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Edited Transcript of MAS earnings conference call or presentation 30-Oct-19 12:00pm GMT

Q3 2019 Masco Corp Earnings Call

Taylor Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Masco Corp earnings conference call or presentation Wednesday, October 30, 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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* Eric Bosshard

Cleveland Research Company - Co-Founder, CEO, Co-Director of Research and Senior Research Analyst

* 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

* Kenneth Robinson Zener

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

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Megan Talbott McGrath

The Buckingham Research Group Incorporated - Director

* 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 - Equity Analyst

* Stephen Kim

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

* 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, ladies and gentlemen, and welcome to Masco Corporation's 2019 Third Quarter Conference Call. My name is Towanda, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes only. (Operator Instructions)

I will now hand the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin.

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

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Thank you, Towanda, and good morning. Welcome to Masco Corporation's 2019 Third 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 third 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.

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 includes non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile 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 businesses as discontinued operations for all periods presented.

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. Good morning, everyone, and thank you for joining us today.

In the third quarter, our top line increased 3%, excluding the impact of currency, driven by growth in plumbing and strong performance in our paint business. Operating profit grew 8% and operating margins expanded 80 basis points to 16.7% in the quarter due to higher volume, pricing actions and disciplined cost control. Our EPS grew 11% to $0.68 per share.

Turning to our segment performance. Our Plumbing segment grew 1% or 3% in local currency. Delta had a record sales quarter led by growth in bathing and sanitary ware products; Brizo, our showroom brand; and pricing actions. Additionally, I'm proud that, for the fifth time, Delta Faucet Company achieved the WaterSense Sustained Excellence Award. This is the highest partner recognition from the U.S. EPA awarded for Delta's continued outstanding efforts to advance the WaterSense program and promote water efficiency.

Watkins also had another record sales quarter as it continued to gain share in the spa market with its broad assortment of price points, programs and innovative products.

International Plumbing grew 5% in local currency due to strong growth in Germany, China and France as Hansgrohe launched new products into the market, as we discussed last quarter.

In our Decorative Architectural segment, sales grew 5%. This growth was led by low double-digit growth in our Paint business, including high single-digit growth in DIY paint and double-digit growth in pro paint.

We capitalized on pent-up demand and gained share in the paint market with our industry-leading brands, quality and service, along with great execution by our Behr team and our partner, The Home Depot. During the fourth quarter, we will continue to work with The Home Depot to enhance the shopping experience with new color centers, new color selection tools and new products.

Moving on to Cabinetry. Our cabinet sales declined 3% in the quarter. This decline was largely due to mix as our lower price point, Merillat, Quality and Cardell brands performed very well in the quarter. Despite the lower sales, we expanded margins in this segment by 210 basis points in the quarter and achieved operating margins of 11.7% due to pricing actions and cost control.

Turning to capital allocation. We continued our share repurchase activity in the quarter by repurchasing 3.8 million shares for approximately $151 million, bringing our year-to-date share repurchase total to $440 million. As it relates to our divestitures, we completed the divestiture of our UK Window business in early September and are very pleased to have signed an agreement to divest Milgard for $725 million. We anticipate closing this transaction in the fourth quarter and expect net proceeds after tax and expenses to be approximately $560 million. We will likely deploy $200 million of these proceeds towards retiring our March 2020 notes and the remainder towards share repurchases during the fourth quarter. In addition, we are making good progress on the sale of cabinetry and we remain on track with that process.

Lastly, due to the treatment of our Windows businesses as discontinued operations and our continued performance as expected, we are narrowing and updating our anticipating -- anticipated earnings per share for 2019 to be in the range of $2.52 to $2.56 from our previous range of $2.62 to $2.72.

Now I'd like to turn the call over to John, who will go over our operational and financial performance in 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 [Steve] 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 6. Sales increased 2% and grew 3% in local currency. Foreign currency translation unfavorably impacted our third quarter revenue by approximately $15 million. In local currency, North American sales increased 3% in the quarter. This performance was driven by volume growth in our paint business and disciplined pricing actions across all segments, which was partially offset by lower volumes in our lighting and hardware businesses and a mix impact in our chemistry business. In local currency, international sales increased 5% in the quarter, with strong growth in Central Europe and China. Gross margins were 34.4%, up 80 basis points.

Our SG&A as a percent of sales matched prior year at 17.7% as we remain focused on cost control. We delivered solid bottom line performance as operating income increased 8% to $326 million with operating margins expanding 80 basis points to 16.7%. Our EPS was $0.68 in the quarter, an increase of 11% compared to the third quarter of 2018. We are narrowing and updating our annual EPS estimate range to $2.52 to $2.56 per share to reflect discontinued operations accounting for our Windows segment. This compares to a full year 2018 adjusted EPS of $2.39 per share with Windows in discontinued operations. Refer to Slide 18 in the appendix of our earnings call deck for historical quarterly information restated for the Windows segment in discontinued operations. This EPS estimate range also assumes that the List 3 tariffs remain at 25% and the List 4 tariffs remain at 15%, a portion of which was effective on September 1. Any changes to announced tariffs at this point in the year will have minimal effect on our fourth quarter results.

