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25-Apr-2019

Masco Corp. (MAS)

Q1 2019 Earnings Call

Masco Corp. (MAS) Q1 2019 Earnings Call

Formatted Report 25-Apr-2019


2 Copyright © 2001-2019 FactSet CallStreet, LLC

CORPORATE PARTICIPANTS

David Chaika Vice President, Treasurer & Investor Relations

Keith J. Allman President, Chief Executive Officer & Director

John G. Sznewajs Chief Financial Officer & Vice President

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

OTHER PARTICIPANTS

Marius Morar Deutsche Bank Securities, Inc.

Stephen Kim Evercore ISI

Matthew Bouley Barclays Capital, Inc.

Michael Jason Rehaut JPMorgan Securities LLC

Michael Wood Nomura Instinet

Susan Maklari Credit Suisse Securities (USA) LLC

Michael Dahl RBC Capital Markets LLC

Truman Patterson Wells Fargo Securities LLC

Keith Hughes SunTrust Robinson Humphrey, Inc.

Kenneth Zener KeyBanc Capital Markets, Inc.

Philip Ng Jefferies LLC

Scott Schrier Citigroup Global Markets, Inc.

Peter T. Galbo Bank of America Merrill Lynch

Adam Baumgarten Macquarie Capital (USA), Inc.

Justin Andrew Speer Zelman Partners LLC

Eric Bosshard Cleveland Research Co. LLC





MANAGEMENT DISCUSSION SECTION

David Chaika Vice President, Treasurer & 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 ..............................................................................................................................................................................................

Windows Business

Please turn to slide 4

We experienced a slow start in 2019 as a combination of factors impacted our results

Some of these factors were anticipated, such a sales pull-forward into Q4 2018 and a large ERP

implementation in our Windows business

However, other factors were external and not anticipated, such as inventory rebalancing in certain

Plumbing and Decorative channels and softer end-market demand early in the quarter

Sales Trends

Despite our slow start to the year, we saw sales trends improve in March and believe that markets are

now performing as we expected

For the quarter, excluding the impact of currency and acquisitions, sales decreased 2%

Operating profit decreased $20mm principally due to lower volumes in our Plumbing, Decorative and

Windows segments

o These were partially offset by pricing actions we took across all segments

Our EPS decreased 2% due to the lower operating profit

Plumbing Sales

Turning to our segments, excluding currency, Plumbing sales were flat

Volume decline in North America was the biggest contributor to flat sales as volume was affected by the

sales pull-forward into Q4 of 2018 that we discussed last quarter and lower demand earlier in the quarter

While Plumbing sales worldwide were flat, we did see continued strong performance with our high-end

Brizo brand in the wholesale showroom channel and good growth in Hansgrohe in both China and

Germany, its largest markets





Spa Business

Watkins, our leading spa business, continued to see good demand for its products and achieved record

first quarter sales

In our Decorative Architectural Products segments, paint volumes were lower in Q1 due to the $20mm of

sales pull-forward into Q4 2018 that we mentioned on our last call, inventory rebalancing and lower end-

market demand

Paint volumes did accelerate in March and this has continued into April

Pro Paint Initiative

We also continue to invest in our pro paint initiative in Q1 by hiring additional employees to sell and

service the professional painter and we expect to continue to gain share in the pro paint market in 2019

Our lighting business was also softer than expected, notably in landscape lighting, which was impacted

by weather in the quarter

Cabinetry

Turning to Cabinetry, sales grew 9% in Q1 with growth in both our repair and remodel business and

strong growth in our new construction business

Our repair and remodel growth was led by our new program with Menards, which we anniversaried in Q1

2019

We’re very pleased with this new business and it is meeting our expectations

Windows Segment

In our Windows segment, sales were down in Q1 as we went live with an ERP system at our largest

window manufacturing facility, which caused us to stop taking orders for about a two-week period as

planned

This implementation has gone [Technical Difficulty] (05:28)

o Additionally, our UK business continued to be challenged by softer market conditions for its

products

Capital Allocation

Turning back to Masco overall, we continued our disciplined capital allocation by repurchasing 3.5mm

shares for $122mm during the quarter

SUMMARY .....................................................................................................................................................................................................................................

Before turning the call over to John, let me give you a brief update on our review of strategic alternatives

for our Cabinetry and Windows businesses

We have engaged outside advisers to help us with this evaluation and we are close to completing carve-

out audits of the business units

o We have made good progress and are on track to complete this review as planned by the end of

June and we will update you accordingly ......................................................................................................................................................................................................................................................





John G. Sznewajs Chief Financial Officer & Vice President

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

Sales

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

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

acquisition and other one-time items

Turning to slide 6, sales decreased 1% on a reported basis, but grew 1% in local currency

Excluding the acquisition of Kichler, sales decreased 4% or 2% in lower currency

Foreign currency translation unfavorably impacted our first quarter revenue by approximately $33mm

In local currency, North American sales increased 2% in the quarter, but decreased 3% excluding the

Kichler acquisition

o This performance was due to lower volume in all segments except Cabinetry as we experienced

sales pull-forward into Q4 2018, inventory rebalancing in certain customers and overall softer

demand in January and February

Gross Margin

In local currency, international sales decreased 1% in the quarter, driven by solid growth in China and

