Formatted Reports1.q4cdn.com/274414510/files/doc_events/2018/07/MAS-Q2-2018-Transcript.pdf · Susan Maklari Credit Suisse Securities (USA) LLC Michael Jason Rehaut JPMorgan Securities

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31-Jul-2018

Masco Corp. (MAS)

Q2 2018 Earnings Call

Masco Corp. (MAS) Q2 2018 Earnings Call

Formatted Report 31-Jul-2018


2 Copyright © 2001-2018 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

David Chaika Vice President, Treasurer and Investor Relations

Keith J. Allman President, Chief Executive Officer and Director

John G. Sznewajs Vice President and Chief Financial Officer

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Stephen Kim Evercore ISI

Susan Maklari Credit Suisse Securities (USA) LLC

Michael Jason Rehaut JPMorgan Securities LLC

Nishu Sood Deutsche Bank Securities, Inc.

Michael Dahl RBC Capital Markets LLC

John Lovallo Bank of America

Philip Ng Jefferies LLC

Keith Hughes SunTrust Robinson Humphrey, Inc.

Stephen East Wells Fargo Securities LLC

Justin Andrew Speer Zelman Partners LLC

......................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

David Chaika Vice President, Treasurer and Investor Relations

GAAP AND NON-GAAP FINANCIAL MEASURES ...........................................................................................................................

Our statements will also include non-GAAP financial measures

Our references to operating profit and EPS 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 ......................................................................................................................................................................................................................................................


BUSINESS HIGHLIGHTS ..............................................................................................................................................................................................

Sales and EPS

Please turn to slide 4





We continued our sales momentum in Q2

Our top line increased 10% excluding the impact of currency, driven by strong growth in the Plumbing,

Decorative Architectural, and Cabinetry segments

Our sales grew 6% excluding the impact of currency, acquisitions and divestitures

Our teams executed well against our plans as we continued to make strategic investments into the

business, integrate our Kichler acquisition and implement price across all segments resulting in an

operating profit increase of $8mm in the quarter and a 16.5% operating margin

Our EPS increased 21% to $0.75 per share

Commodity and Other Inflation

Before I address our individual segments’ performance, let me address the topic of inflation and potential

impact of the latest rounds of tariffs, as I know this is top of mind for many of you

As anticipated, we experienced commodity and other inflation across our segments in Q2 and we

continue to work to mitigate the effect of this inflation with disciplined cost control and pricing actions

o We implemented price increases across all four segments in H1 2018

We believe these pricing actions will offset the commodity and other inflation that we have seen, and we

expect our price/cost relationship to be approximately neutral in H2 2018

If we need to take further pricing actions, we will

China

As we discussed last quarter, we have not been materially impacted by the steel and aluminum tariffs that

have been enacted

While many of the products and components that we source from China would be impacted by this latest

round of proposed tariffs, we are confident in our ability to mitigate this potential cost increase, if enacted,

with our flexible supply chain and price as needed

Additionally, we feel we are on equal or better footing compared to our competition across our product

categories considering our significant domestic manufacturing capabilities in Plumbing and Cabinetry

Plumbing Segment

Now, moving back to this quarter’s performance, let me give you some additional insight into the drivers

behind each of our segment’s performance beginning with Plumbing

Our Plumbing segment continued its consistent top line performance by growing 9% or 6% in local

currency

Watkins, Hansgrohe and Delta drove this growth by capitalizing on strong demand across channels and

geographies

o North American Plumbing grew 6% in local currency

Watkins achieved a record sales quarter due to new product introductions in its dealer channel and strong

growth in its retail channel

New ERP System

Delta had another successful quarter with continued momentum in the showroom, retail and e-commerce

channels

I’m very pleased that this performance was achieved while also launching a new ERP system at Delta,

our largest North American plumbing operation





The ERP launch on May 1 went well, and I’d like to commend and thank the Delta team for their

tremendous efforts to make this system launch a success

International Plumbing grew 5% in local currency, driven by Hansgrohe’s strong growth in its home

market of Germany and continued strength in China

Decorative Architectural Segment

In our Decorative Architectural segment, sales grew 22%

Excluding our acquisition of Kichler Lighting, sales grew 6% with mid-single-digit growth in both DIY and

pro

In our coatings business, we continued to execute our plan together with our channel partner, The Home

Depot, to drive pro paint sales growth by expanding our pro hub store concept and sales force

Integration of Kichler Lighting

The integration of Kichler Lighting is progressing on plan in its first 100-plus days

As a reminder, Kichler is a leading developer of decorative residential and light commercial lighting

products, ceiling fans and LED lighting systems across both consumer and professional distribution

channels into $6B residential lighting market

Decorative lighting has a similar customer base as many of our building products where the purchase

decision is based on design, breadth of product offering, quality and reliability of service

We fully expect to leverage our operational capabilities and coordinate our design experience and

expertise as we integrate Kichler into Masco to further strengthen our position and profitably grow with

our many shared customers

Cabinetry

Moving on to Cabinetry, our Cabinetry segment delivered 13% growth excluding the divestiture of Moores

We drove growth in our repair and remodel business across all channels, led by the ramp up of our

