Masco Corp (MAS) — Q3 2017 Earnings Call Transcript

Thank you, Amy, and good morning. Welcome to Masco Corporation’s 2017 third quarter conference call. With me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco’s Vice President and Chief Financial Officer. Our third quarter earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analysts’ questions. Please limit yourself to one question with one follow up. If we can’t take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We described these risks and uncertainties in our Risk Factors and Other Disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial measures. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconciled these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I’ll now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Dave. And good morning, everyone, and thank you for joining us today. You’ll have to excuse my voice; I am suffering from a classic Midwestern head cold here where our temperatures have been between 40 and 80 degrees depending on the day. Please turn to Slide 4. In the third quarter, we continued to invest in our business while driving profitable growth. Our top line increased 2%, excluding the favorable impact of currency, driven by solid growth in our Plumbing and Decorative Architectural segments. Excluding the divestiture of Arrow Fastener, our top line grew 4%, or 3% in local currency. Our operating margin increased 60 basis points to 15.3%, largely driven by the quick turnaround in our North American Window business. Earnings per share grew 22% to $0.50 per common share, demonstrating once again Masco's ability to convert solid sales growth into even better earnings per share growth through operating leverage, cost improvements, and disciplined capital allocation. As you all know, there were significant natural disasters that impacted North America during the quarter, particularly in Houston, areas throughout the state of Florida, and Puerto Rico. As a result, we were negatively impacted in the quarter as consumers, customers, and builders alike focused on preparing for and cleaning up after these storms and not on building new homes or remodeling their existing homes. Our thoughts go out to all those impacted, and we expect that there will be some ongoing challenges in these areas. But rebuilding efforts should be a net positive for our business in 2018. I'd also like to thank our suppliers, particularly those who support our coatings business, for all their efforts to keep us supplied, which in turn enabled us to serve our customers during these difficult events. Despite these challenges, we achieved our 24th consecutive quarter of sales and operating profit growth. Let me give you some additional insights into the drivers behind each of our segments' performance. Beginning with Plumbing. In North America, our trade business continued to be strong, as we gain share with our high-end showroom products and saw strong growth in eCommerce sales across both pure-play online retailers and our omnichannel partners. I'm also proud to say that for the third year in a row, Delta Faucet Company was awarded the U.S. EPA's WaterSense Sustained Excellence Award, the highest partner recognition for continued outstanding efforts to help advance the WaterSense program and water efficiency. Congratulations to the entire Delta team for its focus on developing innovative kitchen and bath solutions to help conserve water without sacrificing performance. Internationally, Hansgrohe drove significant growth in its focused markets and saw strength in its primary market of Germany, as well as the rest of Central Europe and China. In our Decorative Architectural segment, our paint business continues to perform well. Our Pro Paint sales grew at a double-digit pace, and we believe we are positioned to outperform the DIY market with our powerful BEHR brand, its outstanding product quality and service ratings, and our strong channel partner, the Home Depot. Additionally, we achieved strong sales growth in our Liberty Hardware business from our innovative shower door program and from our eCommerce business. In our Cabinetry segment, our KraftMaid brand drove double-digit growth across its retail and dealer channels, with its strong brand recognition and our continued focus on our growth initiatives. Our new KraftMaid product launch, consisting of on-trend finishes and innovative products that enhance the functionality of consumers' kitchens and baths, will continue this momentum. Offsetting the strong growth was weakness in our UK cabinet operation and softness with our U.S. builder customers, some of which was due to the impact of the hurricanes, which delayed deliveries and installation schedules. In our Windows segment, sales grew 9% excluding the divestiture of Arrow Fastener. Profits increased $33 million, driven by the absence of last year's warranty adjustment, as well as Milgard's strong brand, pricing power, and other operational improvements. I'm very pleased with this rapid turnaround, and as I shared with you previously, I remain confident that we will achieve mid-single-digit operating margins for the full year in this segment, a substantial improvement over 2016. We also continued our share repurchase activity in the quarter by buying back 4 million shares, returning approximately $210 million in share buybacks and dividends to our shareholders. Lastly, on our prior earnings call, we updated our 2017 target for earnings per share to be in the range of $1.93 to $2. Based on our results through the third quarter and the impact of the hurricanes on our business in the second half of the year, and the good start we're seeing in October, we now expect our 2017 earnings per share to be in the range of $1.93 to $1.97. Now, I'd like to turn the call over to John who will go over our operational and financial performance in more detail. John?

Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization and other one-time items. Turning to Slide 6, our performance resulted in solid growth in both our top and bottom line. The third quarter of 2017 was our 24th consecutive quarter of year-over-year sales and operating profit growth. On a reported basis, sales increased 3%, or 2% in local currency, and when accounting for the Arrow divestiture, sales increased 4%, or 3% in local currency. Foreign currency translation favorably impacted third quarter revenues by approximately $15 million as the euro strengthened against the U.S. dollar. North American sales increased 2%, or 3% excluding Arrow due to the demand for our repair and remodeling products across all channels of distribution and across the price continuum, as we continued to experience strong consumer demand for our better and best product offerings, particularly our KraftMaid, Milgard, and Delta higher-end showroom products. As Keith mentioned, our Q3 results were adversely impacted by the devastating hurricanes in Texas, Florida, and Puerto Rico. We estimate the revenue impact of these storms for the full year will be approximately $20 million, approximately $15 million in the third quarter split nearly evenly between the Plumbing, Decorative Architectural and Cabinetry segments, and $5 million in the fourth quarter that we expect will largely impact the Cabinetry segment. International sales increased 4% in local currency, as each of our international Plumbing businesses continue to drive growth. Gross margins expanded approximately 70 basis points compared to the third quarter of last year to 33.6%, largely due to the improvement of our North American Windows business. Our SG&A as a percent of sales matched the prior year at 18.3% as we continue to leverage our volume while making strategic investments to drive profitable growth. We delivered solid bottom line performance, as operating income increased 8% to $296 million with operating margins expanding 60 basis points to 15.3%. And our EPS was $0.50 in the quarter, an improvement of 22% compared to the third quarter of 2016. Turning to Slide 7, our Plumbing segment continues to deliver strong results. Segment sales increased 6%, and excluding the impact of currency, increased 4%. This solid performance was driven by growth in our faucet, shower, and spa businesses. Foreign currency translation favorably impacted this segment sales by approximately $13 million in the quarter. Our North American sales grew 4% in the third quarter, as we experienced strong consumer-driven demand from industry-leading brands with wholesale, large retail, and dealer customers. Our international Plumbing sales increased 6% in local currency. Hansgrohe continues to benefit from investments in brand, design, and innovation. These investments, along with their focus on growing in key markets, is yielding results as they experience strong double-digit growth in both Germany and China. Operating profit for the segment decreased 2% in the quarter as the strong drop-through on incremental volume was more than offset by approximately $10 million of increased strategic growth investments and other variable expenses. Turning to Slide 8, the Decorative Architectural product segment grew 3%. This performance was driven by another quarter of strong double-digit growth of our BEHR PRO initiative. We believe this segment will be the quickest to recover from the hurricanes as we are experiencing strong orders for our primers and interior paint in the affected areas. Liberty Hardware also contributed to topline performance as it continues to benefit from the expansion and growth of its innovative shower door program and in the eCommerce channel. As we mentioned in our second quarter call, Liberty continues to win new retail programs. It was awarded an expanded cabinet hardware program. This program was originally planned to set in the third quarter and now will be set in the fourth quarter. We anticipate spending approximately $8 million in reset costs in the fourth quarter on this program. In the segment, operating income in the third quarter decreased $7 million driven by an unfavorable price-to-commodity relationship as we discussed last quarter. We believe that the third quarter experienced the greatest impact of increased input costs, and we expect this relationship to improve as we go into the fourth quarter. Turning to Slide 9. In the Cabinetry segment, sales declined 4%. This is principally due to additional loss builder business in both the United States and the UK. Our repair and remodel business continues to perform well in the quarter. KraftMaid had solid performance in the home center and dealer channels, delivering double-digit growth through increased volume. Segment profitability declined in the third quarter by $1 million driven by reduced volume and the incremental cost of approximately $6 million. And we mentioned at our second quarter call, related to the anti-dumping duties and countervailing tariffs on imported Chinese plywood and the new KraftMaid product launches, we have mitigated the impact of these duties through supply chain and other initiatives, and do not anticipate them to have a material impact going forward. Turning to Slide 10. Our Windows segment sales matched the third quarter of 2016. Excluding the divestiture of Arrow Fasteners, sales grew 9%. This strong performance was driven by growth in Milgard, our leading Western U.S. window business, which grew 12% in the quarter. Milgard's strong growth was due to favorable pricing, increased volume, and a favorable mix shift toward our premium window and door products. Segment profitability in the quarter increased $33 million over the prior year driven by the lapping of last year’s warranty expense, favorable pricing, and cost-saving initiatives. We are extremely pleased with the rapid progress that the team has made on Milgard's turnaround, resulting in improved outcomes delivered in 2017. As a reminder, our fourth quarter sales and operating profit will be impacted by approximately $18 million and $5 million, respectively, due to our sale of Arrow Fastener. As we mentioned on last quarter's earnings call, we expect to see topline growth and mid-single digit margins in the segment for the full year despite the sale of Arrow. And turning to Slide 11, we ended the quarter with approximately $1.2 billion of balance sheet liquidity. Working capital as a percent of sales increased 140 basis points versus the prior year to 14.3%, principally due to higher inventory to support our growth in new program wins. We believe we will have this inventory work down to a more normalized level by the end of the year. During the third quarter, we continued our focus on shareholder value creation and repurchased approximately 4 million shares valued at approximately $178 million. And with that, I'll now turn the call back over to Keith.