Germany, which was more than offset by softness in other smaller regions

Gross margins were 31.4%, down 120BPS, largely due to lower sales volume and the impact of a full

quarter of Kichler

o We expect gross margin to expand in the remaining three quarters of 2019

SG&A

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

We reported operating profit of $230mm with operating margins of 12.1%

In the quarter, we booked two impairment charges

The first charge was a write-down of Kichler’s trade name for approximately $9mm

o This was driven by a revised look at our long-term revenue growth forecast incorporating market

softness we experienced late last year and in Q1 this year

The second charge was a write-off of the UK Window Group’s goodwill balance for approximately $7mm

EPS

Our EPS was $0.44 in the quarter, a decline of 2% compared to Q1 2018 due to decreased operating

profit, partially offset by the benefit of a lower share count

Finally, we are reaffirming our annual EPS estimate of $2.60 to $2.80

o This guidance assumes that tariffs remain at the 10% level for the remainder of the year and a

normalized tax rate of 25%

Plumbing Segment

Turning to slide 7, our Plumbing segment sales decreased 3% on a reported basis





Excluding the impact of currency, sales matched prior year

Foreign currency translation unfavorably impacted this segment’s sales by approximately $29mm in the

quarter

North America

Our North American sales decreased 1% in Q1 as this segment’s sales comparisons were impacted by

approximately $20mm of one-time items

On our fourth quarter call, we discussed that approximately $10mm of sales were pulled forward into Q4

2018 from Q1 2019

o Additionally, as you may recall, last year’s first quarter sales benefited from approximately

$10mm of sales that were pulled out of Q2 and into Q1, ahead of Delta’s ERP implementation in

2018

INVENTORY

North American performance was also impacted by inventory rebalancing in the wholesale channel,

softness in our rough plumbing business and overall lower demand early in the quarter

Our international Plumbing sales increased 1% in local currency as Hansgrohe experienced solid growth

in both China and Germany

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

Mix negatively impacted the quarter due to lower inventory levels in the wholesale channel in North

America and the mix shift down in our international markets

Segment Results

Segment results were also impacted by a trade show expense which we discussed on our fourth quarter

earnings call

These were partially offset by favorable pricing actions

For 2019, we continue to expect the Plumbing segment sales growth to be in the 3% to 5% range with

margins similar to 2018

Decorative Architectural Products Segment

Turning to slide 8, the Decorative Architectural Products segment grew 5%

This performance was driven by a low-single digit growth in Behr’s pro paint initiative and our acquisition

of Kichler

Excluding the acquisition, sales declined 7%

As we discussed on our last earnings call, the Decorative segment results were impacted by

approximately $20mm of sales pull-forward into Q4 2018 due to increased year-end customer purchases

to achieve incentives

INVENTORY

In addition, first quarter results were lower than expected due to inventory rebalancing and softer demand

earlier in the quarter

Despite a slow start to the year, Behr did see improved sales trends in March, which have continued into

April





Liberty Hardware

In addition, Liberty Hardware experienced growth in the quarter with strength in both its retail and e-

commerce channels

Operating income in Q1 declined vs. the prior year due to lower volume, the full quarter impact of Kichler

and the addition of employees servicing pro paint customers, partially offset by reduced spending

For the full-year 2019, we expect the Decorative Architectural segment sales growth will be toward the

lower end of the 4% to 6% range, including the benefit of the Kichler acquisition, and margins to be in the

range of 17% to 18%

Cabinetry Segment

Turning to slide 9, the Cabinetry segment sales increased 9% in the quarter

The strong performance was driven by solid growth in both our repair/remodel and new home

construction businesses through increased volume and favorable price

o Additionally, our performance was supported by our program win at Menards which anniversaried

in Q1 this year

PROFITABILITY

Segment profitability increased in the quarter by $16mm, principally driven by lower spending due to the

ramp-up costs related to the Menards win in Q1 2018, favorable pricing actions, and increased volume

This increase was partially offset by unfavorable mix, resulting from our growth at Menards and the

double-digit growth in our new home construction business

While growth was strong in Q1, we continue to expect sales growth will be between 0% and 3% and

segment margins to be similar to 2018 as comps get tougher now that we’ve anniversaried the Menards

win, particularly in Q2 due to the significant ramp-up at Menards in Q2 of 2018

Windows Segment

Turning to slide 10, our Windows segment sales decreased 16%, and excluding the impact of currency

decreased 14% in the quarter

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

o This performance was driven by lower volume, offset by favorable pricing

ERP SYSTEM

As we discussed on our fourth quarter earnings call, Milgard executed on the implementation of an ERP

system in its largest facility during the quarter

And as expected, the plant did not take orders for approximately two weeks which impacted Milgard’s

volume

The implementation went very well and that facility has returned to normal production levels

UK Window Operation

The segment’s performance was also impacted by continued market softness at our UK Window

operation

Segment profitability in the quarter decreased $7mm, driven by lower volume and inefficiencies, partially

offset by favorable pricing actions





For 2019, we continue to expect sales growth for this segment to be in the 1% to 3% range, excluding

currency, with modest margin improvement

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

Liquidity

And turning to slide 11, our balance sheet remains strong with net debt-to-EBITDA at 2 times

And we ended the quarter with approximately $1.2B of balance sheet liquidity

In the quarter, we further improved our liquidity and flexibility by entering into a new five-year credit

agreement, which increased availability from $750mm to $1B

Working Capital and Shareholder Value

Working capital, as a percent of sales, improved 150BPS vs. prior year to 16.5%

For the full year, we expect working capital, as a percent of sales, to be approximately 14% which is

similar to where we ended 2018

Lastly, during the quarter, we continued our focus on shareholder value creation by repurchasing 3.5mm

shares valued at approximately $122mm ......................................................................................................................................................................................................................................................