Menards business as well as strong growth in our dealer channel

The rollout and initial months of the Menards program have gone extremely well, and we are on plan to

achieve an $80mm annual sales run rate during Q4

Windows

Turning to Windows, excluding the effect of the Arrow divestiture and foreign currency, sales matched last

year

We experienced increased costs and inefficiencies in the segment primarily due to the rightsizing of our

UK workforce and an adjustment to our warranty reserve largely due to cost inflation

A portion of these costs will likely continue into Q3

Capital Allocation

Moving to capital allocation, we continued our share repurchase activity in the quarter by repurchasing

3mm shares for $115mm, bringing our YTD share repurchase total to $265mm

Based on the strength of our forecasted cash flows and our strong liquidity position, we intend to deploy

approximately $200mm toward share repurchases or acquisitions in H2 2018





Annual Dividend

Our Board of Directors also announced its intention to increase our annual dividend by $0.06 per share or

14% beginning in Q4, reflecting their confidence in our long-term prospects

This is the fifth consecutive year we have increased our dividend

In addition, we further strengthened our balance sheet in the quarter by retiring $114mm in debt that

came due in April

EPS

Lastly, we’re updating our anticipating EPS for 2018 to be in the range of $2.48 to $2.55

This adjustment is largely due to the increased cost in our Windows segment that I just discussed

Demand across our product segments and geographies remains robust

I’m very pleased with our performance in H1 and believe we are well positioned to capitalize on this

robust demand to drive strong growth and margin expansion in H2 2018 ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer

FINANCIAL HIGHLIGHTS .........................................................................................................................................................................................

Opening Remarks

As Dave mentioned, most of my comments will focus on adjusted performance excluding the impact of

rationalization charges, inventory step-up related to purchase accounting for the Kichler acquisition and

other one-time items

Also, as a reminder, any reference to prior period comparisons have been adjusted to reflect the adoption

of the new revenue recognition and pension accounting standards

Please refer to page 19 in the earnings call presentation for the details we provided last quarter

Sales

Turning to slide 6, we delivered solid double-digit top line and EPS growth in Q2

On a reported basis, sales increased 11%, or 10% in local currency

Excluding divestitures and acquisitions, sales increased 7%, or 6% in local currency

Foreign currency translation favorably impacted our second quarter revenue by approximately $29mm

In local currency, North American sales increased 12% in the quarter, or 6% excluding acquisitions and

divestitures

We continue to experience strong consumer demand for our industry-leading repair and remodeling

products across all channels of distribution and across all price points

As a reminder, repair/remodel activity represents approximately 84% of our total sales

Gross Margin

In local currency, international sales matched Q2 2017

Excluding the divestiture of Moores, international sales increased 4%, driven once again by Hansgrohe

Gross margins were 33.6%





As we look ahead to H2, we expect solid gross margin expansion y-over-y as the price/cost relationship

improves and the strategic investments diminish

SG&A

Our SG&A as a percent of sales improved 100BPS to 17.1% as we continue to leverage our SG&A while

making strategic investments to drive profitable growth

We generated operating profit of $380mm and operating margins of 16.5%

As we discussed on last quarter’s call, operating margins were impacted in Q2 due to strategic growth

investments, ERP costs, and a lag in price/cost

We also experienced incremental cost in our Windows segment

o These items aggregated approximately $30mm in the quarter

EPS

Our EPS was $0.75, an improvement of 21% compared to Q2 2017

And as Keith mentioned, we are narrowing our annual EPS estimate range to $2.48 to $2.55 per share

o This lowers the midpoint of our EPS range by $0.04

The principal item that affects this change is the incremental cost in our Windows segment that Keith

described

Plumbing Segment

Turning to slide 7, our Plumbing segment experienced another quarter of strong demand and solid growth

as sales increased 9%

Excluding the impact of currency and acquisitions, sales increased 5%

o This solid performance was driven by growth in our faucet, shower, and spa businesses

Foreign currency translation favorably impacted this segment’s sales by approximately $25mm in the

quarter

Our North American sales grew 6% in local currency as we experienced strong consumer-driven demand

for our industry-leading brands across all channels with growth in wholesale, retail, dealer, and e-

commerce customers

As a reminder, the segment experienced approximately $10mm of sales that were pulled forward into Q1

from Q2 due to the implementation of Delta’s ERP system

Spa Business

Additionally, our spa business continued to outperform the competition, as Watkins Wellness leveraged

its strong dealer network, innovative new products, and industry-leading brands to drive growth

Our international plumbing sales increased 5% in local currency as Hansgrohe’s focus on key markets

continued to yield results with strong growth in both Germany and China

Segment Profitability

Turning to segment profitability, operating margins were impacted by a lag in price/cost and strategic

growth investments, which include displays

These items aggregate approximately $15mm

Mix also impacted margins largely due to our lower price point Peerless faucet win at retail





As we consider H2, despite the anticipated $5mm of ERP spend at Delta in Q3, we are confident that we

will experience margin expansion as our pricing and cost containment actions are realized and our

strategic growth investments begin to favorably comp y-over-y

As a reminder, we had $18mm of display and other spending in H2 2017

For the full year, we expect operating margins for this segment to be down slightly compared to 2017

