Allman, Masco Corporation - CEO, President & Director [24]

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So when you look at the mix of Kichler's business, decorative interior fixtures is an important large chunk of it. But landscape lighting is also a big portion of the business and important to us and one that we do very well when you go out and do channel checks and talk to the market. Kichler landscape lighting specifically is very strong with regards to the product and the service and durability, et cetera. So it's an important part of the business, and we do well with it. And when you have some tough weather, that can affect it. In terms of what we're doing and how we're driving this business, it's pretty consistent with how we've driven our other businesses with regards to the Masco Operating System, where we focus on quality of earnings and getting businesses better and aligned from a process and execution perspective before we focus on getting them bigger. So they'd get better before we get bigger is a common mantra that we drive, and that involves applying 80-20 disciplines to our product assortment and to our customers, et cetera. So I think that, coupled with, as John mentioned, we're exceeding our expectations as it relates to some of the cost-out and productivity and synergies that we're driving. So this is more of a top line issue than a cash flow or bottom line and return issue. So we would expect, as we drive both cost improvements on the procurement and on the logistics and some of those basics, as well sharpening our pencil on programs, that we'd expect ultimately that we'd continue to drive margin improvement in the business.

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Operator [25]

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Your next question comes from the line of Michael Wood with Nomura Instinet.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [26]

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First, just wanted to ask about with the decorative sales being pointed to the low end of the range, does that have an impact on where within the profit guidance 17%, 18% range we'd fall?

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John G. Sznewajs, Masco Corporation - VP & CFO [27]

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No, Mike, doesn't really have an impact at all on that.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [28]

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Okay. And then I wanted to ask about the inventory rebalancing that was unanticipated. Can you quantify that at all in paint and plumbing? And is the March-April strength being helped by restocking? Or has that not occurred?

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John G. Sznewajs, Masco Corporation - VP & CFO [29]

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So Mike, in terms of the destocking, now we probably won't go into the details of quantifying on those measures on either segment. In terms of are we seeing changes going prospectively, as you might imagine, going into the spring selling season, things are starting to pick up. Keith alluded to the fact we saw things get better in the tail end of the quarter. And so we may see a little bit of that coming back here as we start off Q2, and we're still working our way through all that.

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Keith J. Allman, Masco Corporation - CEO, President & Director [30]

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I would tell you, Mike, that our sell-through to the consumer, if you will, the POS is stronger than our sell-in to our customers.

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John G. Sznewajs, Masco Corporation - VP & CFO [31]

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Yes. And I would also point out, Mike, I think an element of our destocking particularly in plumbing is due to our exceptional service levels with our customers. Now I think that they're able to perhaps hold a little bit on to inventory. So this might be a little bit of a onetime item in terms of that because of the strength of our service capability.

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Operator [32]

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Your next question comes from the line of Susan Maklari with Crédit Suisse.

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Susan Marie Maklari, Crédit Suisse AG, Research Division - Research Analyst [33]

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My first question is just around the raw material side of things. Can you give us some color on what you've seen in terms of inflation? And any thoughts on how that may trend as we look to the remainder of the year?

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Keith J. Allman, Masco Corporation - CEO, President & Director [34]

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Susan, some of our commodities have moderated year-over-year but are up sequentially, if you will. So if we kind of take it -- walk through a couple of the commodities, the big ones, copper and zinc, in plumbing, that started to moderate, I would say, in the back half of 2018 and are down, call it, 10% to 20% year-over-year in Q1. But zinc in particular has bounced back. So probably a modest net benefit for the full year on those commodities.

In terms of TiO2 and resin, they're both still up year-over-year. TiO2 seems to have stabilized. However, we're still seeing pressure on resins. And obviously, oil prices are very volatile, so we're continuing to keep an eye on that. Not really a benefit for the year. In Cabinets, plywood distribution and logistics, they remain elevated, elevated, but I would say they've moderated a bit. So while some inputs have moderated, others remain elevated and increasing on a year-on-year basis. So we're really not anticipating much of a net benefit or tailwind from deflation in '19.