Thank you, John. I am pleased with the third quarter results and with the progress we have made driving our growth initiatives that we outlined in May. We continue to invest in our Plumbing business and enjoy strong global growth as a result. In our Architectural - Decorative Architectural business, we continue to extend our DIY paint leadership and gain share in the PRO market while leveraging our Liberty Hardware business. In our Cabinet business, we are pleased with the progress of our KraftMaid dealer initiatives and our new product introductions, both of which will drive profitable growth. Finally, our turnaround with the Windows business has been exceptional. The fundamentals driving our business are strong. Demographics, namely the large millennial group, are increasingly favorable and should drive household formation and housing for years to come. Home prices are appreciating, up over 5% year-over-year, boosting consumer confidence to invest in their homes. Housing turnover, a leading indicator for our business, is at a healthy annualized pace of 5.4 million units. The U.S. residential housing stock is aging, a key driver of repair and remodel spending, with 70% of homes in the U.S. now over 25 years old, an increase of more than 19 million units in the past 10 years. We remain committed to investing behind our brands for growth, developing innovative products to ensure we maintain our must-have position with our customers. Focusing on operational excellence through our continued deployment of the Masco operating system, and finally balancing our capital allocation between acquisitions with the right strategic fit and share buybacks and dividends. Our operational execution, coupled with our strong balance sheet and liquidity position, provides us with multiple levers to continue to drive shareholder value and outperform the industry. Nearly three years ago, we committed to doubling earnings per share from $0.88 in 2014 to $1.80 in 2017. I'm proud of our team and the fact that we will exceed this target. Looking forward, we are committed to achieving our 2019 earnings per share target of $2.50 that we set at our Investor Day in May. With that, I'll open up the call for Q&A.

Hi. This is Chris Counihan on for Susan. I was just hoping you could provide some additional color on some of the margin pressure you're seeing in the Paint and Plumbing segments. How much of that was input cost-driven versus price mix?

Yes. So, Stephen, we did see some commodity inflation. Chris, I should say, I'm sorry. We did see some commodity inflation in both those segments in the quarter, and we shared that on our second quarter call. At the same time, you know, some of the strategic investments that we incurred, some incremental display and advertising cost as we are now nationally resetting our displays in our dealer customers across the United States and we probably—what we decided to do was pull forward some of that expense. We were going in at a fairly modest clip, and given the strength of the plumbing unit it has been seeing, we thought we would accelerate some of that spend. So, you’ll see some of that hit in the third quarter and you’ll also see some of that hit in the fourth quarter. I’d say probably $5 million of incremental spend related to those display resets being set in the third quarter, maybe $5 to $10 million in the fourth quarter as well. So as we accelerate some of that spend. On the paint side, you know, we did see some raw material inflation, and as I indicated in my prepared remarks, we do think that we were most impacted by the price-to-commodity relationship in the third quarter, and going forward, that should ease a little bit going into the fourth quarter and beyond.

Got it. Thanks. And then my second question is on cabinets, I know you said there would be additional spillover into Q4, you know it would be isolated to the cabinet segment. I was wondering if you could provide some color on why that segment is experiencing that spillover and not the rest?

Yeah. So the reason that the Cabinets segment is experiencing spillover from the hurricane impact is, if you think about the way the projects work, the cabinets are one of the last things to get set when a home is really—you know, has been damaged and it gets rebuilt. So they have to go through flooring, electrical plumbing, drywall, paint, and all that other stuff before people set their cabinets. So there is going to be a little bit of headwind in cabinetry going into Q4. But as we go into 2018, we do expect that we should see some tailwinds broadly across all of our product categories as a result of the rebuilding efforts in Texas and in Florida.