Turning to Slide 7. Plumbing segment sales increased 1%. Excluding the impact of currency, sales increased 3%. Foreign currency translation unfavorably impacted the segment sales by approximately $15 million in the quarter.

North American sales increased 2% in local currency in the third quarter against a tough 9% comp in the third quarter of 2018. Growth was led by our Spa business, which delivered another record sales quarter. Delta also achieved another record sales quarter through pricing actions and growth in our showroom-oriented Brizo products and the Delta-branded bathing and sanitary ware products.

International plumbing sales increased 5% in local currency. This performance was driven by Hansgrohe's growth in Central Europe and China as they experienced strong demand for its recently introduced products.

The segment's operating profit growth of 5% was driven by higher volume and pricing actions. For full year 2019, we continue to expect plumbing sales growth to be in the 1% to 3% range in margins similar to 2018 as we feel more of the cost impact of tariffs in the fourth quarter. And as a reminder, our 2018 fourth quarter results benefited from approximately $10 million of sales pulled forward.

Turning to Slide 8. Decorative Architectural Products grew 5%. This performance was driven by low double-digit growth in our paint business, with high single-digit growth in DIY and double-digit growth in Pro. Exterior paints and deck stains experienced strong growth in the quarter due to pent-up demand from earlier in the year and solid execution by our Behr team and our channel partner. Strong paint sales were partially offset by lower sales in our lighting and builders hardware businesses, as disciplined pricing actions impacted volumes in the quarter.

Operating income in the third quarter grew compared to prior year due to increased volume, selling price increases and a continued focus on cost control and productivity initiatives, partially offset by higher year-over-year commodity costs in paint, lighting and builders hardware.

For full year 2019, we continue to expect Decorative Architectural Products sales growth will be in the 1% to 3% range, including the benefit of the Kichler acquisition, and operating margins will be in the higher end with a 17% to 18% range, driven by our strong performance in cost control year-to-date.

For the fourth quarter, recall that we faced a difficult 8% sales comp as we experienced approximately $20 million in sales pulled forward in Q4 2018, and we will feel more of the impact of tariffs on material costs in the fourth quarter of this year.

Turning to Slide 9. In the Cabinetry segment, sales decreased 3% in the quarter. This performance was driven by a softer market, mix and a difficult 11% sales comp against the third quarter of 2018, when excluding the Moores divestiture. This decline was partially offset by pricing actions and growth in our lower price point offerings.

Segment profitability increased in the quarter by $4 million with margins of 11.7%, an increase of 210 basis points, driven by pricing actions and cost control partially offset by mix. We continue to expect full year 2019 sales growth between 0% and 3%. However, based on our year-to-date performance and continued cost control, we now expect full year margins to be approximately 10.5%, an improvement of approximately 150 basis points from our prior guidance.

And turning to Slide 10. Our balance sheet remains strong, with net debt-to-EBITDA at 1.8x, and we ended the quarter with approximately $1.5 billion of balance sheet liquidity. Working capital as a percent of sales improved 20 basis points versus the prior year to 16%. As a result of moving our Windows business to discontinued operations, we now expect full year working capital as a percent of sales will be approximately 15.5%. During the third quarter, we continued our focus on shareholder value creation by repurchasing 3.8 million shares for approximately $151 million.

Lastly, as Keith mentioned, we were pleased to enter into an agreement to sell Milgard Windows in September, which will likely close in the fourth quarter. We expect the proceeds after tax and expenses to be approximately $560 million from this transaction. At this time, we anticipate using the proceeds to pay down our $200 million debt maturity and for approximately $400 million of share repurchases.

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. I'm pleased with our performance so far in 2019, and the second half of the year is progressing as expected. Our teams have done a tremendous job to position us to offset the impact of tariffs while delivering on our commitments. Our markets are largely performing as planned, with modest improvement expected in the second half of 2019. Furthermore, the fundamentals of our markets remain solid and supportive of long-term growth. Existing home sales have improved to nearly 5.4 million units for the past 3 months, up about 3% from last quarter. Home prices, which are highly correlated with repair and remodel spending, continue to appreciate, and the consumer remains healthy with wages continuing to grow and unemployment at a 50-year low.

As many of you know, we recently held an Investor Day where we outlined our strategy and the initiatives that will drive growth over the next 2 to 3 years. In addition, we further detailed the next chapter of Masco as a focused and more resilient plumbing and decorative products company.