Decorative Architectural Products Segment

Turning to slide 8, the Decorative Architectural Products segment grew 22%

Excluding the acquisition of Kichler, sales grew 6%

o This performance was driven by Behr’s pro and DIY businesses each growing mid-single digits

Liberty Hardware also contributed to the top line as it continues to achieve strong growth in both its retail

and e-commerce channels

Operating income in Q2 increased 11%, driven by the Kichler acquisition and increased volume, partially

offset by higher depreciation and amortization expense from the Kichler acquisition and an unfavorable

price/cost relationship

As we look to H2 2018, we anticipate continued cost pressure on raw materials for paint and we will work

to mitigate this inflation as needed

But for the full year, we expect margins in this segment will be in the upper end of our 16.5% to 18.5%

range

Cabinetry Segment

Turning to slide 9, in the Cabinetry segment, sales increased 13% in the quarter excluding the impact of

the Moores divestiture

This outstanding performance was driven by our industry-leading brands as we experienced double-digit

growth in our repair and remodel business and low-single-digit growth in our new home construction

business through increased volume and favorable price

The Cardell program at Menards continues to roll out on schedule and we are very pleased with this

program’s initial performance

Segment profitability increased in the quarter by $2mm, principally due to increased volume and favorable

price/cost, partially offset by mix and ramp-up costs related to the Menards win

For the full year, we expect 5% to 7% sales growth excluding the divestiture of Moores with operating

margins at approximately 2017 levels

Windows Segment

Turning to slide 10, excluding the divestiture of Arrow Fastener, our Windows segment sales grew 2%

and matched prior year in local currency

Foreign currency translation favorably impacted this segment’s sales by approximately $2mm

This performance was driven by single-digit growth at Milgard due to increased volume, favorable pricing,

and a positive mix shift toward our premium window and door products

o This was offset by a market softness in the UK

As a reminder, this segment faces a tough comp in Q3 as segment sales grew 9% in Q3 2017





SEGMENT PROFITABILITY

Segment profitability in the quarter decreased $10mm, driven by actions we took in the UK to further

right-size our workforce and inefficiencies in an increased warranty reserve at Milgard

We anticipate approximately $5mm of incremental costs in Q3 as we address the inefficiencies and

launch new products

For the full year, we expect this segment sales growth to be 3% to 5% excluding currency and

divestitures, with operating margins down approximately 100BPS compared to 2017

BALANCE SHEET ITEMS ............................................................................................................................................................................................

Working Capital

And turning to slide 11, we ended the quarter with approximately $400mm of balance sheet liquidity as

well as full availability on our $750mm revolving credit facility

Working capital as a percent of sales increased 190BPS vs. prior year to 17.1%, largely due to the impact

of the Kichler acquisition

For the full year, we expect working capital as a percent of sales to be approximately 15%

FCF

We also took further action to strengthen our balance sheet by retiring $114mm of debt in April

During Q2, we continued our focus on shareholder value creation by repurchasing 3mm shares valued at

approximately $115mm, bringing our YTD total to $265mm

With our strong FCF, we expect to deploy approximately $200mm in H2 2018 in either acquisitions or

share buybacks on top of the more than $800mm deployed YTD.

In addition, expressing confidence in our future, our board announced its intention to raise our annual

dividend to $0.48 per share, a 14% increase starting with our Q4 2018 dividend

OUTLOOK ......................................................................................................................................................................................................................................

North America, Europe, and China

Lastly, the outlook for the business remains strong

We’re seeing solid growth in North America, Europe, and China and we remain confident in our ability to

generate more than $800mm in FCF in 2018 ......................................................................................................................................................................................................................................................


Q2 HIGHLIGHTS ....................................................................................................................................................................................................................

Plumbing and Decorative Segment

I’m pleased with our performance in H1 2018

We moved quickly to address the shifting market environment with effective pricing and cost actions

Our Plumbing and Decorative segments continued to drive growth with new products and programs and

channel expansions





Our focused efforts in our Cabinetry business has led to strong growth and margin performance, and we

have successfully executed on growth investments and a significant ERP launch at Delta

U.S. Housing Stock

Furthermore, the long-term fundamentals of our industry remain strong

Demographics should drive household formation and housing for years to come as the large millennial

generation has begun to start forming households

Home price appreciation, which has a strong correlation with repair and remodel spending, remains

strong at nearly 7% y-over-y

o Existing home turnover remains at a healthy overall level of 5.3mm units

Age of housing stock continues to increase as 65% of the U.S. housing stock is now over 30 years old

and older homes have more repair and remodel spending per home than newer homes

And importantly, consumer confidence remains at a 15-year high, as consumers benefit from a healthy

economy

Investments

With the actions we have taken and the investments we have made, we are well positioned to capitalize

on the favorable industry fundamentals to drive strong growth and margin expansion in H2 2018, as we

expect to generate over $800mm in FCF for the year

We will continue to deploy that cash flow with a disciplined and balanced approach to acquisitions with

the right fit and return, share repurchases and dividends to create value for our shareholders ......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTION

Stephen Kim Evercore ISI Q I guess if we could just start with your Plumbing business, I think you broke out $15mm in price/cost and also I

think ERP within there, perhaps I just want to make sure that we got the components clearly. And in terms of what

we could expect in Q3 and Q4, if you’re specifically looking for margins to be up y-over-y in both of those quarters

in addition to just the back half. ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Hey, Stephen. Good morning. It’s John. In terms of the components that I called out, yeah, indeed $15mm as the

total breaks out – we did call the ERP spend of about $5mm on our last quarter call, so the balance is roughly our

price/cost lag. In terms of what you can expect for Q3 and Q4, if you recall, we have a fair amount of display

investment in the third and Q4 last year. So H2 last year, we had at aggregate about $18mm in total in this

segment. So, yes, to your second question, I would say that we would anticipate margin expansion in both Q3

and fourth quarter in that segment. ......................................................................................................................................................................................................................................................

Stephen Kim Evercore ISI Q That’s good. Great. And then the second question I had was related to your comment about the M&A –

acquisition and/or repurchases. Was curious if you could describe what the pipeline is looking like and if there are





certain end markets that look particularly promising to you. Could you give us any kind of color as to

geographically or in terms of verticals, which areas you’re most focused on now given the pipeline? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Stephen, our pipeline is healthy and it’s diverse. We have opportunities that we’re looking at that range from

smallish in size and bolt-on, if you will, to existing segments, and we have some larger ones both that would

function within the segment as well as looking at some new segments. So we have a broad approach in terms of

size. We’re also looking both domestically and internationally, and we have the capital in the balance sheet to do

these acquisitions, but I’d like to reiterate that we’re going to be patient and make sure that we find acquisitions

that have the right fit and return that fit with both our strategy and our culture and obviously we’re focused on

creating shareholder value for the long term. So we’re going to remain disciplined and balanced in our approach,

and we are going to continue to value our acquisitions with a particular eye on return on invested capital where

we can generate appropriate return for the shareholders. ......................................................................................................................................................................................................................................................

Stephen Kim Evercore ISI Q Would it be fair to say that when you’re talking about both bolt-ons as well as maybe ones that are a little bit larger

that you’d be willing to go above that $200mm if the right opportunity came along or would you say that that

$200mm we should think of as kind of a ceiling? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A No, I wouldn’t think of it as a ceiling given the right opportunity. And again, based on our eye and our patience, it

would have to be the right opportunity. But we have, as you know, the quality of a balance sheet to be able to go

out over that $200mm level if the right opportunity came. ......................................................................................................................................................................................................................................................

Susan Maklari Credit Suisse Securities (USA) LLC Q I just wanted to talk a little bit about the paint segment. You mentioned some unfavorable price/cost that’s

continuing to be a lag in that part of the business. Can you just kind of give us some sense of how those factors

are coming together, your ability to get price there, and maybe within that, some of the expenditures related to the

expansion of the hub stores? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah, good morning, Susan. In terms of the input cost [ph] of paint, yes (26:50). As I think our other public peers

have disclosed, there are continuing headwinds in terms of price/cost affecting both TiO2 and some of the

engineered resins that go into paint. And so, as I mentioned in my prepared remarks, we’re actively working to

mitigate this through both pricing as well as working with our suppliers and working internally on our own

efficiencies to try to mitigate those as best we can.

In terms of our ongoing investment in expanding our pro business, we’re absolutely making further investment as

we indicated earlier this year. That said, at this point, we’re not disclosing the amount as our channel partner and

we have decided to just to say a little less about our investment in that area at this point. ......................................................................................................................................................................................................................................................





Susan Maklari Credit Suisse Securities (USA) LLC Q Okay. And then certainly in terms of cabinets, you had some really nice performance on the top line and the

margin in there. It seems like you’re getting some momentum with that dealer investments and some of the other

things that you’ve been doing. I guess can you just give us a little more color on that? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Sure, Susan. This started, call it, 12 months to 18 months ago when we really went to work to reconfigure our

supply chain and our factories to address the dynamic in the market. So we took our Quality factories, for

example, and focused them – Quality, meaning the Quality brand, and focused them on the assembly of incoming

purchase materials for the opening price points. So we have a factory that’s reduced its complexity and focused

on the lower price point part of the market. We then took the Quality brand and the Merillat brand, and we

common-ized the architecture. So again, driving simplification and cost reduction to go after, call it, that middle

point of the market, and then we have the very efficient and effective KraftMaid brand and supply chain that

focuses more on that middle to higher semi-custom. So, a combination of reconfiguring our supply chain so that

we have the right level of complexity and cost across the different bandwidths of the market, and then continuing

to drive good sales force execution.

And I think when you look across – while it’s taken some time for us to execute this, when you look at the

Menards win that we were able to land, that was really an amplification of our strategy and shows that how we

were able to be competitive with regards to low cost opening price point, if you will, stock cabinetry, value semi-

custom and semi-custom, so it’s starting to pay off and we are going to continue to drive this segment, and

obviously with nice dropdowns on the incremental growth, we’re upbeat about its potential. ......................................................................................................................................................................................................................................................