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Susan Marie Maklari, Crédit Suisse AG, Research Division - Research Analyst [35]

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Okay. And then within the plumbing segment, you noted that there was some impact from a negative mix shift, and that's actually an area of the business where we've been seeing more of a positive mix come through over the last few quarters. Can you just talk to that shift? And I guess how have you seen things as we've exited the quarter with the demand improving?

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Keith J. Allman, Masco Corporation - CEO, President & Director [36]

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Yes. I think that the large driver for sure of the mix shift was the inventory rebalancing at one of our wholesale customers. So when that happens and we have an influx, if you will, of wholesale orders -- excuse me, when the -- when a wholesale order is reduced, then that as a mix makes the retail orders the greater percentage and wholesale tends to be a better mix for us. So that's a real driver for us. So we see that improving as we go forward.

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Operator [37]

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

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [38]

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Keith and John, just a follow-up on decorative. If I look at the kind of implied sales progression to get to the lower end of the range for the full year, particularly given Kichler is a bit weak, it implies that the core paint business ramps up to -- back up to more mid-single-digit growth, potentially a bit better. So I just wanted to ask kind of is that the level of rebound that you've seen already occur into April? Or is there more wood to chop in terms of getting that acceleration? And anything specific in terms of programs we should be thinking about there?

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Keith J. Allman, Masco Corporation - CEO, President & Director [39]

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Yes. I think it's -- I'd say it' a little bit of a combination. But you've got the numbers down. You're right on how we're thinking about it.

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Michael Glaser Dahl, RBC Capital Markets, LLC, Research Division - Analyst [40]

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Okay. I guess as my follow-up, in terms of the split between Pro and DIY, it seems, obviously, DIY may be more impacted by the inventory issue. But just any color you can give us on expected relative growth rates for Pro and DIY implied by your full year guidance.

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Keith J. Allman, Masco Corporation - CEO, President & Director [41]

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Well, I think we're expecting the DIY market to be flattish, maybe even to slightly down in 2019, and that's the majority of our sales. There's a little bit of, as we talked about, softer market conditions that we're experiencing. That will have an impact on the full year. The inventory rebalancing certainly is a piece of that. We continue to be bullish on our -- excuse me, on our Pro business. We're continuing to invest in that. We talked about accelerated investments that we have in this quarter and the fact that we're not going to really anniversary our incremental investments in '18 until the third quarter. So we continue to think that, that growth will be...

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John G. Sznewajs, Masco Corporation - VP & CFO [42]

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Yes. The Pro side, yes, it should be kind of high single digits. It's kind of the way we're viewing it here in 2019, Mike, and -- or -- yes, in kind of low single digits for the DIY side of the business.

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Operator [43]

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Your next question comes from the line of Stephen East with Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [44]

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This is actually Truman Patterson on for Stephen. Just wanted to touch on the architectural paint side of the business. A couple of your competitors produced up first quarter revenues, which might imply a little bit of at least near-term share loss at Behr. I guess do you guys think that this is actually happening? And if not, could you guys just elaborate a little bit on it?

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Keith J. Allman, Masco Corporation - CEO, President & Director [45]

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I think you have to pull out the pull forward when you do that. I think we're hanging right in there to holding our share to maybe gain a little bit.

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John G. Sznewajs, Masco Corporation - VP & CFO [46]

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Yes. And the inventory rebalancing that was a factor in the paint business as well in the first quarter, there's 2 -- I mean, if you take a look at those 2 factors, we don't think we're looking -- we're losing any share.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [47]

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Okay, okay.

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John G. Sznewajs, Masco Corporation - VP & CFO [48]

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Yes, yes. And I would tell you, Truman, that sell-through is probably better than sell-in in the quarter.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [49]

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Okay. Okay. And no SKU loss or anything within the retailer?

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Keith J. Allman, Masco Corporation - CEO, President & Director [50]

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No.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [51]

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Okay. Okay. Also, on the decorative architecture side, op margins declined and missed your guidance by a little bit. Was this more driven by paint decrementals from the weak volumes or from Kichler and the tariff impact on the margins?