We have already begun to execute on these strategies with the completed divestiture of our UK Window business, a signed agreement to divest Milgard for $725 million and very good progress with the Cabinetry sale process.

Against solid fundamentals and focused execution on our strategies, strong cash flow and balanced capital allocation, we will continue to create value for our shareholders.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Stephen Kim with Evercore.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [2]

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Congratulations on a good quarter. I wanted to ask, if I could, about your Plumbing business, in particular the international business, which seems like it performed well. You attributed that to Germany, China and France. Last quarter, I think you called out some weakness in Lat Am, Italy and Turkey. But what I'm trying to understand is you attributed a lot of the strength to introducing new products into the market, and I was wondering if you could help us understand how much of a strength we saw there in the plumbing international was due to like a load-in kind of a process. How much of it do you see as underlying growth which can continue and whether the markets you called out last quarter, which were soft, have improved or if Germany, China and France just simply offset that through the new products?

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

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I'll take that one, Stephen. The overall growth was more from the good sell-through of those products than it was load-in. There was always a little bit of load-in in the channel. But fundamentally, those products are taking off well and they're well received.

With regards to Latin America and Italy and Turkey, I haven't seen anything that's remarkable with regards to how those are performing. In other words, really not much of a change there from how they performed. It's really been a case of solid performance and good traction with our new products as we look across Central Europe and China. Our brands, the Hansgrohe and the high-end Axor brand, is very well-regarded in that space when you look at both through distribution and particularly when you look at the international projects, hotels, cruise ships and the like. So we have strong brands and the new products are doing well, more sales -- more from the sales of those products. And in some of the challenged markets, they kind of remained stable, where they were when we talked last quarter.

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

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And Stephen, the one thing I would probably add to Keith's comments would be that if you look at our performance in the third quarter of 2018, I think we're up against a relatively easy comp here in the third quarter of 2019. So I think that also aided the top line growth that you saw.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [5]

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Okay. Got it. That's helpful. Second question relates to the cabinet business, which put up a very strong margin in this quarter, stronger than we were expecting. I know you took your guide up for the year. I was curious as to -- with -- as we think about the fourth quarter though, it seems based on our numbers that we're looking for a pretty -- or you're looking for a pretty noticeable declining momentum in the margin there. So I was just curious if you could comment on if there's any change in the margin trajectory in cabinets that is tied to actions that are worth calling out. And has there been any shifting of overhead out of cabinets in the period that we also -- that are also worth calling out?

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Keith J. Allman, Masco Corporation - CEO, President & Director [6]

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No real change in the margin's trajectory. There hasn't been a shift of overhead, if you will, out of the business. Stephen, with regards to the top line, we are lapping a pretty soft Q4 from 2018. If you recall, the activity in this part of our business really slowed down late last year, and we don't anticipate that happening. And we're also launching some significant new products in the quarter. A few new doors, more of the focus is on finishes and paint and the like. And we have, as you may recall, put in some technology in paint. And we think that has us in a very competitive position where we can do color changeovers almost in a batch of 1-type scenario with very minimal loss of productivity. So we're able now to launch more frequently new colors and do it in an efficient way. I think you see that when you look at the very competitive margin that we have against some of the broader industries and at relatively low volume when you look at where we stand. So we're working hard to leverage those investments. We're up against a little bit of a soft comp, but no real change in terms of any kind of overhead.

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Operator [7]

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

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John Lovallo, BofA Merrill Lynch, Research Division - VP [8]

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The first one is the -- you gave us the EPS guide, which is helpful. I'm just curious if there's any other moving pieces for a comparable EBITDA forecast for the full year. It looks like D&A is expected to be $145 million. And the interest, it looks like it's unchanged. Are there any other pieces? Or maybe could you just provide us with a 2019 EBITDA guide?

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John G. Sznewajs, Masco Corporation - VP & CFO [9]

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John, maybe I'll push it a different way with the disc ops, maybe give everyone a little bit better color as to how this impacted in pulling the Windows business out of continuing ops and then to disc ops, affected more of the bottom line and maybe not on EBITDA, but help -- maybe help get you there. If I don't get to your question, just let me know.