Michael Jason Rehaut JPMorgan Securities LLC Q The first question I had was on actually a couple of the segments that Susan asked, maybe just in a different light,

First, on paint, with DIY and pro both up mid-single digit, I was more interested in pro for the moment. DIY

obviously very solid mid-single-digit growth, but pro, I’ve been thinking about that more as a little bit of a growth

category and you kind of consistently pointed to a low-double-digit or a 10% or better type of growth rate. So with

the mid-single-digit growth this quarter, I was just curious if you kind of view that as the beginning of an inflection

point where perhaps, given the size that it’s achieved over the last few years, we should be thinking more about a

mid-single-digit type contribution rather than low-double digit or is this more of a one quarter type of pause

because we’ve also kind of thought about this as still a good area of expansion potential over the next two or

three years. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A We’re committed to this to driving double-digit growth for the next couple of years in this pro segment, keeping in

mind, of course, that it is over $400mm, so it’s a sizeable chunk to drive in terms of double-digit growth, but we’ve

seen that our investments in this pro hub concept and expanding our pro sales force works. We’re pleased with

the growth. I am sure there’s going to be some quarters that are more accelerated than others, but we remain

committed to the double-digit growth and we’re happy with our DIY growth as well. Together with The Home

Depot, I think we’re doing an outstanding job of converting shoppers to buyers in the aisle. We’re generating good

traffic with our brand and our advertising scheme, and of course the quality in the can speaks for itself. So,





overall, when we look across coatings both against ourselves and the competition, we think we’re doing pretty

good. ......................................................................................................................................................................................................................................................

Michael Jason Rehaut JPMorgan Securities LLC Q Okay. That’s great. Understandable. Secondly, on the cabinets segment, great growth there and an impressive

turnaround, continues to be a great turnaround story over the last couple of years. I was curious in terms of the

Menards rollout if that was a contributor to the obviously very strong top line growth this quarter. I know you said

that you continued to expect Q4 to recognize that $80mm annualized run rate, but I don’t know if there’s any – I

mean cabinets is more of an inventory business, not sell-in. I don’t know if there is any sell-in in advance of that,

but if the Menards rollout contributed to the top line. But even outside of that, if you could just talk about the dealer

channel with this double-digit growth there or repair/remodel and what are the key drivers that allowed the strong

results. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Yeah, of course, the Menards win, it was a big win for us and, as I mentioned, being able to showcase the work

that we’ve done over the past year, year and a half in terms of cost competitiveness, assortment expansion, and

good sales work, so that is definitely a contributor. But as you mentioned, we had strong growth in our dealer

channel as well, and then when you look across demand drivers, we had strong growth in both repair and

remodeling and new construction. So it’s beginning to come together and it’s, as you might imagine, no one action

that we took. We’ve built this and executed this turnaround over a series of actions that included obviously cost-

outs. We’ve driven significant assortment enhancements in terms of launches at both KraftMaid and Merillat, and

then the reconfiguring of the supply chain that we did, call it, 18 months ago with regards to focused cost

reduction around the various price points along the continuum. So all those things have come together and we’re

excited about the potential in the business. ......................................................................................................................................................................................................................................................

Michael Jason Rehaut JPMorgan Securities LLC Q Any further granularity in terms of maybe over the next couple of quarters, should we be expecting at least like a

core mid-single-digit growth and obviously Menards could potentially add to that? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A We’re looking for the full year in that 5% to 7% growth range. ......................................................................................................................................................................................................................................................

Nishu Sood Deutsche Bank Securities, Inc. Q So, Keith, appreciate the commentary about the input costs and the tariffs at the beginning. Looking at the

guidance reduction, the kind of $0.04 at the midpoint, I imagine a lot of puts and takes going into that that you

highlighted or you called out the incremental Decorative Architectural, can you talk about just some of the other

puts and takes as well relative to where your expectations were previously? It sounds like in Decorative

Architectural the price/cost trends are going a little better than expected perhaps with the high end of your margin

guidance range there. In Plumbing, it sounds like perhaps the opposite. So maybe some of the other kind of major

puts and takes that went into kind of reconsidering the guidance for this quarter. ......................................................................................................................................................................................................................................................





Keith J. Allman President, Chief Executive Officer and Director A Yeah, Nishu, when we compare what we thought about at the beginning of the year vs. what we’re seeing unfold

here, there’s two primary drivers. One is foreign exchange and two is the Windows headwinds that we

experienced. In terms of the Windows headwinds, that impact was about $10mm in Q2 and that was a

combination of a significant reduction in workforce that we did in our business in the UK and some warranty

expense that we accrued in our Milgard business here in the United States, and we think there will be about

$5mm of impact in those areas in Q3. So when you aggregate that, that comes to about $0.04.

And then in terms of FX, we’re experiencing about $70mm in revenue less favorability than we originally thought

we would, and that affects operating profit. So, that accrues to about $0.03. So there’s $0.07 right there, but that’s

the principal difference in terms of what we thought at the beginning of the year and the way we’re seeing the

year unfold. ......................................................................................................................................................................................................................................................