Q1 HIGHLIGHTS ....................................................................................................................................................................................................................

Core Repair and Remodel Market

The fundamentals of our business and our core repair and remodel market are healthy

Consumers remain confident, and wages are growing

This increases the consumers’ willingness to invest in their home

Home prices continue to appreciate

o This is highly correlated with repair and remodel spending

The age of the housing stock is increasing, with 15mm owned homes greater than 30 years old

This drives increased remodel spending

Long-Term Growth

And household formations have steadily increased throughout 2018, driven by the millennial demographic

This trend is projected to fuel housing demand for the next decade

We believe these fundamentals are supportive of good, long-term growth

Adjusted EPS

We’re also positive on our current markets

While we had a slow start to the year, we’re encouraged by our recent trends and the acceleration of

demand we saw coming out of the quarter and continuing into April

Given the strong fundamentals, improving market conditions and our ability to execute our plans for 2019,

we reaffirm our expectation to achieve 2019 adjusted EPS in the range of $2.60 to $2.80





Balance Sheet

With our strong balance sheet and expected full-year 2019 cash flow conversion of over 100%, we intend

to deploy approximately $600mm towards share repurchases for the full year of 2019, consistent with our

balanced capital allocation strategy

With our focus on executing our strategy, coupled with our strong balance sheet and liquidity, we will

continue to create shareholder value

Lastly, please save the date for our planned Investor Day on September 17 in New York City, where we

will update you on our progress towards our previous goals and our long-term strategy ......................................................................................................................................................................................................................................................

QUESTION AND ANSWER SECTION

Marius Morar Deutsche Bank Securities, Inc. Q The question about rough plumbing, I think over the last six years, when you called out rough plumbing, it was

always a driver of growth. And this time around, you are saying there was softness in rough plumbing. And I was

just wondering if you could give us a little bit more insight into that. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A When you look at our Plumbing segment and you compare where we have particular concentration in new

construction, rough plumbing tends to be a little more skewed towards new construction than repair and

remodeling and that really is a primary driver of some of the softness that we’ve seen. ......................................................................................................................................................................................................................................................

Marius Morar Deutsche Bank Securities, Inc. Q All right. Thank you. And then, given the combination of a slow start and the fact that you’re maintaining your full-

year guidance, does that imply that you expect to come at the lower-end or do you anticipate that H2 will make up

for the slow start? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Well, we did expect a slower Q1 due to the pull-ahead that we mentioned in a couple segments, but I would say

that the quarter was a little softer than we expected. We didn’t expect the inventory rebalancing and I would say

that there were others probably a little worse than expected, but we did see things pick up in the back part of the

quarter and into early April here. And it looks like the 25% tariff is coming off the table. So, that could help us with

volume a bit. So, all in, we feel good about our ability to execute and achieve our plans and that’s why we are

reaffirming our range of $2.60 to $2.80. ......................................................................................................................................................................................................................................................

Stephen Kim Evercore ISI Q So, just want to clarify on the tariff guide. You are now assuming 10% and you said that coating provide a little bit

of a lift, but just wanted to make sure that in your guidance, you are incorporating – a 10% is maintained and

doesn’t go to 25%. Just want to clarify if that is different from what you are assuming last quarter. ......................................................................................................................................................................................................................................................





Keith J. Allman President, Chief Executive Officer & Director A Yes. So, if you may recall that we assume that it was 25% for the year as we started out the year. So, that’s

correct, Stephen, that we’re assuming that it’s 10% and that 10% stays throughout the year. ......................................................................................................................................................................................................................................................

Stephen Kim Evercore ISI Q Okay. And you would also assume, I think, that you were going to recover the bulk of that and through pricing

actions, so the EPS impact probably wouldn’t be that meaningful I assume. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Stephen, I should also point out when we assume that we’re going to recover in price, we also assumed because

of those pricing actions and we may have some reduced volume as a result of those pricing actions. So, just

make sure you’re clear on that. ......................................................................................................................................................................................................................................................

Stephen Kim Evercore ISI Q Yeah. Correct. Yeah. Thanks for that clarification. On Kichler, you talked about landscaping or lighting being

impacted by weather in the quarter. We also know there are obviously some other issues there at Kichler. So, my

question overall is can you give us a sense for how much of the Kichler sales decline you thought was impacted

by weather and how much was related to other issues? And when do we think we can see sales grow on a y-

over-y basis in Kichler? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A We’re off plan a little bit on the revenue side with Kichler. We’ve took a fresh look at our long-term revenue

forecast and we have seen some softness in the lighting market overall going back to let’s say the last quarter,

quarter and a half of 2018 and that softness has continued into the early part here in 2019, as I mentioned,

probably some weather-related due to landscaping, but also we believe that the industry is digesting the impact of

tariff pricing and we need to get through that.

This industry is more of an impact from tariff as a proportion than most of our other segments for sure. We’re also

applying more discipline to our pricing as it relates to retail and wholesale programs. This is consistent with how

we run our other businesses and we think that’s – has an impact on the overall revenue in this business.

In terms, Stephen, specifically of growth in 2019, we’ll be challenged to achieve growth in 2019 at Kichler due to

the slow start to the year and, as I mentioned, our discipline around pricing in both retail and wholesale programs.