So if you think about as we exited the second quarter, because right now, consensus estimate on us is a little tough because people -- some people have already pulled Windows out. But if you think about it, at the end of the second quarter before anyone started pulling it out, our consensus for Q3 at that time was $0.71 per share. And a consensus at that time for the Windows segment was about $21 million. Now the one thing you have to add to that, when you pull Windows from continuing ops into disc ops, you have to add back about $1 million in corporate expense because that was allocated to the Windows segment. So call it $22 million. That $22 million is roughly $0.06 a share. So that $0.71 consensus for Q3 should have been about $0.65 for Q3 once you pull the Windows business out. And then if you take a look at that same kind of math for the full year, John, our full year guide at the time was $2.62 to $2.72, again, as we exited the second quarter. So the midpoint of that range was $2.66. Now when you remove the Windows from continuing ops and put it to disc ops, you pull about $40 million of operating profit at consensus out. But then you have to add back about -- add to that, I should say, about $5 million of corporate costs to come back to Masco, so about $45 million in aggregate. Well, that $45 million in aggregate adds up to about $0.12 in EPS. So if you think about $2.66 midpoint less that $0.12 is about $2.54 a share, which is right in the heart of our current revised range of $2.52 to $2.56. So right in the spot where we thought we would be as we exited the second quarter. So I'm hopeful that's helpful and hopefully that answers your question. If it didn't, let me know.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [10]

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Yes, no. That's very helpful. And then as a follow-up, the debt paydown that you guys are talking about now, that seems like maybe a slight change of plan for the sale proceeds. Am I thinking about that right? Or was this kind of contemplated all along?

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John G. Sznewajs, Masco Corporation - VP & CFO [11]

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It's really been contemplated all along, John. Recall that the March 2020 maturity, again, it was only $200 million, it's not index eligible. So to refinance that, we had always contemplated paying that down. And we did also get that out and mentioned it at the Investor Day. So I don't think there's anything -- no, there's no new news there on that one.

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Operator [12]

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Our 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 [13]

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Just a follow-up on the guidance, that reiteration at the midpoint, excluding the discontinued ops. I see that cabinetry and decorative look like they were increased in terms of the profitability from the prior guidance. So can you just talk about what the offsets to that were?

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John G. Sznewajs, Masco Corporation - VP & CFO [14]

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So I think, John -- Mike, sorry. The offset to that would be perhaps a little bit lower volume that we experienced here a little bit in Q3 in the Plumbing segment and a little bit in the Cabinetry segment as well as some of the -- that particularly might continue as we go into the fourth quarter. As we've been putting in pricing, some of that might have to do a little bit of -- with price elasticity there.

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Michael Robert Wood, Nomura Securities Co. Ltd., Research Division - Research Analyst [15]

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Okay. And did the exterior paint and stain boost that you talked about have more of an impact in either Pro or DIY? So could you just talk about what you saw, I guess, in growth for those 2 subsegments in interior?

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

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If you look, Mike, paint volume was probably the largest contributor in this segment in terms of growth. We did have some price, but we're pleased with the low double-digit growth that we saw in the segment. It feels like we gained a bit of share both in Pro and DIY. Our investments continue to pay off in the Pro, and we continue to expand our capabilities. Pleased with the rollout of the new Color Center along with The Home Depot. That's going well. That really enhances the shopping experience and leverages our leading quality position to great value. So we think we outperformed the market a little bit. Understandably, it is hard to pin the exact size of a market in quarter -- from quarter-to-quarter. But with our low double-digit growth, we think we had a good quarter.

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

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Yes, Mike. And maybe to be more specific to the question, we don't think we saw a real distinction between performance in exterior and deck stains in Pro versus DIY. We think it was pretty consistent across both of those end customers.

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Operator [18]

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

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [19]

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John, thanks for the clarity on the moving pieces around the guide. A follow-up to your response to one of Mike's questions on plumbing and the elasticity comment, I think that was an area that Keith focused on. You focused on that at the Investor Day as well. So just hoping you could give us a little more color on how the environment has evolved over the past couple of months as you've looked to implement additional pricing to cover tariffs and just how you're thinking about the price volume tradeoff right now in plumbing specifically.

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Keith J. Allman, Masco Corporation - CEO, President & Director [20]

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Mike, this is Keith. We really haven't seen a change in terms of the elasticity or the dynamic of volume as it relates to pricing. Continue to see that the lower price point products tend to be more sensitive to price movement. Understandably, there still is a lot of pricing activity occurring in the market, so it remains a challenge, frankly, to understand the specific [SKU] level elasticity when the competition around that particular price point and the assortment is so dynamic. So we feel we have a good handle on the elasticity, and we have factored that in as it relates to how we go out with subsequent price increases to try to hit that sweet spot and lessen the volume impact.

With regards specifically to where we stand in the tariffs, we've largely implemented price and other measures to offset the 25% List 3 tariffs. And we continue to work, and we'll -- it's very dynamic and we'll see what happens ultimately in the second part of List 4 and whether or not there's any changes to List 3. So it's a dynamic environment. But fundamentally not a lot has changed with regards to what we're driving. We're going to continue to work with our customers and with our supply chains. We're driving internal productivity teams to mitigate existing and any potential future tariffs.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [21]

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That's helpful. A follow-up question, just shifting gears to paint and the environment there. Obviously, strong volumes and margins in the quarter. One of the areas that I think has been a point of concern for some of the investment community is really just the promotional environment and what we're seeing more at a retail level between the big box customers. Can you talk about just how the promotional environment has evolved in paint? And whether you expect and include any change in that dynamic within your fourth quarter commentary?