Nishu Sood Deutsche Bank Securities, Inc. Q Got it. And then on price/cost, does that tell us that price/cost has gone as expected as you kind of anticipated it

earlier this year? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah, I’d say it’s about as expected. And we always said from the very beginning that it would be a back half kind

of a story for this year on price/cost, and that’s how it’s playing out, Nishu. So I think both Keith and I mentioned in

our prepared remarks we expect to be price/cost neutral in H2. ......................................................................................................................................................................................................................................................

Nishu Sood Deutsche Bank Securities, Inc. Q Got it. And then on Decorative Architectural, the mid-single-digits growth in DIY kind of tells us that you’re still

seeing a positive volume growth there. It would seem to be better than the category growth, so obviously a good

performance there. You’ve had that trend in place now for some time. What are the underlying drivers of that?

How long can you continue to outperform the DIY category kind of looking ahead? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Well, we’re certainly expecting that mid-single-digit growth through the year and we’re very pleased with the

traction we’re getting. And it is certainly a partnership with The Home Depot, as I mentioned, to convert traffic in

the store to customers. In terms of what’s driving that, we have, let’s call it, 2,000 points of distribution that’s just

outstanding and very well managed with The Home Depot. We’ve got great levels of service. We have a truck

going to a distribution center for Home Depot every week and this is the concept of focus in 80/20 on steroids

here where we are completely focused on The Home Depot and their customers. So, that efficiency and that level

of focus, be it in service levels, in the quality and of course in the brand – leading DIY brand and that is a

significant generator of foot traffic and sales. So it’s a combination of service, product, quality, brand, outstanding

distribution, and an understanding of what the consumer wants and how to make that conversion and taking care

of them. So it’s definitely a partnership with The Home Depot and Behr, and we expect continued growth. ......................................................................................................................................................................................................................................................





Michael Dahl RBC Capital Markets LLC Q First question on Decorative, just breaking down the margin performance both in the quarter and then thinking

about the guide and some of those comments around price/cost, it actually – it looks to me as if ex Kichler, the

legacy business was probably roughly flat in the quarter and just given the guide toward the upper end of that

16.5% to 18.5% range would suggest that potentially flat to even up for the full year on the legacy business. Am I

thinking about that the right way or is there something in the Kichler margins that has gone better than expected?

Just a little more color on just the difference between those two margin components there would be great. ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah, Mike, I think you had some good insights there. One, Kichler’s annual margins as we disclosed when we

bought the company [ph] are in that (40:19) a low-double-digit range and lower obviously than we have been

experiencing – the high teens we’ve been experiencing in that segment. That said, I would say that Kichler is

probably doing a little bit better from a margin perspective than we originally had anticipated, but not materially

different. So, that helps the margin in the segment just a touch. And with the inflation that we’ve experienced in

paint raw materials and some of the actions we’ve taken, don’t forget that the way that it works for us particularly

with paint is we recover price with paint. We recover the commodity cost inflation on that paint. So actually, what

that does is tends to contract margins a little bit. So, that has a piece of it. So we do expect kind of modest margin

contraction for the full year. ......................................................................................................................................................................................................................................................

Michael Dahl RBC Capital Markets LLC Q Okay. Got it. That’s helpful. My second question just around Plumbing, you’re in the midst of the ERP. Could you

just give us an update? It seems like guidance items didn’t really change as far as the cost, top line looked

decent. So it doesn’t seem to be that disruptive. But just give us an update on kind of the ERP conversion there

and whether there have been any puts and takes around that. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Yeah, Mike, I would characterize it as being a little bit further along than as you said in the midst of it. We went

live in May. We have obviously been through a couple of closes. We have manufacturing turned on. This was a

significant order-to-cash type of system launch. So it was a very significant system that we implemented that

involved hundreds of people of that organization and a multitude of change management initiatives and training,

et cetera, as we not only implemented the ERP system, but it was a new ERP system. It wasn’t a new version of

an existing system. So it was a significant endeavor and I think, Mike, you’re pointing to a good point, that while it

was costly and it was a significant investment, it was very well executed and we’re happy with that. We certainly

have some efficiencies that we need to continue to drive and we have some business intelligence tools we have

yet to turn on. But when you look at the magnitude of this and the success of it, it’s been a real big plus. And we

also had an upgrade – a significant upgrade to our SAP system at Hansgrohe that we executed in the quarter as

well and that went very well. So this is something we put a focus on and doing a better job at, and I am pleased

with our performance, particularly at Delta. ......................................................................................................................................................................................................................................................

John Lovallo Bank of America Q





First question is, I just want to make sure I understand this, the comment about being – price being flush with raw

mats in H2. Is that the case in Q3 as well or is there just more catch-up in Q4 that’s kind of leveling it off for H2? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A John, it’s roughly similar quarter-to-quarter. So not a lot of difference between Q3 and Q4. ......................................................................................................................................................................................................................................................

John Lovallo Bank of America Q Okay, that’s helpful. And then I think last quarter you had mentioned that freight and logistics cost had not really

increased that much given your use of standard distribution runs. Did you see any uptick in that in Q2? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah, John, we actually have seen a little bit of an uptick in that particularly for more customized products like our

Windows products as well as our Cabinetry products where we don’t have as standard of runs, let’s say, as we

may have with Behr paints or with Delta faucets going to some of our common customers. So, yeah, indeed, we

have seen a little bit of inflation, but we think we’re in a position to work to offset some of that either through price

or some of our own internal efficiencies. ......................................................................................................................................................................................................................................................