Thank you. It’s very helpful.

Hi, good morning. First, just on the paint price cost. You know, paint is traditionally a very disciplined end market, although demand there also tends to be relatively less cyclical because of the maintenance piece. Do you think there’s any change, or could there be any change in discipline in that industry just given the ongoing softness that you’re seeing in the DIY gallon growth? And if you could provide that, that growth would be helpful?

Good morning, Mike. It’s John. Yeah, so in terms of what we saw on DIY gallon growth, it was down just modestly. As we indicated, our Pro business was up double digits. You know, in terms of your first question around pricing discipline within the industry, we don’t expect any change in that dynamic going forward. You know, I can't speak for everyone else, but just given how we look at our—and serving our major customer, we’re very focused on supporting their strategy of both serving the DIY consumer with the best experience, the best quality of paint, and the best service in the industry, as well as really growing our share with the Pro. So we see no change in that dynamic whatsoever.

Okay. Great. And thanks for the color on the plumbing strategic spend. Can you also give us some details on the decorative hardware setup, what delayed that from the third quarter into the fourth quarter? Thank you.

Yes. So we're going to start that program with one of the large retailers, and as expected, we were largely expecting to set that in September. With the storms impacting a big part of the country, they just elected to delay that a couple of weeks, so nothing significant there.

Thanks for taking my questions. John, just a follow up on the detail around the plumbing spend in particular on the display resets. Could you just give us a little more detail on how that was originally set to play out over what time period? And I guess thinking forward into 2018 then, should we expect incremental costs to continue, or is this kind of pulling in $10 million or so into ‘17 that would have otherwise been in ’18?

Mike, we did post some expense; I think it will be a multi-quarter impact. So, we are pulling some expense out of early ’18 and into ‘17 for both Q3 and Q4. But we will continue to have some of those resets going into 2018 as well. So we do expect the impact to be a little bit more modest in 2018 than it was in the back half of 2017.

The reason we're accelerating this investment, Mike, is because it’s working for us. I don't know if you’ve had a chance to get out to the market and see some of our dealers and our showrooms, but fundamentally, these are the best displays that are out there. We’re displaying our showering program more strongly. We've gained additional, I think it’s two to three linear feet in these displays, and our customers in the showrooms are seeing good return on those investments. So that’s the reason why we’re so bullish on this investment, because the initial sets are performing so well.

Okay, great. That’s helpful. And my second question is going back to the paint side and the commentary around how Q3 should really be the peak of the pressures. I guess just given the inflation that you’re seeing in some of the raws there. Can you give us more detail on kind of what related to your pricing strategy or areas of cost reduction specifically are giving you the confidence that you know you’ll recoup some of these margin headwinds as we get through the next several months?

Mike, this is Keith. As you know, given the concentration with one customer, we don’t go into specifics on price. We work in terms of cost avoidance. We work hand in glove with our suppliers, those same suppliers that really help us out during the hurricanes. We have great relationships with them. They help us win, and we help them win. So together, it’s a good team. So we’re constantly looking at value in the can, and we’ve, by demonstrated performance, have really walked a nice line there in keeping the quality in the can while trying to be as competitive as we can and giving the consumer what they need. In terms of price-to-commodity, over time the prices ebb and flow, and we tend to get commodities, get price rather and get price commensurate with that flow. There’s always some lag, particularly when commodities accelerate really quickly. There’ll be more of a pronounced lag. But over time, we tend to remain flush with regards to price-to-commodity, and that’s what we expect going forward.

All right. Thanks, Keith. Good luck in Q4.

Thank you. First question back to the Decorative Architectural products, in the fourth quarter '16 there was a pretty heavily promotional spend, about $15 million. Will that reoccur in the fourth quarter of '17?

At this point, Keith, we're expecting a little bit of promotional activity, but probably will not be as intense as it was in the fourth quarter of 2016.

Given that, will that allow margins to rise in that segment with—as you talk about contemplated with the price/cost pressures?

Yeah. So, you know, I think, Keith, there are a couple of things to keep in mind there, right. One is that seasonally we slow down into the fourth quarter. And obviously, you know...

Keith, if it helps in paint, we really haven't changed our outlook from last quarter where we talked about for the full year mid-single digit growth and modest margin erosion.