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

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Mike, the -- the promotional environment has picked up a little bit so far this year, I'd say. I would add that our partner has been disciplined with their promotional activity, and we think that makes a lot of sense. We have selectively promoted certain products and have held certain events, and we'll do that if we think it will drive profitable sales. But ultimately, we're choosing to compete on the quality of our products, the selection, the service, the store environment, rather than just simply price. And I think our Q3 results reflect that.

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John G. Sznewajs, Masco Corporation - VP & CFO [23]

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And Mike, I'd like -- one thing I'd like to reinforce that Keith said is that really, the promotional cadence and amount is really determined by the retailers. It's not determined by the manufacturer. So it's really in their hands to determine those actions.

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Operator [24]

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

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [25]

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A competitor of yours mentioned a slower start to 3Q in general, but activity picked up in September and October. So curious if you've seen any directional change in activity inter-quarter and thoughts leading into fourth quarter, given your comments on the macro front sounded pretty positive.

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John G. Sznewajs, Masco Corporation - VP & CFO [26]

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Phil, we really don't like to talk about short-term trends in our -- very short-term trends in our business. And so we posted a good Q3, and there is always month-to-month changes in our business. So I don't want to take too much away from any short-term performance in the company.

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Philip H. Ng, Jefferies LLC, Research Division - Equity Analyst [27]

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Got it. And can you give us an update on where you are with the cabinets divestiture and given what you're able to get from a proceeds standpoint on Windows? It seems like there could be some upside to what you guided at the Investor Day.

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Keith J. Allman, Masco Corporation - CEO, President & Director [28]

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The process is going well. It's a competitive process, and that speaks well to the quality of the business. We'll talk more in detail as we get a signed agreement. For now, we'll just say that the process is going as planned.

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Operator [29]

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Our next question comes from the line of Justin Speer with Zelman & Associates.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [30]

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I was curious on your comment of raw material headwinds in the fourth quarter in decorative. I would have expected tailwinds. So I just wanted to get some context there.

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Keith J. Allman, Masco Corporation - CEO, President & Director [31]

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Justin, I think it's important to note that raw materials and our cost basket are still up year-over-year. We are seeing some moderation for resins in TiO2. Long term, I'd remind you that when we look at our relationship between price and commodities, we tend to be flush over time. So we're not expecting significant material benefits to our margins. And there's other costs at play here as well, including labor and freight, to name a couple. But fundamentally, we are seeing some moderation, but our basket is still up year-over-year.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [32]

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And does that -- that cost basket you mentioned, does that also include -- I think last quarter, you mentioned in-store display spend increasing year-over-year in the second half and particularly in the fourth quarter. Is that still the case? Maybe if you can give some context on how much that headwind is to profitability incrementally this year versus last year.

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John G. Sznewajs, Masco Corporation - VP & CFO [33]

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Yes, Justin. That would be relatively small and not worth really calling out. The other thing that will have an impact on the fourth quarter is the fact that we'll feel more of a fuller effect of the tariffs in the fourth quarter in that -- particularly in that segment because recall both Liberty hardware and Kichler faced more of an import -- have more of an import model, I should say. So that rolls into the cost basket as well.

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Justin A. Speer, Zelman & Associates LLC - MD of Research [34]

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Okay. And then just following up on that. One last question. Just if you can give us a sense for how you're preparing for the step up in tariffs as you look to next year. Maybe elaborate on how you feel about pricing and productivity. I know you touched on it, but those efforts, whether or not you can -- you think you can fully offset, as you see it today, tariffs as you look to next year.

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Keith J. Allman, Masco Corporation - CEO, President & Director [35]

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Really no change from what we commented at the Investor Day. We think we've done a good job through a combination of levers, both productivity, working with our supply base to drive costs down, some value engineering work that we've been -- really has been ongoing and then, of course, some pricing actions to cover List 3. We have a go get out there for List 4, and we're working on doing that.

With regards to what might happen if List 3 goes up or the second phase of List 4 goes in, we'll have to see when that -- if and when that comes. In terms of how we're approaching it, again, really no change. We're working hard on cost out. We're working hard on value engineering. And we're going to continue to drive price, factoring in what we're learning. This has been a learning process as it relates to the dynamics of the various assortments and all the moving parts and the price elasticity. So we're going to continue to be strategic in all aspects, particularly in how we apply price.