Philip Ng Jefferies LLC Q Curious to get your thoughts on the commercial integration of Kichler and how that’s ramping up as you leverage

some of your distribution. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A It’s going very well. We’re on plan. It’s been over 100 days. We have executed integration along a number of

fronts in terms of treasury, risk management, legal. We are working with the team at Kichler to implement the

Masco Operating System. We’re going in and grabbing efficiencies as quickly as we can, particularly in areas of

logistics and freight consolidation in China with our existing China infrastructure and we’ve got work to do yet. We

have common customers that we think are going to be able to be leveraged to add further value. So, in summary,

I’d say that we’re on plan for sure. We’re on plan with our investment thesis. The cultures are meshing very well.

We’re getting early wins and we are planning for more longer term wins. ......................................................................................................................................................................................................................................................

Philip Ng Jefferies LLC Q Got it, and then Keith, you kind of touched upon it in your prepared remarks on the tariffs – potential tariffs I guess

in China. Curious what type of impact you kind of envision in your supply chain and how you’re going to manage it

respectively, and particularly interested on the Kichler side of things since it’s a newer business and you do buy a

lot of components from Asia. Thanks. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A I’ll state the obvious, but there’s a lot of moving parts here and it remains to be seen where it all shakes out, if at

all, and to what degree and how it’s enacted and the timing and everything else, but it varies as you might expect





across our segments. So, in paint, which is a large segment for us, that would have really no impact. Windows

has a little bit of impact with some imported hardware, have some impact in Cabinetry with regards to imported

plywood and then Plumbing and our decorative hardware and lighting would have the largest impact.

In terms of how we handle that, we look at a couple things. Number one, what can we do effectively and quickly

with regards to the supply chain to mitigate some of these costs. And then number two, we look at our competitive

position. And by and large, we believe that we are on equal or better footing when you look at our competition

across our product categories considering what we do in terms of domestic manufacturing in Plumbing and

Cabinetry, and then in lighting, really that is a industry-wide value chain as it relates to procuring from China. So

in that regard, price is obviously something when you look at our channel service and the strength of our brands,

that we would initiate it if needed. But I would reiterate there’s a lot of moving parts and we’re going to watch and

see where this all shakes out. But we feel comfortable in both our competitive position and our ability to stay

whole as it relates to cost-outs and price. ......................................................................................................................................................................................................................................................

Keith Hughes SunTrust Robinson Humphrey, Inc. Q Questions – or a quick question back in Plumbing, specifically U.S. Plumbing. You had kind of called out generally

it sounds like all the channels were good in this period. Just diving the details a little bit more, I know in the past,

wholesale has been a big win for you, I think the sector as a whole. Did that trend kind of continue in Q2 with that

being the leader of growth? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Yes, it did. Very strong in wholesale and it’s been strong for quite a while. ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah... ......................................................................................................................................................................................................................................................

Keith Hughes SunTrust Robinson Humphrey, Inc. Q Why has that been so – go ahead. ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A I’d say – just reminding you that even though we posted pretty good numbers, that was impacted by the ERP, so

that $10mm that was pulled out of Q2 into Q1, don’t forget that as well. ......................................................................................................................................................................................................................................................

Keith Hughes SunTrust Robinson Humphrey, Inc. Q And does that affect the wholesale numbers or is that a retail? Where does that kind of fall? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A I think that was fairly broad based across all of our customers. ......................................................................................................................................................................................................................................................





Keith Hughes SunTrust Robinson Humphrey, Inc. Q Okay, and final question on this. Why has wholesale been so good over these periods you discussed, Keith? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A I think a lot of it speaks to the work we did on the assortment. So we went in and worked on the opening price

point with some targeted launches. We’ve done a significant amount of work in the showroom aspect of

wholesale. So we’ve had some nice work that we’ve done on what we call the back end or the counter business

and we have also done more on the assisted sale on the front end, and then a lot of our work goes to influencer

outreach and marketing programs where you may recall we spent a year or so back some significant capital to

build an extension and create a customer experience center, where by design, we bring in our showroom

customers to show them the Brizo and the Delta and the product offerings that we have and to work on that

customer outreach, and that really creates advocacy. And then you overlay that with our investment that we’ve

made in displays across the showroom continuum where we have not only juiced up the displays in terms of LED

lighting and showcasing the product more effectively, we also gained three incremental feet. So it’s a combination

of all those things around that area of what I would call commercial excellence that is driving the good growth for

us. ......................................................................................................................................................................................................................................................

Stephen East Wells Fargo Securities LLC Q Congratulations in a pretty tough environment that we’re seeing. Keith, in early May, you talked about being flush

with price/cost by the end of Q2 and you all still feel that way. Could you talk about a few things? One, could you

– the assumptions that you have for your various major raw materials as you look through the back half of the

year, and it sounds like in paint, you might not be flush in H2, offset it with being better than flush in some of your

other businesses. Is that the right way to think about that? And then finally, on the raw materials, sort of the lag

time from when you get a cost announcement to when that actually is typically flowing through your income

statement? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A Probably the best way to break your question down, Stephen, is to think in terms of some of our different

segments. So if you look at Plumbing, big driver there is copper and zinc. And if you look at, say, June as a point

of view from June 2018 to June 2017, you’ve seen about a 12% increase from about $2.70 up to $3 for copper.