And with that impact on tariff, that will be a factor as well. We are confident that as we get through this rough start

to 2019 that lighting will grow in a similar trajectory to repair and remodel over the long term and we’re working on

some exciting new programs to get after that, but term specific at 2019, growth can be challenged in Kichler. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yes. Stephen, what I would supplement Keith’s comments with is on the operational side, I think we made some

good improvement there and there’re some further opportunities for us to go after by implementing by our Masco





Operating System. So, if I may, from a bottom line perspective, we see a good opportunity there too to continue to

improve that business. ......................................................................................................................................................................................................................................................

Matthew Bouley Barclays Capital, Inc. Q I wanted to ask about the strategic review kind of understanding there’s different potential outcomes there. How

would you guys think about capital deployment upon completion of these transactions? Is the expectation that you

may buy back additional stock or are there, I guess, acquisitions that might be closer to the vest in paint or

plumbing? Just kind of any thoughts there. Thank you. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. In terms of use of proceeds, if we go in that direction, we really do not see a change in the capital allocation

strategy that we’ve articulated and consistently executed against. That being consistent with regards to funding

our business. We would use – we’ve talked about the $600mm of share buyback in 2019. We certainly are

continuing to look at acquisitions. We have a solid and strong pipeline that we’re continuing to evaluate. But as

I’ve said consistently, we’ll be patient as it relates to acquisitions to ensure that we’re deploying capital to

businesses that have the right strategic fit and can give us the right return. So, no real change to our capital

allocation strategy. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Matthew, maybe to give you a little bit more clarity, we will probably focus a little bit more on share repurchase

activity if we were go to the sale route, acknowledging the fact that our balance sheet is in good shape now. So, if

an acquisition were to come along, we could use our balance sheet to help fund any acquisition that were to come

along. So, we wouldn’t be afraid to deploy a little bit of those – a fair amount of those proceeds if that’s where it

goes to share repurchase activity. ......................................................................................................................................................................................................................................................

Matthew Bouley Barclays Capital, Inc. Q Okay. I appreciate that detail. And then, secondly, just back to Decorative, you mentioned that trends around

sales pace accelerating in March and April in paint, but you changed the revenue guidance slightly. So, is that

simply just as you mentioned the slower expectations around Kichler or is that just a reflection of Q1 results? I

guess ultimately is the expectation that sales growth Q2 to Q4 is going to be a bit slower than what we had

previously envisioned? Thank you. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. In terms of the segment growth, I would say that probably it comes down to the two factors as you

mentioned. One, the Kichler revenue was a little bit softer here in the first part of the year. And then also, we had

a little bit softer first part of the year in our other businesses in that segment. And so, that’s why we’re kind of

guiding down to that – the lower-end of that range here for 2019. ......................................................................................................................................................................................................................................................

Michael Jason Rehaut JPMorgan Securities LLC Q





First question I had was on the improvement in trends that you saw during the year. You said that you started off

the year a little softer due to weather and then, March kind of more met your expectations. I was wondering if you

could give us a sense specifically by month how the sales progressed on a growth basis. How bad was it in

January, February and what type of rate did you finish the last month of the quarter? And so far in April, are you

seeing similar to March or perhaps a little stronger? Any color on the progression would be helpful. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Mike, first to reset, just keep in mind, as you know, that Q1 is our smallest and most volatile quarter, often

impacted by weather and sometimes the timing of purchasing from the prior year-end, et cetera. So, we’re

encouraged by the turn in the trends that we saw in March. Volumes picked up noticeably for many of our

products, including plumbing and paint. We’re seeing a strong backlog and reports from the field for example in

our spa business, which we think is a great barometer for consumer spending. So, that’s going very well.

So, along with the macro fundamentals and what we’re actually seeing in terms of orders and backlogs, we’re

also hearing anecdotal evidence from our customers and channel partners that the consumer is healthy, that

there’s spots of very good traffic in fact. And we’re positive for the remainder of the year and feel that we’re well

set up for the $2.60 to $2.80 guidance that we’ve given. In terms of specific month-by-month breakdowns, I’ll

steer away from that, but just tell you that we’ve seen at the end of the quarter a nice pickup. ......................................................................................................................................................................................................................................................

Michael Jason Rehaut JPMorgan Securities LLC Q No, that’s helpful, Keith. I appreciate that color. I guess, secondly, appreciate the transparency on Kichler and

obviously, there’s sometimes growing pains and seems like you’re doing a few things that are impacting the

performance this year. I just wanted to get a sense and kind of recognize perhaps you’ll have a great and more

detailed review at the Analyst Day, but ahead of that, just trying to get a sense of what landscape lighting

represents as a percent of the overall sales, number one.

And number two, in terms of some of the proactive actions that you’re taking from a pricing discipline standpoint

and I assume that’s perhaps also you’re reducing lower-margin SKUs or customers perhaps, what that might do

to the overall margin profile of the business over the next year or two to the extent that you’re able to fully

implement that shift? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A So, when you look at the mix of Kichler’s business, decorative interior fixtures is a important large chunk of it. But

landscape lighting is also a big portion of the business and important to us and one that we do very well when you

go out and do channel checks and talk to the market. Kichler landscape lighting specifically is very strong with

regards to the product and the service and durability, et cetera. So it’s important part of the business and we do

well with it. And when you have some tough weather, that can affect it.

In terms of what we’re doing and how we’re driving this business, it’s pretty consistent with how we’ve driven our

other businesses with regards to the Masco Operating System where we focus on quality of earnings and getting

businesses better and align from a process and execution perspective before we focus on getting them bigger. So

that get better before we get bigger is a common mantra that we drive and that involves applying 80/20 disciplines

to our product assortment and to our customers, et cetera.