Okay. And just one other quick one within the cabinet weakness you saw in the U.S. builder business, is that fire-related or hurricane or are we still in the process of getting out of some builder business that is just really not where you want to be?

Well, clearly the hurricane was a big piece of it. When you look at our builder direct concentration in branches where we have them, we have them in Denver, Texas, and Florida. So two-thirds of our footprint was pretty well devastated. So that was a significant piece of it, but it wasn't all of it. We're continuing to drive price into that builder channel. We want to have this build, and we will have this segment profitable for us, and when we do that we don't always win those re-bids when we go back with price, and there was a little bit of that. We had a little bit of builder consolidation that created some headwind for us, and will create a little bit of headwind going forward for the next couple of quarters. But fundamentally, it was a combination of the pricing actions that we've taken, a little bit of hit from the builder consolidation, and the hurricane.

Hi, guys. Thanks for taking my questions. The first question, I guess, is that your largest partner has initiated an advertising campaign supporting competitors, you know, Pro coatings products. Can you maybe just give us an update on your thoughts on that and how you see that going forward?

I’ll tell you, John, we haven't really lost any shelf space with our Behr products. Our relationship with Depot is very strong, and we're joined at the proverbial hip with both DIY and Pro market share initiatives that we have. It's a great position to be in when we have the best brand in terms of where the best quality is verified by third-party folks, the best service verified the same way, and the most compelling proposition on the shelf in terms of how we commercialize it. We have all these great stories that are out there. So, we've had—obviously, Depot offers many brands across product categories. They want consumers to have the choice, and we’re confident in our product offering, and we expect to continue to win.

I’d also say, John, that they are equally advertising our product as well in the marketplace; it’s not just solely. So there’s a great partnership on the advertising side with Home Depot on that front as well.

Okay. Thanks, guys. And then it seems like some of the industry data for cabinet has been a little bit softer than we expected at least. Is there any reason in your view why it's sort of underperforming the overall R&R business?

Yeah. John, I think there are a couple of things that we can point to on that front. You’re right, the data has been a little bit choppy and a little bit soft. You know, what we are seeing, I think are two things. One, we're seeing not that we participate in this part of the category, but the very high end, the custom part of the market, we are definitely seeing softness, or at least the data suggests that there was softness in the very high end of the market. So I think that’s one component of it. I think the second component of it may just be installation labor—that while we're seeing good demand across our dealer customers and in the retail channel for our KraftMaid products, you know, we are hearing pockets of the country where demand is strong enough that your product is simply delayed because you can’t get the installation labor to install the products.

Thank you. Going back to the hurricane impact, a lot of investors are looking past the current weakness and anticipating the positive tailwind you might get from rebuilding, which you mentioned. Houston seems to be pretty well along rebounding, recovering from the immediate impact. On the ground, how is that showing up for you folks? Are there any early indications that you're seeing? What kind of impact, you know, the tailwind you might see from the rebuilding efforts there?

Yeah, you're right. We're seeing the same effect. We do see Houston recovering a little bit faster than the Florida markets at this point. We principally think that’s due to the nature of the weather where it was localized flooding versus widespread rain and wind damage in the state of Florida. So early indications, what are we seeing? Right, so we are starting to see in particular strong orders for our paint and primer products, which is what we would expect following the storm, and we've seen that after other natural disasters as people look to repaint their homes; they need to prime it with our Kilz primers. So you know, that’s a—that’s the first sign. And so this is going just as expected as we've experienced following other hurricane activity. Following that should be orders for faucets and cabinets, which should be the last to be impacted. And as I mentioned earlier, we don't think that will be felt until 2018.

Got it. Got it. Okay. Yeah, I guess that's reflected in how you laid out the expected sales breakdown for Q4 as well. Second question, I wanted to go back to the price commodity in paint. You know, obviously you're not talking specifically about price responses, but thinking about the inflection in the price commodity, you know, with the disruption to the petrochemical sector and input costs, the maximum kind of input cost impact for Pro Paint is probably going to be in Q4. So how should we think about that? I mean, I would have expected that, you know, that would have delayed the inflection in price commodities. But it sounds like you're saying even in spite of any potential hurricane-related increase in input costs, you're still going to be able to see the inflection in Q4. How do I reconcile that?

Yeah. I mean, I think quite simply, you know, we do think that the hurricane impact, and there are some very, very minor disruptions with transportation and things like that, we will flow to that impact very quickly.