Now, while that has dipped down a little bit more of late, that’s been a significant cost driver. And then zinc, again

over the last year, has gone from about $1.25 to $1.35. So, that’s about a 7% increase, and again we’ve seen that

dip a little bit in the last month, but those are still healthy increases. So, that’s the driver in the Plumbing segment.

When you look at our coatings business, it’s really about resin and TiO2, and we’ve seen TiO2 go up kind of the

same as copper, about 12%, if you look at it from June of 2018 to June of 2017. And then in resins, we’ve seen it

go up to almost $0.85 a pound now. So, that’s a significant increase. And what we’re seeing is probably going to

be a little bit more pressure in resins as we look to the back half. So, that’s the primary driver in coatings. And

then we use hardwood – obviously hardwood lumber and plywood, and again that’s gone up coincidentally right

about in that 12% range. So, pretty broad-based commodities pressure that we’ve experienced and that’s the way

we’ve attacked it with both cost and price, as we mentioned, getting price across all four segments. ......................................................................................................................................................................................................................................................





Stephen East Wells Fargo Securities LLC Q Got you. All right. And then as you look at your lag time, how long from when you get that announcement that it

flows through? And then the other question I just had is your capital allocation, you’ve already bumped it up

through 2019 to $1.7B. I’m wondering how far into it you are with that and any thoughts or indications whether you

bump that any further? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A In terms of the lead time on the price – and John, I’ll let you take the capital allocation question – it really varies by

segment, and a lot of it depends on the inventory. So you could imagine, I’m sure, with a China supply chain

where we may be FOB the ship at the port that we would have a longer time before we could actually get price

into our P&L, and in some cases, it’s more cyclical as it relates to price books and when the price books come

out. And then in more direct business that’s off sheet, we could get that right away. So it’s a variable – it varies. It

could be one to two quarters depending on the commodity and the supply chain that we’re talking about.

John, do you want to touch on capital? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A Yeah, sure. Stephen, in terms of capital allocation, you’re right. As we outlined at our Investor Day last year, we

had a pretty healthy $1.7B that we updated after-tax reform. And I think one of the things that we’ve gotten more

comfortable with over the course of the last couple of quarters is perhaps operating with lower levels of cash on

the balance sheet. And so, could there be more capital than the $1.7B that we indicated in May of last year

deployed through that three-year window? Yeah, I think there’s a possibility that that does exist. How much more?

It’s tough to say. I mean we’ll have to see what plays out for us both in terms of where does the share price go as

well as where do acquisition candidates emerge. And so, that’s something still out in the future a little bit. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q I’d like to ask a quick question on the Windows business. Just some color on the size of those pieces that you

mentioned. What’s one-time, what’s ongoing, and particularly as you look to 2019 or maybe the intermediate term

what the right margin is for this business? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer and Director A We had about $10mm headwind in this quarter. We think it will be about $5mm next quarter as we work through

some of those inefficiencies we talked about over in the UK in particular. In terms of long term, for the year, we’re

looking at 3% to 5% growth in the top line. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q Well, I’m thinking more like on those pieces that you mentioned, you mentioned a warranty piece, then you

mentioned UK workforce. I was just curious how those pieces – as we think to next year in particular, what

repeats and what doesn’t, and what the right – with these restructuring moves, what the right margin structure is

for that piece of the business.





John G. Sznewajs Vice President and Chief Financial Officer A Yeah, sure. Justin, so like you might expect, the UK piece is kind of one-time in nature as we work through some

of the restructuring activities and that should not be recurring. In terms of the warranty piece, that’s one of those

things that we evaluate our warranty from time to time, and you have to make adjustments to all your judgment-

based accounts whether it’s warranty or whether it’s accounts receivable or whether it’s inventory, whatever, so

from time to time into it. The principal reason that drove this quarter’s adjustment was some of the inflation that

we are experiencing with respect to some of the warranty costs that were coming in. Longer term, I guess to the

nature, the heart of your question, in terms of where do we expect margins to be, at this point, it really doesn’t

change our view that long term and again long term is not next quarter or Q1 next year, but long term the margins

for this quarter should be in that low-double digit to low-teens, that 10% to 13% range that we called out at our

Investor Day in May of last year. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q And then lastly for me just a follow-up question on cabinets. How much benefit from Menards in the quarter and

then did you provide a back half organic growth figure for the Plumbing business in your guidance? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A No, I don’t think we provided a back half. I think all we said is for a full year of 5% to 7% excluding the divestiture

of Moores. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q Okay. And then on the cabinets piece, just thinking about the Menards contribution in the quarter, obviously that

helped, but we don’t know how much. Do you have any context there for us? ......................................................................................................................................................................................................................................................

John G. Sznewajs Vice President and Chief Financial Officer A We haven’t disclosed that to this point. Yeah, we don’t intend to disclose it at this time.





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