So I think that coupled with, as John mentioned, we’re exceeding our expectations as it relates to some of the

cost-out and productivity and synergies that we’re driving. So this is more of a top line issue than a cash flow or

bottom line and return issue. So we would expect as we drive both cost improvements on the procurement and on

the logistics and some of those basics, as well as sharpening our pencil on programs that we’d expect ultimately

that we’d continue to drive margin improvement in the business. ......................................................................................................................................................................................................................................................

Michael Wood Nomura Instinet Q First, just wanted to ask about, with the Decorative sales being pointed to the low-end of the range, does that

have an impact on where within the profit guidance, 17%-18% range, we’d fall? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A No, Mike. Doesn’t really have an impact at all on that. ......................................................................................................................................................................................................................................................

Michael Wood Nomura Instinet Q Okay. And then, I wanted to ask about the inventory rebalancing that was unanticipated. Can you quantify that at

all in paint and plumbing? And is the March-April strength being helped by a restocking or has that not occurred? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A So, Mike, in terms of the destocking, no, we probably won’t go into the details of quantifying on those measures

on either segment. In terms of are we seeing changes going prospectively, as you might imagine, going into the

spring selling season, things are starting to pick up. Keith alluded to the fact that we saw things get better in the

tail-end of the quarter. And so, we may see a little bit of that coming back here as we start off Q2, and we’re still

working our way through all that. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A I would tell you, Mike, that our sell-through to the consumer, if you will, the POS is stronger than our sell-in to our

customers. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. And I’d also point out, Mike, I think an element of the destocking particularly in Plumbing is due to our

exceptional service levels with our customers. And I think that they’re able to perhaps hold a little bit less

inventory. So this may be a little bit of a one-time item in terms of that because of the strength of our service

capability. ......................................................................................................................................................................................................................................................

Susan Maklari Credit Suisse Securities (USA) LLC Q Thank you. My first question is just around the raw material side of things. Can you give us some color on what

you’ve seen in terms of inflation and any thoughts on how that may trend as we look to the remainder of the year? ......................................................................................................................................................................................................................................................





Keith J. Allman President, Chief Executive Officer & Director A Susan, some of our commodities have moderated y-over-y, but are up sequentially, if you will. So if we kind of

take it – walk through a couple of the commodities, the big ones, copper and zinc, in Plumbing, that started to

moderate, I would say, in the back half of 2018 and are down, call it, 10% to 20% y-over-y in Q1. But zinc in

particular has bounced back. So probably a modest net benefit for the full year on those commodities.

In terms of TiO2 and resin, they’re both still up y-over-y. TiO2 seems to have stabilized. However, we’re still

seeing pressure on resins and, obviously, oil prices are very volatile. So we’re continuing to keep an eye on that.

So not really a benefit for the year.

In cabinets, plywood distribution and logistics, they remain elevated, but I would say they’ve moderated a bit. So

while some inputs have moderated, others remain elevated and increasing on a y-over-y basis. So we’re really

not anticipating much of a net benefit or tailwind from deflation in 2019. ......................................................................................................................................................................................................................................................

Susan Maklari Credit Suisse Securities (USA) LLC Q Okay. And then, within the Plumbing segment you noted that there was some impact from a negative mix shift.

And that’s actually an area of the business where we’ve been seeing more of a positive mix come through over

the last few quarters. Can you just talk to that shift? And, I guess, how have you seen things as we had exited the

quarter with the demand improving? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. I think the large driver for sure over the mix shift was the inventory rebalancing at one of our wholesale

customers. So when that happens and we have a influx, if you will, of wholesale orders – excuse me, when the

wholesale orders reduce, then that, as a mix, makes the retail orders a greater percentage; and wholesale tends

to be a better mix for us. So that’s a real driver for us. So we see that improving as we go forward. ......................................................................................................................................................................................................................................................

Michael Dahl RBC Capital Markets LLC Q Keith and John, just a follow-up on Decorative. If I look at the kind of implied sales progression to get to the lower-

end of the range for the full year, particularly given Kichler is a bit weak, it implies that the core paint business

ramps up to back up to more mid-single digit growth potentially a bit better. So I just wanted to ask kind of is that

the level of rebound that you’ve seen already occur into April or is there more wood to chop in terms of getting

that acceleration and anything specific in terms of programs we should be thinking about there? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. I’d say it’ a little bit of a combination, but you’ve got the numbers down. You’re right on how we’re thinking

about it. ......................................................................................................................................................................................................................................................

Michael Dahl RBC Capital Markets LLC Q





Okay. I guess as my follow-up, in terms of the split between PRO and DIY, it seems obviously DIY may be more

impacted by the inventory issue. But just any color you can give us on expected relative growth rates for PRO and

DIY implied by your full-year guidance? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Well, I think we’re expecting the DIY market to be flattish, maybe even to slightly down in 2019 and that’s the

majority of our sales. There’s a little bit of – as we talked about softer market conditions that we’re experiencing,

that will have a impact on the full year. The inventory rebalancing certainly is a piece of that.

We continue to be bullish on our PRO business. We continue to invest in that. We talked about the accelerated

investments that we have in this quarter and the fact that we’re not going to really anniversary our incremental

investments in 2018 until Q3. So, we continue to think that that growth will be... ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. The PRO side, yeah, it should be kind of high-single digits. It’s kind of the way we’re viewing it here in

2019, Mike, and, yeah, and kind of low-single digits for the DIY side of the business. ......................................................................................................................................................................................................................................................