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Operator [36]

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Our 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 [37]

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First, I just wanted to hit on and go back to the Windows proceeds. And apologies if I didn't hear this right in the prepared remarks, but I just wanted to get a sense, number one, relative to your proceeds guidance back at the Analyst Day, roughly what was the delta, given the proceeds did appear to be a bit more than we were expecting? I was just curious if, based on your original proceeds or guidance, if there were some delta that you'd like to share with us. And as a result of that, does that change at all the timing and split of proceeds as it relates to share repurchase? I know that initially, you guys had talked about maybe half up front and half over the next 9 months, given the change in what appears to be the higher-than-expected proceeds for Windows. Does that change any of your thoughts in terms of the capital allocation?

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John G. Sznewajs, Masco Corporation - VP & CFO [38]

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Yes, Mike. So a couple of questions embedded in there. And the first one, with respect to our total anticipated proceeds from the transactions, we said at Investor Day that we would expect at least $1 billion after tax from these transactions. And I think we're definitely on pace to achieve that though. As Keith mentioned, we're working hard on the cabinet business. And while we like the progress, there's not much to talk about at this point on that one.

With respect to our thoughts on allocating the capital or the proceeds that we received from the Windows sale, and you think about that and how our cadence of cash flow comes in with the business, so if you expect about $560 million of after-tax proceeds from that transaction, and you consider that we've been roughly putting out about -- in line with our $600 million initial guidance of share repurchases a year, and we're about $450 million year-to-date, so that would imply we've got $150 million to go plus the $560 million. So we'll call it roughly $700 million of capital to allocate based on the proceeds from the Milgard transaction. Well, if you think about the $200 million of debt retirement plus approximately $400 million to maybe a little bit more than that of share repurchase in the fourth quarter of this year, you get pretty close to that $700 million that we look to allocate. So I think our capital allocation is very much in line with what we communicated at the Investor Day. So we feel confident. We like where we're at. We like how the transactions have evolved. And so we feel good and confident about how we're allocating the capital.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [39]

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That's great, John. I appreciate the detailed answer there. That was helpful. I guess secondly, just going back to an earlier question around cabinet margins, I know you don't like to get too bogged down on these calls on segment margins by quarter. But the implied guidance, unless I'm doing the math wrong and I'd love your thoughts here, but the implied guidance for roughly 10.5% margins for cabinets for the full year does imply a pretty steep fall off in the fourth quarter, something around even 70%, if I'm doing the math right, which will be a nice year-over-year decline. So I was just curious if there's anything that I'm doing wrong there. Any items driving 4Q have such a down year-over-year quarter after you've had such strong results for the first 3 quarters of the year?

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John G. Sznewajs, Masco Corporation - VP & CFO [40]

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Yes, Mike. No. I don't think there's anything significant that's driving that down. I do -- I would remind you that seasonally, the fourth quarter tends to be one of our slower quarters, and so maybe more of a national seasonal slowdown in that business that is driving the lower margin in the fourth quarter. Other than that, there's no one-off or unique items that we anticipate flowing through in Q4.

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Operator [41]

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Our 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 [42]

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I wonder if I could ask a question a little differently about plumbing trends. The strength that you guys have seen in stability, is there -- given how last year in the second half of '18 demand kind of deteriorated in some housing dynamics, can you comment regionally, to the extent you feel comfortable, about any insights you might have? I mean because, for example, the West, which had attracted slowdown, has improved? I mean can you discuss maybe a little bit how regional cadences flow through your business just to give us any insight?

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Keith J. Allman, Masco Corporation - CEO, President & Director [43]

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Well, I -- there hasn't been a significant material difference as we look at the different regions from what we typically expect. There's different things that happen from weather that -- we tend not to talk about that very much. But certainly, there is some regional impact as storms and weather roll through. We have some ebbs and flows in different regions as it relates to new construction activity. But remember that we're about 90% repair and remodeling, so that tends to have less of an effect on us. We have different inventory and volume flows through channels that can affect us. So if you step back and really look at it, we haven't experienced a significant variability in terms of regional trends, other than what we all talk about, as I said, in terms of some weather patterns. Really, not a whole lot of difference.

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Kenneth Robinson Zener, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [44]

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Okay. Appreciate that. I just thought I might ask you. Now Keith, I heard your comments on -- earlier on price elasticity. Let me ask you this way. Is the lower price point impacted by tariffs more simply because tariffs are a greater percent of the actual price versus the higher end? It's a smaller percentage. Is that part of the dynamic that we would expect to see there at the lower price point impact from tariff price increases? Or is higher price point just not that important?

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

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Not -- sorry to kind of [step down here] a little bit. Not really as it relates to the percentages per se because the tariffs are basically a percent applied to the purchase cost. So that tends to be relatively the same. Where it tends to affect really is more the sensitivity at that low price point and the fact that, not always, but by and large, when you look at goods that are procured from China, they tend to be more on that lower price point part of the assortment. So it's not so much a percentage. It's that when you look at make versus buy, the buy tends to be a little bit heavier skewed on the opening price points, and then you combine that with the -- more sensitivity to that price point, that's where the elasticity comes to play.