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John G. Sznewajs, Masco Corporation - VP & CFO [52]

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I'd say it was -- had to do more with the volumes -- lower volumes on the paint side of the business and as well as this is our first quarter of Kichler, the full quarter of Kichler. And it's a seasonally weaker quarter for them. So that was a pretty significant impact on lower margins here in Q1 as well.

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Keith J. Allman, Masco Corporation - CEO, President & Director [53]

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And also, we had incremental investment for the Pro.

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John G. Sznewajs, Masco Corporation - VP & CFO [54]

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That's a good point.

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Keith J. Allman, Masco Corporation - CEO, President & Director [55]

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So that's a factor. So I think if you look at -- I won't specifically quantify, but I think the volume was the main driver simply because -- certainly a full quarter of Kichler and the fact that this is a lower quarter for Kichler. And then incremental investments. D&A was up a little bit with the full year acquisition amortization. But I think those first 3 are the main drivers.

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Operator [56]

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Your next question comes from the line of Keith Hughes with SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [57]

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I guess 2 questions. One, on the inventory rebalancing, do you feel like here in April that that's completed for both plumbing and paint?

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Keith J. Allman, Masco Corporation - CEO, President & Director [58]

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I think so, yes.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [59]

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Okay. And then second question within paint. Is the DIY market for you as affected -- actually, is the Pro market for you as affected by weather as we see on some of your other competitors in sort of the Pro?

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Keith J. Allman, Masco Corporation - CEO, President & Director [60]

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I think it's -- I don't want to talk about our competitors, but I think it's pretty similar. Our Pro volume tends to be skewed a little bit more towards exterior, and so that would be affected by the weather. I'd say it's about the same.

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Operator [61]

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Your next question comes from the line of Ken Zener with KeyBanc.

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Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [62]

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John, could you talk about the earnings weighting in the first half of the year versus the second half just to give us kind of a sense of how much momentum we could expect compared to prior years?

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John G. Sznewajs, Masco Corporation - VP & CFO [63]

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Sure, Ken. And we said on our fourth quarter call, we thought the first quarter was going to be a little bit softer partially due to the sales pull forward that we called out on the earnings call and partially due to the -- we knew the first quarter of Kichler is a seasonally weaker quarter. So we kind of had expected that going into the beginning of the year. Keith mentioned a couple of things that were unanticipated. That said, as we see the progression for the next 3 quarters, I'd say it's going to be just a steady progression from here. I think the second quarter, we had -- you'll recall we had some good strength in a couple of our businesses partially due to the fact that we launched the Menards program really in earnest in Q2 of last year. So we saw some good growth in that business.

And so I think it would be a steady ramp from here with arguably the second half being better than the first half of the year is the way we're seeing things play out here. If you can take a look at the comps that we have against 2018, I think that is probably a good indicator of how you should see the balance of the year play out. So that's kind of the way we're thinking about it now, Ken.

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Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [64]

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And if you could comment on the -- I know it's small, but the U.K. window business.

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John G. Sznewajs, Masco Corporation - VP & CFO [65]

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Sure. As you might expect, the U.K. window business, to your point, is relatively small. And no surprise that there's pockets of weakness and softness over in the U.K. in advance of Brexit. What we are seeing there is that new home construction over there, which we play a little bit in, was up very low single digits, but the remodeling market was down fairly significantly, call it mid-single digits in Q1. And so that really impacted our business there pretty significantly. No surprise. But as Keith mentioned, the progress we're making on evaluating these businesses is continuing, and we look forward to talking to everyone or making everyone aware once our decision is complete.

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Operator [66]

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Your next question comes from the line of Phil Ng with Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [67]

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So with your strategic decision on windows and cabinets, certainly, you'll be a more focused company. What type of impact do you anticipate it would have with negotiations with your customers and suppliers given your reduced scales? And any potential dyssynergies we should be thinking of?