Truman Patterson Wells Fargo Securities LLC Q Just wanted to touch on architectural paint side of the business. A couple of your competitors produced up first

quarter revenues, which might imply a little bit of at least near-term share loss at Behr. I guess, do you think that

this is actually happening? And if not, could you guys just elaborate a little bit on it? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A I think you have to pull-out the pull-forward when you do that. I think we’re hanging right in there to holding our

share to maybe gain a little bit. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. And the inventory rebalancing that was affected in the paint business as well in Q1, Truman. If you take a

look at those two factors, we don’t think we’re losing any share. ......................................................................................................................................................................................................................................................

Truman Patterson Wells Fargo Securities LLC Q Okay. Okay. Thanks, guys. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. And I would tell you, Truman, that sell-through is probably better than sell-in in the quarter. ......................................................................................................................................................................................................................................................

Truman Patterson Wells Fargo Securities LLC Q Okay. Okay. And no SKU also or anything within the retailer?





John G. Sznewajs Chief Financial Officer & Vice President A No. ......................................................................................................................................................................................................................................................

Truman Patterson Wells Fargo Securities LLC Q Okay. Okay. Also, on the Decorative Architectural side, op margins declined and missed your guidance by a little

bit. Was this more driven by paint decrementals from the weak volumes or from Kichler and the tariff impact on

the margins? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A I’d say it was – had to do more with the volumes – lower volumes on the paint side of the business as well as –

this was our Q1 Kichler – the full quarter of Kichler and it’s a seasonally weaker quarter for them. So, that was a

pretty significant impact on lower margins here in Q1 as well. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A And also, we had incremental investment for the PRO. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A That’s good point. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A So, that’s a factor. So, I think if you look at – I won’t specifically quantify, but I think the volume was a main driver

simply – certainly a full quarter of Kichler and the fact that this is a lower quarter for Kichler and then incremental

investments. D&A was up a little bit with the full-year acquisition, amortization, but I think those first three are the

main drivers. ......................................................................................................................................................................................................................................................

Keith Hughes SunTrust Robinson Humphrey, Inc. Q I guess two questions. One, on the inventory rebalancing, do you feel like here in April that that’s completed for

both plumbing and paint? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A I think so. Yeah. ......................................................................................................................................................................................................................................................

Keith Hughes SunTrust Robinson Humphrey, Inc. Q Okay. And then, second question within paint is the DIY market for you is affected – excuse me, is the PRO

market for you is affected by weather as we see some of your other competitors start with the PRO? ......................................................................................................................................................................................................................................................





Keith J. Allman President, Chief Executive Officer & Director A I think I don’t want to talk about our competitors, but I think it’s pretty similar. Our PRO volume tends to be skewed

a little bit more towards exterior. And so, that would be affected by the weather. ......................................................................................................................................................................................................................................................

Kenneth Zener KeyBanc Capital Markets, Inc. Q John, could you talk about the earnings weighting in H1 vs. H2 just to give us kind of a sense of how much

momentum we could expect compared to prior years? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Sure, Ken. I mean as we said on our fourth quarter call, we thought Q1 is going to be a little bit softer partially due

to the sales pull-forward that we called out on the earnings call and partially due to the – we knew that Q1 Kichler

is a seasonally weaker quarter. So, we kind of had expected that going into the beginning of the year. Keith

mentioned a couple things that were unanticipated.

That said, as we see the progression for the next three quarters, I’d say it’s going to be just a steady progression

from here. I think Q2, you recall, we had some good strength in a couple of our businesses, partially due to the

fact that we launched the Menards program really in earnest in Q2 of last year. So, we saw some good growth in

that business.

So, I think it would be a steady ramp from here with arguably H2 being better than H1 is the way we’re seeing

things play out here. If you just take a look at the comps that we have against 2018, I think that is probably a good

indicator of how you should see the balance of the year play out. So, that’s kind of the way we’re thinking about it

now, Ken. ......................................................................................................................................................................................................................................................

Kenneth Zener KeyBanc Capital Markets, Inc. Q Thank you. And if you could comment on the, I know it’s small, but the UK Window business. Thank you very

much. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Sure. As you might expect, the UK Window business, to your point, is relatively small and no surprise that there’s

pockets of weakness and softness over in the UK in advance of Brexit, but we are seeing there is that – new

home construction over there, which we play a little bit in, was up very low-single digits, but the remodeling

market was down fairly significantly call it mid-single digits in Q1. And so, that really impacted our business there

pretty significantly, no surprise. But, as Keith mentioned, the progress we’re making on evaluating these

businesses is continuing and we look forward to talking to everyone or making everyone aware once our decision

is complete. ......................................................................................................................................................................................................................................................

Philip Ng Jefferies LLC Q





Post your strategic decision on Windows and cabinets, certainly you’ll be a more focused company, what type of

impact do you anticipate it would have with negotiations with your customers and suppliers giving you reduced

scales in any potential dis-synergies we should be thinking of? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Our strength or our importance to our customers is really driven by what we bring with brand service and

innovation primarily across that core part of our business in paint and plumbing. So, we don’t anticipate any

significant change in our customer relationships across our paint, plumbing, hardware businesses should we

choose to go a divestiture out with these businesses. I think there, our relationship, as I said, is driven by the

things we do well and it’s something that we earn. We don’t anticipate any degradation to that based on a

potential sale. ......................................................................................................................................................................................................................................................