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Operator [46]

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Our next question comes from the line of Truman Patterson with Wells Fargo.

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

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Nice results. First, I wanted to circle back on cabinets a little bit and the sale. Cabinets is having a very solid year. I think third quarter, [out profit] was up almost 20%, so nice results. At the same time, when you look at the outlook, it appears more favorable. We've got some antidumping duties on the Chinese importers, et cetera. Is there a possibility that the sale maybe gets pushed back a little bit and doesn't close in the first quarter as you adjust your sales proceeds target? And is that sales proceeds target higher today than maybe it was 2 or 3 quarters ago?

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Keith J. Allman, Masco Corporation - CEO, President & Director [48]

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We haven't changed our target. We talked at Investor Day about being more than $1 billion, and we're not moving off of that target. We feel good obviously about the transaction that came through with Windows. You mentioned antidumping. That really is not an impact on our sales process. On the cost side, we've been working through mitigating actions for quite some time now. We saw this coming and have moved the majority -- far and away, the majority of our sourcing out of China for cabinets. So that's already been factored into it. It's been a competitive process. The process is going well. And we have not changed our expectations in terms of timing.

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

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Okay. Okay. And then on the pro paint business, I believe at your Investor Day, you said that it was maybe 7% or so of market share nationwide, around those levels. I know that there's kind of a multiyear run rate -- runway to really grow this business. But is there a certain share? Or could you just discuss some of the share gains that you're targeting over the next several years?

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

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Our Pro sales now are approximately 25% of our coatings revenue. So we have seen good growth and good market share over the past, call it, 5 years that we've been strategically driving this initiative and this program. Very pleased with the double-digit growth that we saw and understanding that the bigger this business gets, the more challenged it is to grow off that big base, that's a factor. But fundamentally, we believe in what we're doing. And we think we have a very strong value proposition for the type of Pros that we're targeting. And with the Behr paint, our product assortment, the brand, the service proposition that our partner, The Home Depot, has worked so hard to develop, I think we have a strong value proposition for those pro painters that we're going after. So our intent is to continue to outgrow the market. And we have every reason to believe that we're going to be able to continue to do that.

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Operator [51]

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Our next question comes from the line of Megan McGrath with Buckingham Research.

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Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [52]

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I just wanted to think a little bit longer term and put the third quarter results in the context of some of your commentary around the Analyst Day. If I take out cabinets, your revenue growth in the third quarter is above your expectations for the next couple of years in terms of the top line. And I know some of your forecasts were based off of industry forecasts about return remodel may be slowing. But you did talk about seeing modest improvement. So putting that all together, are you feeling -- I realize we're only 1 quarter in and not so far off your Analyst Day, but are you feeling any more constructive about those end markets in that longer-term context?

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John G. Sznewajs, Masco Corporation - VP & CFO [53]

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Megan, it's John. No. I would say we -- we're not going to adjust our thinking about the long term based on 1 quarter's results. Yes. Granted, we did have a very good quarter. In some instances, we're up against a tough comp, which makes us feel good. But long term, the fundamentals of the markets are what they are, and we do think that, that low single-digit growth in the overall markets is going to be what we experience in the next -- in the coming several years. And so really no change to our long-term view on the markets relative to our performance here in Q3.

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Megan Talbott McGrath, The Buckingham Research Group Incorporated - Director [54]

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Okay. And then just quickly on -- in the quarter on Kichler, you did say that it was down again in the quarter. But was there any kind of incremental movement there? Was it down less than last quarter or same as it has been? Any detail there?

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

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As we've talked in the past, this category is going to be challenged throughout the year for us with the increased costs. And as you know, the tariffs hit this in our hardware business particularly hard. And we made the strategic choice to be very disciplined in terms of our pricing actions. And that has effect on the top line. We are performing well and the team is performing well as it relates to realizing savings and improving our business processes and integrating the company, cost savings like ocean freight and continuous improvement projects to reduce labor and a variety of other sourcing savings that we're driving. So there's going to be some challenge in the top line for this business in 2019, as I've talked about in the past. But long term, we like the prospects of the business and are confident that we're going to achieve our long-term return expectations in this acquisition.

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Operator [56]

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Our next question comes from the line of Eric Bosshard with Cleveland Research.

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Eric Bosshard, Cleveland Research Company - Co-Founder, CEO, Co-Director of Research and Senior Research Analyst [57]

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The paint segment, Keith, I appreciate your comments that the Color Center and the product quality is driving this more than the promotions. I'm curious on the sustainability of the double-digit growth this quarter, how we should be thinking about that performing moving forward.

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

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In terms of the total paint market?

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Eric Bosshard, Cleveland Research Company - Co-Founder, CEO, Co-Director of Research and Senior Research Analyst [59]

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No. Your paint business, specifically.