Hi, good morning. Thanks, guys. Keith, I guess just big picture on the organic growth side, I think it was 3% in the quarter. It would have been 4%, I guess, aside from the hurricane impact. That’s kind of where the revenue growth has been in the last year and a half or so How do you think about that trend into the fourth quarter, especially what you talked about with October off to a good start? Can you start to see that re-accelerate? And any thoughts on the ability to out-punch that 3% to 4% range as you get into the early part of next year?

I think in terms of the full year, Dennis, maybe it makes sense to go kind of line by line by our commodities, you know, and paying for the segments rather than in paint. As we've talked about, mid-single-digit growth for the full year—we're still expecting to see that. In cabinets, which was hit harder by the hurricanes, as we described, we will probably continue to get a little bit of top line hit there in the fourth quarter. We’re looking at our top line maybe to be flat to down slightly in cabinets for the full year. In terms of plumbing, again mid-single-digit growth for the full year, we're having strong growth. Our capacity is seasonal, and the fourth quarter typically slows down for us, and we're anticipating that. So for Windows, we’d see mid-single-digit growth as our expectation and we're confident in that. In terms of 2018, I’d really—you know, we’re seeing this as an extension of ‘17. We haven't—we still believe in the fundamentals. We're seeing good point-of-sale at the cash register for our products, particularly in paint. We're seeing good semi-custom cabinet sales and, as I said, the resets in our dealer and showrooms and in plumbing are very productive for us. So we're right on our Investor Day plan for 2019, and we would expect 2018 to be a continuation of the good growth that we've seen.

And Dennis, maybe just one point of clarification; specifically in the third quarter, the way we probably look at it as if you take the hurricanes out and the impact of Arrow, we're closer to 5% top line growth.

Okay… John, just on the earnings guidance, the implied guidance in the fourth quarter is relatively wide range, but hopefully, you can maybe just detail what are the puts and takes that would get you to the higher end of that range versus the lower end or the more sensitive items?

Yeah, I mean, I think there's really two things, Dennis, that we see; principally one is just simply volume and how the fourth quarter shapes up there. I mean, that’s the key driver. Other than that, it would be how we decide to control our expenses or put forward some expenses into the fourth quarter if we choose to do so out of 2018.

Hey, guys. It’s actually Trey on for Steve. Thanks for taking our questions. First, could you talk a little bit about how you expect your market share in terms of at Home Depot Behr Pro? Do you expect that to eventually mirror that to what you have in terms of the DIY product at Home Depot?

The way we think about our Pro initiative is really to go after about half of the Pro market here in the United States, which is a significant market. It’s those painters that are involved with residential repaint with maintenance and repair, apartment maintenance, those sorts of things. The folks that are already in Home Depot, that’s really where our value proposition rings. So, we continue to see the kind of double-digit growth that we’ve seen and to attack that specific segment.

Got you. And then could you turn back to cabinets? Is there any additional abandonment that happened in 3Q from builder business you just walked away from excluding that consolidation that happened? Also, was there any incremental promotional activity going on in the cabinet?

The promotional activity in cabinets was pretty consistent, and we haven't really seen much of a change from where it's been the last couple of quarters. In terms of the builder business, there was a concentration on a couple of those builders that were affected with consolidation, a little bit from the price increases that we put into the market, and then, of course, the hurricanes.

Hey, this is Neal BasuMullick for Mike. I guess for someone to ask a bit on the turnaround in Windows. How much do you see as your efforts being sort of ahead of schedule, you know, the ERP rollout and Milgard share gains recently? I guess, you know, where are you in the turnaround given the solid performance, and are there any bottlenecks you pointed out, labor or otherwise, that you're seeing kind of coming up?

I would tell you, and I did mention it on a prior call, that I expected this turnaround to be relatively quick. And the reason for that is because our value proposition is really clear to us and it's clear to our customers in terms of lead times, delivery, and fill rates. We had a line of sight with regards to the improvements that we had planned to get those lead times down into industry-leading levels, and we've done that, and the demand bounced back quite quickly. By and large, this is a business that our dealers bid on a sheet-by-sheet basis, meaning they get a job and they bid it and then they win or lose, and oftentimes, the delivery time is a key driver in doing that. So we expected it to be a relatively quick turnaround, but having said that, I would tell you it’s been faster than I expected. So I'm pleased with that. Neal, what was your follow-up question?