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Keith J. Allman, Masco Corporation - CEO, President & Director [68]

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Well, our strength or our importance to our customers is really driven by what we bring with brand service and innovation primarily across our -- that core part of our business in paint and plumbing. So we don't anticipate any significant change in our customer relationships across our paint, plumbing, hardware businesses should we choose to go a divestiture route with these businesses. I think there -- our relationship, as I said, is driven by the things we do well, and it's something that we earn. It's not -- we don't anticipate any degradation to that based on a potential sale.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [69]

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Okay. That's really helpful color. And then on plumbing, it was little weaker. You obviously had the noise with pull forward. But with new construction still pretty soft to start the year from a stores perspective and potential impact in your rough plumbing business, will that be a potentially bigger drag in 2Q? Or you've seen enough in terms of orders and trends where you feel pretty good that orders -- I mean, volumes in that plumbing business will kind of bounce back in that mid-single-digit range?

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Keith J. Allman, Masco Corporation - CEO, President & Director [70]

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Yes. We don't anticipate it being a bigger drag going forward.

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Operator [71]

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Your next question comes from the line of Scott Schrier with Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [72]

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I wanted to ask if there's any update to how you're thinking about tariffs. And I know you were kind of reevaluating whether or not you were going to look into supply chain changes or anything. So I know it's kind of a moving target, but any color you can give from that front will be helpful.

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Keith J. Allman, Masco Corporation - CEO, President & Director [73]

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I think probably the most relevant update is how we're thinking about it in terms of the probability of the 25%. So we, as I mentioned, came into the year with our base plan assuming that the 25% was going to go into effect, and our assessment now is that it won't. We believe that the 10% will stick, but it's variable. In terms of update of what we've been able to accomplish, it's a combination, in some cases, of moving product out of China into a different supply chain. In other cases, it's working with our Chinese suppliers on value engineering and cost reduction and some cost sharing. And what we haven't been able to recover, we've been effective in going out and getting price. So I think the update is we don't believe that 25% -- we don't think that 25% is going to happen, and we do think that 10% is going to stick. We believe that it is extremely variable, and we need to be fleet on foot with regards to supply chain, cost out and pricing. And we -- the other part of the update would be that we've been pretty successful, from my assessment, in doing those 3 things up to this point.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [74]

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For my follow-up, I wanted to ask a little bit about -- for the strategic review, if that does go to the divestment route, and you're talking about, well, buybacks seem to be the priority for capital allocation or internal investment. But if you were to look in the external opportunities, you talked about your pipeline, how attractive are these opportunities? Are seller expectations or multiples elevated? Does it make sense when we're arguably later in the cycle? So just wanted to see how things are looking from the M&A perspective.

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Keith J. Allman, Masco Corporation - CEO, President & Director [75]

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Yes. I think when we think about the strategic alternatives, I think it's good to reset the key drivers of why we're doing this. And I've been in the seat here as CEO for 5 years. And when we came in with the new team, we really -- we committed to doing 3 things. One was driving the full potential of our business through the installation of a common operating system. Two was to drive leverage across our businesses, of course, in supply chain and procurement but, more importantly from my perspective, in processes and people. And then thirdly, to improve our portfolio, to make it more R&R focused, less cyclical, higher margin, more dependable because we felt that was good for the shareholders and would add value. And we began in earnest right away when I came onboard to do that with the spin-off of our services business. And that has been very successful for the shareholders. If you look at their market cap now and our total, it's -- that was good for the shareholders. We also said with regards to the portfolio that we felt the best avenue for creating shareholder value was to fix our cabinet and windows businesses, and we've done that. So this is a natural progression of what we've set out as our strategy, to continually improve our portfolio to drive shareholder value as it relates to reduced cyclicality and more repeatability and higher margin. So while it's -- and I know your question was directly related at use of proceeds. I think more fundamentally, this strategic alternative assessment is really focused on creating shareholder value and continuing with the track record that we have of doing that. Now with regards to the attractiveness in our pipeline, we really haven't seen a -- too much of a significant change in valuation and expectations on the sellers. And that doesn't slow us down. We continue to cultivate, we continue to work for opportunities and we have a very robust pipeline and some exciting opportunities. But we're going to be patient, and we're going to ensure that the targets we're looking at are strategically right for us and that we believe fully that we can earn the return that we expect to earn when we make an investment. It doesn't feel to me that valuations have as of yet really loosened up. It's -- the sellers are -- it's a bit of a slow start in the quarter, and they're not particularly interested in selling off of a bad quarter. They want to sell off of momentum. So it's a volatile period if you put yourself in the seat of a seller, and we really haven't seen that much change in terms of expected valuations.