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

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We've got a good proposition, as I've talked about in detail in the past, and I believe in it, and we're continuing to invest in it both in terms of the customer experience in the aisle for DIY as well as the Pros experience. And our channel partners investing in -- continue to drive that. Our commitment is to continue to outperform the market, and we think that this market is a good market for us going forward. And we intend to continue to take share both in DNY -- DIY and in the Pro.

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John G. Sznewajs, Masco Corporation - VP & CFO [61]

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And Eric, we're not moving off of our Investor Day from 5 weeks ago when we said that DIY should grow low single digit over the next several years and Pro should grow over the -- in the mid-single-digit range over the course of the next several years. So I'd look back to that discussion that we had to think about our long-term view on the growth of our paint business.

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Eric Bosshard, Cleveland Research Company - Co-Founder, CEO, Co-Director of Research and Senior Research Analyst [62]

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Okay. And then within that, this quarter's performance is the upside relative to those targets' faster market. I'm just trying to understand what drove that magnitude of growth in the business this quarter, the upside.

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Keith J. Allman, Masco Corporation - CEO, President & Director [63]

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It's always a combination of volume and price. This quarter, volume was the larger contributor. And we're pleased with that result. So we think we gained a little bit of share. So to answer your question directly, it was more volume-driven than anything in the quarter. Our investments in the Pro are paying off. As I mentioned, we're rolling out the new Color Solution Center along with The Home Depot. That really helps the shopping experience, and I think we're well positioned to continue to outperform.

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Eric Bosshard, Cleveland Research Company - Co-Founder, CEO, Co-Director of Research and Senior Research Analyst [64]

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And then to follow up on Kichler, can you frame at all for us just what the year-over-year numbers look like in the business at this point?

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

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No. Eric, we don't break out the performance of individual businesses once they lap the acquisition period. No. We just don't break those out.

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Operator [66]

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

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [67]

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Just to clarify on the share repurchase post the divestitures. At the Analyst Day, you guys talked about deploying half of the proceeds immediately to buyback, give or take. So should we expect that $400 million from Windows sort of as an ASR maybe in Q4, and then perhaps there will be a second accelerated repurchase after the sale of cabinets? Is that how we should model that?

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John G. Sznewajs, Masco Corporation - VP & CFO [68]

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Matthew, we'll take a look at the market conditions and decide on the form of transaction. It could be an ASR. It could be open market or a repurchase or a combination thereof. And so -- yes, it all depends on how we see the market, and we'll make a decision based on that.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [69]

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Okay. Got it. And then just back to the elasticity question in plumbing. Obviously, you guys talk about the volume impact there. But as you raise prices across kind of the spectrum of price points, I mean to what extent do you guys think you actually see volumes go away versus perhaps customers simply trading down to lower price points? So are you suspecting that there's possibly more of a mix impact rather than a volume impact?

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

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It varies, Matthew, by category. And if you think about the repair component of it as well. So in some cases, let's say particularly in plumbing where there's a repair component there, there really isn't much of a delay. So if there was a price-sensitive consumer in that realm, then that would represent a down trading. In other areas, there is more of an ability to postpone. I think we're seeing some of that in lighting and hardware where they can postpone a purchase. So it's -- I think it's a combination and it varies. And in some cases, there's less price sensitivity. We mentioned having a record quarter in our spa business. That's a discretionary, very expensive purchase. Well worth the money, but costs a few dollars to get that, and we had a record quarter. So it really does vary by type of product.

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Operator [71]

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Our 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 [72]

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On the pro paint business, it started off a little slower in the year and you had a -- you're back to your kind of your double-digit growth we've seen for the last couple of years. I guess the question is what happened this year? We've seen a little bit more uneven performance. And there was a question earlier about promotions. That was really more for DIY. Have you seen promotional activity in the pro paint business as well this year?

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

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I think one of the impacts in terms of choppiness in Pro this year was that we don't like to talk about weather. But undoubtedly, there was some unfavorable weather in the first half. So in the prepared remarks, John talked a little bit about pent-up demand. That's really what we were referring to there. So I think there was a lift there. I talked about the size of our Pro business. And the bigger you get, the harder it is to get bigger. And we're seeing some of that. But again, our -- we believe in our investments. And we believe in the value proposition for the type of pro that we're going after. And we're continuing together with Home Depot to continue to invest in that. So there will be quarter-to-quarter choppiness, no question about that. But fundamentally, we're committed to outgrowing the market, and we've demonstrated that.

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John G. Sznewajs, Masco Corporation - VP & CFO [74]

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In terms of promotional activity on the Pro, Keith, not a lot of news there. There is relatively consistent promotional activity on the Pro side.

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Operator [75]

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Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.

Everyone, have a wonderful day.