On…

On capacity. I apologize, and capacity, you know, and then we've talked about the labor market in the northwest and in California being tight, it continues to be tight. I will tell you, however, that the operational improvements that we've made have really helped out in this regard. We've talked about what was it—just 12% growth in Milgard in the quarter and we have close to record lead times and fill rates during that significant period of growth. I like where we're at in capacity, but as always, it's something we have to work on both in terms of getting folks in the door and then also turnover in those less than 90 days. But the permits we've made go a long way to helping with that.

Thanks. Good morning. Maybe a couple of more bigger picture questions or higher-level questions. In terms of cabinets, it looks like ex the hurricanes sales down around 2%. You know, it's your seventh quarter of declining sales year-over-year. And I understand that, you know, being very focused on price and profitability. You know, given what you saw in the quarter regarding that and your negotiations, like when would you expect this segment to start seeing some flattening out at least in the revenue base as we go forward?

You know, we've talked about our long-term view on cabinets to be in that 5% to 7% growth range and the 13% to 15% margin. Certainly, we're going to start to get and move in that direction in 2018. We're focused on the margin improvements, particularly in the builder segment, and then in the repair and remodeling; our new product introductions on both KraftMaid and Merillat are performing well. So we expect to continue to march towards that 5% to 7% growth and 13% to 15% margin that we called out on our Investor Day.

Okay. And then in paint, you know, you gave your sort of estimate for gallon growth in the quarter, which is down a little bit. At the beginning, you talked about the positives we're seeing in terms of repair and remodeling and house prices and things like that. Just generally speaking, you know, we've seen kind of lackluster gallon growth for the industry for quite some time now. What do you think is driving that, given the positives we're seeing in terms of the macro fundamentals?

Well, I think there is a number of things, and there’s a lot of people who have talked about this. The demographics, I think, plays a piece in it where millennials tend to be more of a do-it-for-me rather than do-it-yourself. There has been a significant uptick in terms of renters as a percent of household formations versus owners, and renters tend to paint less. And then the products are getting better in terms of coverage, you know, a lot more of our colors which require fewer gallons if you go way back to paint primer in one. That’s a piece of it. I will tell you that our belief is that as these millennials start to get into forming families, that I think that discretionary money is going to make a big difference. You know, if you're going to look at the cost to have someone paint your house versus you painting yourself on a weekend, I think that’s going to start to skew the scales as we see more formations from the millennials. So fundamentally, when we look at the numbers that we look at to peg the market for DIY paint, we think it’s going to start to come back.

Megan, as you look at our sales count on a combined basis, DIY and Pro, I'll tell you we were up low single digits in the quarter on a gallon basis. So overall, feel pretty good about how we’re performing.

Thank you and good morning.

Morning, Alex.

As it relates to some of the guys, as it relates to some of the guidance they've put out at the Investor Day. That killed some Liberty lines, I think you're looking for $50 million to $80 million revenue opportunity over time, and then the Pro business $152 million to $180 million. Where do you stand generally on those targets? Tracking ahead? Tracking behind? And any other comments?

You know, Alex, acknowledging that we’re only kind of a quarter and a half into a three-year guidance on those, you know, I think we’re definitely on track. Clearly one of the things that will help—Liberty was that the expanded cabinet hardware program that we’re setting now. That’s definitely a big component to helping us achieve if not exceed—the higher end of the range there. And then on the Pro side, we continue to do—we’re very pleased with somewhere we’re outperforming on the Pro, and you know, I think we’re right on track to achieve the Pro growth that we forecasted.

Well, you know, we’re only a couple of quarters into it. So, we’re continuing to work. We’ve gotten a lot of the productivity improvements behind us and we’ve certainly improved in our on-time delivery and fill rates. We’ve got an ERP system that we’re continuing to roll out. The last couple of plants that we put that in have performed very well and we’re prepared for that. So there’s always more work, particularly in continuous improvement to drive—keep working.

Hey, guys. You’ve provided some color on price-to-cost better in paint. In the fourth quarter, can I have missed it? Can you give some color on how we should think about price-to-cost in plumbing and fourth quarter and going into 2018?

Yeah, again, Phil, as we look at it, we expect that that relationship should slowly improve over time. You know, as we talked about in the second quarter call, we may have got a little price ahead of commodity cost, and that’s why you saw the expanded margins in Q2, and so we’re feeling a little bit more of that in Q3. But as we go into Q4 and into 2018, we will have to look at putting a further price into the marketplace.

Yeah, I think that’s a good way to look at it, Phil. You’re right on that. You nailed the seasonality perfectly. That’s exactly how the business develops over the course of the year. And given the strength that we’re seeing, as long as the volumes continue to hold out and the strong orders we’re seeing continue to—you know, we would expect that kind of development in 2018.