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John G. Sznewajs, Masco Corporation - VP & CFO [76]

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And Scott, maybe just one other piece of information because we get this question quite a bit. Much more tactical than Keith's answer is the tax basis of these businesses. And just for everyone's benefit, the tax basis of this group, the 3 businesses collectively, is about $300 million. So I think that helps frame things for people as they think about, if we go to the sale route, the expected net proceeds from those businesses.

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Operator [77]

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Your next question comes from the line of John Lovallo with Bank of America.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [78]

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It's actually Pete Galbo on for John. John, maybe you can just elaborate a little bit on the double-digit growth in cabinets, new construction that you guys saw in the quarter. I mean, is that mostly just loaded on the Menards side? Or what kind of drove that given the flattish new construction environment in 1Q?

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John G. Sznewajs, Masco Corporation - VP & CFO [79]

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Yes. So I think it's -- it doesn't necessarily relate to Menards because that's not -- it's R&R. It had to do with the fact that -- you may recall over the course of really 2015 through 2017, we pulled back on our -- a lot of our new construction business because it was less than profitable. So as we saw some growth here in the first quarter, it's really off of a relatively easy comp compared to the first quarter of 2018.

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Peter Thomas Galbo, BofA Merrill Lynch, Research Division - Associate [80]

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Got it. Okay. And maybe just one more on the strategic review and if you're willing to comment at all. I mean kind of what level of inbound interest have you guys received since kind of putting these 2 businesses out there as potential divestiture candidates? Anything you're willing to comment on there?

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Keith J. Allman, Masco Corporation - CEO, President & Director [81]

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Very good. These are attractive businesses that have leading brands in their categories, good, strong cash flow. We've done a good job with putting in good teams of leaders in these businesses, and we've improved them tremendously, but there's still improvements to go. So these are good businesses, real solid market share, brands, innovation pipelines, et cetera. So we're seeing very healthy interest.

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Operator [82]

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Your next question comes from the line of Adam Baumgarten with Macquarie.

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Adam Michael Baumgarten, Macquarie Research - Analyst [83]

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Just quickly on plumbing. You guys mentioned wholesale destocking. Can you talk about the trends you saw in U.S. retail?

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Keith J. Allman, Masco Corporation - CEO, President & Director [84]

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In terms of destocking?

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Adam Michael Baumgarten, Macquarie Research - Analyst [85]

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No. In plumbing, what kind of sales trends you saw in U.S. retail.

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John G. Sznewajs, Masco Corporation - VP & CFO [86]

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Yes. Our retail business was okay kind of Jan and February where we're a little soft but, again, similar to the trends that we saw in the overall market. So some pickup as we went into margin the first part of April. So it's not inconsistent with what we saw across our broader portfolio of businesses.

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Adam Michael Baumgarten, Macquarie Research - Analyst [87]

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Got it. And then just on cabinets, I mean, you haven't changed the guide there even with the kind of strong start to the first quarter. I know that kind of ex Menards, you're kind of implying slightly down volumes. And I think part of that, at least last quarter, was handicapping for some of the tariffs that were potentially going to come through. Is it safe to assume given your more benign look on tariffs that the kind of underlying ex Menards cabinets growth outlook is a little bit better?

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John G. Sznewajs, Masco Corporation - VP & CFO [88]

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Yes. I'd say it might be just slightly better at about -- I wouldn't say it's materially better than what we were thinking about in the beginning of the year.

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Operator [89]

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Your next question comes from the line of Justin Speer with Zelman Associates (sic) [Zelman & Associates].