Philip Ng Jefferies LLC Q Okay. That’s really helpful color. And then, on Plumbing, it was a little weaker. You obviously had some noise with

pull-forward, but with new construction still pretty soft to start the year from a starters perspective and potentially

impacting your rough plumbing business, will that be a potentially bigger drag in Q2 or you’ve seen enough in

terms of orders and trends where you feel pretty good that orders – I mean volumes in that Plumbing business will

kind of bounce back in that mid-single-digit range? Thanks. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. We don’t anticipate it being a bigger drag going forward. ......................................................................................................................................................................................................................................................

Scott Schrier Citigroup Global Markets, Inc. Q I wanted to ask if there’s any update to how you’re thinking about tariffs and I know you were kind of reevaluating

whether or not you are going to look into supply chain changes or anything. So, I know it’s kind of a moving target,

but any color you can give from that funnel would be helpful. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A I think probably the most relevant update is how we’re thinking about it in terms of the probability of the 25%. So,

we, as I mentioned, came into the year with our base plan assuming that the 25% was going to go into effect. And

our assessment now is that it won’t. We believe that the 10% will stick, but its variable.

In terms of update of what we’ve been able to accomplish, it’s a combination in some cases of moving product out

of China into a different supply chain. In other cases, it’s working with our Chinese suppliers on value engineering

and cost reduction and some cost sharing. And what we haven’t been able to recover, we’ve been effective in

going out and getting price.

So, I think the update is we don’t believe that 25% – we don’t think that 25% is going to happen and we do think

that 10% is going to stick. We believe that it is extremely variable and we need to be fleet of foot with regards to

supply chain cost-out and pricing and with – the other part of the update would be that we’ve been pretty

successful from my assessment in doing those three things up to this point. ......................................................................................................................................................................................................................................................





Scott Schrier Citigroup Global Markets, Inc. Q Thanks for that. So, for my follow-up, I wanted to ask a little bit about – for the strategic review, if that does go to

the divestment route and you’re talking about, well, buybacks seem to be the priority for capital allocation or

internal investment, but if you were to look in the external opportunities, you talked about your pipeline, how

attractive are these opportunities? Are seller expectations on multiples elevated? Does it make sense when

you’re arguably later in the cycle? So, just wanted to see how things are looking from the M&A perspective. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. I think when we think about these strategic alternatives, I think it is good to reset the key drivers of why

we’re doing this. And I’ve been in the seat here as CEO for five years and when we came in with the new team,

we really – we committed to doing three things. One was driving the full potential of our business through the

installation of a common operating system. Two was to drive leverage across our businesses, of course in supply

chain and procurement, but more importantly from my perspective in processes and people. And then, thirdly, to

improve our portfolio to make it more R&R focused, less cyclical, higher margin, more dependable, because we

felt that was good for the shareholders and would add value.

And we began in earnest right away when I came on board to do that with the spin-off of our services business

and that has been very successful for the shareholders. If you look at their market cap now and our total, that was

good for the shareholders. We also said with regards to the portfolio that we felt the best avenue for creating

shareholder value was to fix our cabinet and Windows businesses and we’ve done that. So, this is a natural

progression of what we’ve set out as our strategy to continually improve our portfolio to drive shareholder value as

it relates to reduced cyclicality and more repeatability and higher margin.

So, while it’s – I know your question was directly related at use of proceeds, I think more fundamentally, this

strategic alternative assessment is really focused on creating shareholder value and continue with the track

record that we have of doing that.

Now, with regards to the attractiveness in our pipeline, we really haven’t seen too much of a significant change in

valuation and expectations on the sellers, and that doesn’t slow us down. We continue to cultivate, we continue to

work for opportunities, and we have a very robust pipeline and some exciting opportunities.

But we’re going to be patient and we’re going to ensure that the targets we’re looking at are strategically right for

us, and that we believe fully that we can earn the return that we expect to earn when we make an investment. It

doesn’t feel to me that valuations have, as of yet, really loosened up. It’s a bit of a slow start in the quarter, and

they’re not particularly interested in selling off of a bad quarter. They want to sell off of a momentum. So it’s a

volatile period if you put yourself in the seat of a seller and we really haven’t seen that much change in terms of

expected valuations. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A And, Scott, maybe just one another piece of information because we get this question quite a bit, much more

tactical than Keith’s answer, is the tax basis of these businesses. And just for everyone’s benefit, tax basis of this

group, the three businesses collectively is about $300mm. So I think that helps frame things for people as they

think about, if we go to the sale route, the expected net proceeds from those businesses. ......................................................................................................................................................................................................................................................





Peter T. Galbo Bank of America Merrill Lynch Q John, maybe you can just elaborate a little bit on the double-digit growth in cabinets, new construction that you

guys saw in the quarter. I mean is that mostly just load-in on the Menards side or what kind of drove that given the

flattish new construction environment in Q1? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. So I think it doesn’t necessarily relate to the Menards business because that’s R&R. It had to do with the

fact that you may recall over the course of really 2015 through 2017, we pulled back on a lot of our new

construction business because it was less than profitable. So we saw some growth here in Q1. It’s really off of a

relatively easy comp compared to Q1 2018. ......................................................................................................................................................................................................................................................

Peter T. Galbo Bank of America Merrill Lynch Q Got it. Okay. And maybe just one more on the strategic review and if you’re willing to comment at all. I mean kind

of what level of the inbound interest have you guys received since kind of putting these two businesses out there

as potential divestiture candidates? Anything you’re willing to comment on there. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Very good. These are attractive businesses that have leading brands in their categories, good strong cash flow.