Hi, guys. Thanks for taking my question. Can you just clarify on the plumbing input costs in terms of the metals? We've seen copper and zinc up kind of dramatically. What's the lag in terms of when those go up and then when you see them in your results?

Yeah, it’s John. You're right, there is generally a lag that we see in our P&L. Generally, it’s about two quarters, roughly speaking, because of the length of our Asian supply lines. And so if you track copper and zinc, it’s not a direct one-for-one, but it’s pretty close. You can see how that will play out over the course of time.

Obviously, we can't get into specifics; we'll let you know when we do a deal. But in terms of our focus on it in the pipeline status, really there hasn't been a change from the last update I gave last quarter, and that is that we're continuing to work. We're moving attractive targets both in and out of the pipeline for various reasons. We've got good volume, and we've got what I believe to be a good spread in terms of value across. If you look at the distribution, the type of companies we're looking at, we're looking globally and we're looking here in North America. So, good activity, and we're continuing to stay focused. But at the same time, patient. We need to find targets with the fit and the right returns before we act out them, and we're continuing to work it.

Hey, good morning. Nice quarter, given a hurricane. I wanted to ask you, your Windows business is crushing. I never knew that could be such a profitable business. What's the ceiling on this? Two to three years out, where can you drive margins to, given the turnaround still underway?

You know, as you know, Bob, we talked about 10% to 13% margins on the Investor Day. So that would imply, you know, the top at 13%, but you know, we're going to keep driving out there. We've got a great leadership team in place, a great brand, good delivery, good fill rates, and fundamentally a strong underlying market. So that 13% is probably not the limit.

Got it. And when you—I just wanted to think about, you've got $2 billion of cash on the balance sheet. It sounds like you're being very disciplined around your approach to M&A opportunities. Is barring any large scale or M&A that consumes cash, if we just expect, you know, more buybacks and more raise the dividend activity from a capital allocation standpoint?

Bob, it’s John. I think that's the way to think about it, right? The way we prioritize our capital allocation, as you know, always first and foremost invest in the business to continue the growth of our existing businesses, and you know CapEx, as you've been watching, runs pretty late to 2.5% of sales. And then after that, it is rebalancing the M&A activity that keeps us talked about versus share repurchase activity, and we were out in the marketplace pretty aggressively in the third quarter buying back 4 million shares. And then you're right; we have raised the dividend four times over the course of the last four years, and while we cannot commit the company, we’ll continue to look at that type of activity going into 2018.

Got it. And just the cleanup question, you know, I was just trying to understand some of your commentary around plumbing in the margin compression in your obviously investing in some strategic growth initiatives. What's kind of a dollar spend in Q4 and when do you finish investing in that business? When do you get back to the dollar spend you put in? Where does that come out, and should we expect it to go into Q4 and to the 2018? Thanks and good luck.

Thanks, Bob. I know we do expect to do in the fourth quarter. We do expect the spend somewhere to be in that $5 million to $10 million range in Q4, and will there be similar activity in 2018 in the plumbing segment? Yes, there will. We’ll give you better clarity and guidance on that in our February call when we have our plans all set for 2018. So, you kind of spend in 2018 for those displaced.

Hey, guys. I wanted to dig a little bit deeper into the cabinet segment and, you know, some of the declining revenues there. Could you guys just give us an update on your capacity utilization levels? You know, previously you've stated you can still hit about 1.5 million starts. And, you know, as we’re looking into 2018 and in the fourth quarter, just how do you really think about kind of the trade-off between your capacity utilization level and maybe some of the decremental operating margins that you see from that?

We think our capacity is in a great place. We have plenty of headroom to get up to that 1.5 million start level and commence, commensurate our growth. We really look at capacity as a cost issue more than anything, and when you look at the type of capacity that we have with regards to, say, operating on two shifts instead of three shifts, that’s not a whole lot of extra cost for us. So in terms of the decremental, if you will, margin that excess capacity would present, it’s really not a big deal for us because we're talking about extending hours of operation across an existing asset that we need to meet our demand for our current demands. Our capacity is in good shape. That’s right where we want it, and we’re excited about pivoting to growth and getting our KraftMaid, new product introductions working and getting our Merillat and quality brands humming. Fundamentally, as we talked about at the Investor Day, this is a good business for us, and we look forward to getting it back up to those performance levels. I'd like to thank everyone for their interest in Masco Corporation. And this concludes today's call.