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Justin A. Speer, Zelman & Associates LLC - MD of Research [90]

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Wanted to take the question back to Kichler and thinking about -- just if you could take us back down memory lane on what -- if you could remind us what you were thinking about the opportunity with that business when you bought it versus maybe the reality of what it is today now that you're expressing this, I guess, more negative tone with the impairment, the weakness in the underlying markets. But I want to understand what the right annualized revenue and margin profile for that business is now going forward now that you have it in your hands for over a year.

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Keith J. Allman, Masco Corporation - CEO, President & Director [91]

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The underlying thesis when we looked at it and we ultimately ended up acquiring it was that it was a large market with fragmented competition that had demonstrated growth at or slightly above the base R&R market, and it demonstrated an ability to get price commensurate with commodities. So what we saw in this business was an opportunity to apply some of our operating system techniques to take cost out, that if we could go in and apply and work with them as it relates to demand generation through influencer advocacy, and that we could learn from them on how to more quickly identify consumer trends. There's also an opportunity that we saw and we are taking advantage of as it relates to supply chain and new product development processes to shorten that cycle.

So as we get in here -- and look, what that -- those fundamental underlying premises, and as we know the business better, have not changed. What's changed and what we didn't anticipate was tariffs. And this business is, for the most part, procured in China, and so there's issues associated with the pricing and elasticity that we're working to better understand. But fundamentally, what we've learned about their presence in the market, their presence in the channels and how they're appreciated with the distribution is unchanged, and we're going to continue to drive it. We still feel good about it.

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John G. Sznewajs, Masco Corporation - VP & CFO [92]

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Yes, Justin, what I want to make certain we've got greater clarity for everyone on is sensitivity of that tradename calculation to small movements in top line. I'll get into some granularity here but because it's -- the tradename is based off of the projected revenue of the business. So when you value assets for doing purchase price allocation, you don't have a lot of room to move particularly on the tradename before you may be in an impaired situation. And so slight movements in top line projections can put you in such a position. So I don't want you to walk away from the conversation that we are particularly troubled by what's taken place at Kichler. It's just the very sensitive nature of the calculation that's caused this impairment.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [93]

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So I guess a follow-up on that, I guess, number one, was there any lost market share associated with this? Because it was my understanding that most of your competitors were also kind of similarly sourced or they -- at least that the supply chains were similarly arranged. And then secondly, with the tariff, potentially the prospect of that coming off, does that potentially just flip the scripts back to what you were originally thinking? Or is there something maybe larger underneath, maybe a lost share or something that took place or maybe more difficult to get back even with tariffs essentially being removed?

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John G. Sznewajs, Masco Corporation - VP & CFO [94]

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Yes. So we don't -- and it's probably -- it's a little bit too early to tell whether we lost share. We don't think we've lost any share, but we're still -- when you are up against a bunch of private competitors, it's always tough to determine share positions on a short-term basis. And so -- but at this stage, we don't think we've lost any meaningful share any place. So we -- that does not impact. In terms of the tariffs coming off, does that change our thinking longer term? Yes, it could. We got to see that come through. But in terms of what we've done, we had to go with kind of the facts and circumstances as we know them today.

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Operator [95]

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And gentlemen, your final question comes from the line of Eric Bosshard with Cleveland Research.

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Eric Bosshard, Cleveland Research Company - CEO [96]

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Just a follow-up on Kichler. I understand the disruption of the tariffs and of weather. But in terms of the ultimate destination with this business, the targets that you bought it in terms of your market share and the margin opportunity, do you feel different now than you did a year ago when you bought the business?

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Keith J. Allman, Masco Corporation - CEO, President & Director [97]

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No, we don't. We think that this business is going to grow at or slightly above the overall repair and remodel market, and we're driving towards continued margin improvements. We're overperforming our plan, and we're doing better than I expected as it relates to some of the cost outs that we're driving. So as John mentioned, with the accounting calculations for tradename, it's hypersensitive to revenue. But there wasn't a goodwill write-down that we took here or write-downs associated with the cash flow. So that's more the issue.

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Operator [98]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.