We’ve done a good job with putting in good teams of leaders in these businesses and we’ve improved them

tremendously, but there are still improvements to go. So these are good businesses, real solid market share,

brands, innovation pipelines, et cetera. So we’re seeing very healthy interest. ......................................................................................................................................................................................................................................................

Adam Baumgarten Macquarie Capital (USA), Inc. Q Just quickly on Plumbing, you guys mentioned wholesale destocking, can you talk about the trends you saw in

U.S. retail? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A In terms of destocking? ......................................................................................................................................................................................................................................................

Adam Baumgarten Macquarie Capital (USA), Inc. Q No. In Plumbing, what kind of sales trends you saw in U.S. retail? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. Our retail business was okay kind of January-February, where we’re a little soft, but again similar to the

trends we saw in the overall market; saw some pickup as we went into margin the first part of April. So it’s not

inconsistent with what we saw across our broader portfolio of businesses. ......................................................................................................................................................................................................................................................





Adam Baumgarten Macquarie Capital (USA), Inc. Q Got it. And then, just on cabinets, I mean you haven’t changed the guide there even with the kind of strong start to

Q1. I know that kind of ex-Menards, you’re kind of implying slightly down volumes. And I think part of that at least

last quarter was handicapping for some of the tariffs that were potentially going to come through. Is it safe to

assume, given your more benign look on tariffs, that the kind of underlying ex-Menards cabinets’ growth outlook is

a little bit better? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A Yeah. I’d say it might just be slightly better at about – I wouldn’t say it’s materially better than what we were

thinking about in the beginning of the year. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q Wanted to take the question back to Kichler and thinking about just if you could take us back down memory lane

on what – if you could remind us what you were thinking about the opportunity with that business when you

bought it vs. maybe the reality of what it is today. Now that you’re expressing this, I guess more negative tone

with the impairment, the weakness in the underlying markets, but I want to understand what the right annualized

revenue and margin profile for that business is now going forward, now that you have it in your hands for over a

year. ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A The underlying thesis when we looked at it and we ultimately ended up acquiring it was that it was a large market

with fragmented competition that had demonstrated growth at or slightly above the base R&R market, and it

demonstrated an ability to get price commensurate with commodities.

So what we saw in this business was an opportunity to apply some of our operating system techniques to take

cost out, that if we could go in and apply and work with them as it relates to demand generation through influencer

advocacy and that we could learn from them on how to more quickly identify consumer trends.

There’s also an opportunity that we saw and we are taking advantage of as it relates to supply chain and new

product development processes to shorten that cycle. So as we get in here and look what those fundamental

underlying premises as we know, but know the business better, have not changed.

What’s changed and what we didn’t anticipate was tariffs. And this business is, for the most part, procured in

China. And so, there’s issues associated with the pricing and elasticity that we’re working to better understand.

But fundamentally, what we’ve learned about the presence in the market, the presence in the channels and how

they’re appreciated with the distribution is unchanged and we’re going to continue to drive it. We still feel good

about it. ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. Justin, I want to make certain – we’ve got greater clarity for everyone on is sensitivity of that trade name

calculation to small movements in top line. I’ll get into some granularity here, but because it’s – the trade name is





based off of the projected revenue of the business, so when you value assets for doing purchase price allocation,

you don’t have a lot of room to move particularly on the trade name, before you may be in an impaired situation.

And so, slight movements in top line projections can put you in such a position. So, I don’t want you to walk away

from the conversation that we are particularly troubled by what’s taken place at Kichler. It’s just the very sensitive

nature of the calculation that’s caused this impairment. ......................................................................................................................................................................................................................................................

Justin Andrew Speer Zelman Partners LLC Q So, I guess a follow-up on that, number one, was there any lost market share associated with this, because that

was my understanding that most of your competitors were also kind of similarly sourced or at least the supply

chains were similarly arranged? And then, secondly, with the tariff, potentially the prospect of that coming off,

does that potentially just flip the script back to what you’re originally thinking or is there something maybe larger

underneath or maybe a loss share or something that took place maybe more difficult to get back even with tariffs

that this is being be removed? ......................................................................................................................................................................................................................................................

John G. Sznewajs Chief Financial Officer & Vice President A Yeah. So, we don’t – and it’s probably a little bit early to tell, whether we loss share. We don’t think we’ve lost any

share, but we’re still – when you’re up against a bunch of private competitors, it’s always tough to determine

share positions on a short-term basis. And so – but at this stage, we don’t think we’ve lost any meaningful share

anyplace. So, that does not impact it.

In terms of that the tariffs are coming off, does that change our thinking longer term? Yeah, it could. We’ve got to

see that come through. But in terms of what we’ve done, we had to go would kind of facts and circumstances as

we know them today. ......................................................................................................................................................................................................................................................

Eric Bosshard Cleveland Research Co. LLC Q Just a follow-up on Kichler. I understand the disruption of the tariffs and of weather, but in terms of the ultimate

destination with this business, the targets that you bought it in terms of your market share and the margin

opportunity, do you feel different now than you did a year ago when you bought the business? ......................................................................................................................................................................................................................................................

Keith J. Allman President, Chief Executive Officer & Director A No. We don’t. We think that this business is going to grow at or slightly above the overall repair and remodel

market and we’re driving towards the continued margin improvements. We’re over performing our plan and we’re

doing better than I expected as it relates to some of the cost-outs that we’re driving. So, as John mentioned, with

the accounting calculations for trade name, it’s hypersensitive to revenue, but there wasn’t a goodwill write-down

that we took here or write-downs associated with the cash flow. So, that’s more of the issue.





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