Masco Corp (MAS) — Q4 2017 Earnings Call Transcript

Thank you, Lisa and good morning. Welcome to Masco Corporation’s 2017 fourth quarter and full year 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 fourth quarter earnings release and the presentation slides 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 will now turn the call over to our President and Chief Executive Officer, Keith Allman.

Thank you, Dave. Good morning, everyone and thank you for joining us today. Please turn to Slide 4. In May of 2015, the new leadership team at Masco held our first Investor Day in over 7 years. We introduced the new team, outlined our strategies in detail and committed to more than doubling our earnings per share from $0.88 in 2014 to $1.80 in 2017. I am very proud to say that the Masco team exceeded that $1.80 target by earning $1.94 per share, a 3-year compounded growth rate of over 30%. I would like to thank our more than 26,000 employees worldwide for their hard work and dedication and for doing their part to help us accomplish this lofty goal. Let’s discuss some of our key accomplishments in 2017 that contributed to the achievement of this goal. Our revenues for the year grew 4%, excluding the impact of currency and our operating profit increased 9% or $98 million as margins expanded 70 basis points to 15.3%, our highest margin in 15 years. This operating profit growth demonstrates our strong operating leverage, continued improvements in cost productivity and our ability to successfully implement price across segments to offset raw material and other inflation demonstrating the strength of our brands, innovation and the value that we bring to our customers. Turning to our segments, our Plumbing segment delivered strong performance across our diverse global plumbing platform, with Delta, Hansgrohe and Watkins each achieving record sales and record profits for the year. Notably, Delta achieved record sales in the fourth quarter. When you consider that the fourth quarter is typically a slower quarter, this is a significant achievement. Delta delivered this growth with strong performance in trade retail and e-commerce due to the breadth of its product assortment, commitment to innovation and focus on serving the customer. Hansgrohe, our global plumbing company, drove strong growth in the fourth quarter in Germany, France, the Netherlands and China as it continued to execute on our strategic initiatives and gained share in its focus markets. During the fourth quarter we also completed the acquisition of Mercury Plastics, a plastics processor and manufacturer of water handling systems for appliance and faucet applications for $89 million. This acquisition enables us to continue to expand the development of the industry leading PEX waterway technology for faucet and appliance applications. In our Decorative Architectural segment, we finished the year with strong momentum as fourth quarter sales grew an outstanding 12%, our propane initiative continued its double digit growth in the quarter and for the year. And I am pleased to say that this program is now over $400 million in revenue with significant market opportunity still ahead. To continue to capitalize on this opportunity, we have committed along with our partner the Home Depot two additional investments and are actively recruiting to expand our hub store footprint and our outside pro sales force. We expect to have these additional employees on-board in early 2018. While the DIY market has been soft for most of 2017, together with the Home Depot we continued to outperform the market by successfully driving mid single-digit DIY growth during the fourth quarter as our customer-focused programs, industry-leading quality, service and brand continue to produce results. Liberty Hardware also achieved double digit top line growth in the quarter as it completed the load in for a new retail cabinet hardware program capping off double digit top line growth for the year. I am also pleased that we entered an agreement to acquire Kichler Lighting late in the fourth quarter. We expect this transaction to close in the first quarter and its results will be reported in our Decorative Architectural segment. Kichler is a strong fit with Masco with top brands in each of its product categories, a focus on design and innovation and outstanding customer service. As products are sold through channels where we have a strong presence such as plumbing showrooms, home centers and online as well as other channels including lighting showrooms and electrical distributors. We are excited about the future of this business and with its annual sales of approximately $450 million and similar growth prospects to our other businesses. This will be an additional driver of growth for Masco. Turning to cabinetry, we experienced some headwinds in this business throughout the year due to some unplanned losses of our builder business, increased tariffs and the effects of hurricanes in the third and fourth quarters of the year. Despite these headwinds our KraftMaid brand grew mid single-digits for the full year and we improved the overall segment operating margins by 310 basis points in the fourth quarter. I would like to share with you an exciting development in our cabinetry business. We recently won a significant program with Menards to be a supplier of special order and in stock cabinetry with our Cardell brand of cabinets. We have already begun setting displays in the Menards stores and this activity will continue throughout the first half of 2018. It will take some time to ramp up this program, but we believe this program will be approximately $80 million in annual revenue at maturity. We achieved this win with an assortment of innovative products at attractive price points. Congratulations to the entire Masco cabinetry team for securing this exciting new account that will drive profitable growth. During the fourth quarter we also determined that the Moores Furniture Group, our small UK cabinet operation was no longer core to our long-term strategy and completed the divestiture of this business. Moving on to windows, we achieved a $54 million improvement in operating profit in this segment for the full year due to the improved performance at Milgard, our leading Western United States window business which achieved high single-digit growth for the full year. Now turning back to our consolidated results, our strong operating performance in 2017 generated $564 million in free cash flow, strong cash flow was a hallmark of Masco enabling us to drive shareholder value through reinvesting in the business, selectively pursuing acquisitions with the right fit and return, and returning cash to shareholders through share repurchases and dividends. Consistent with our balanced capital allocation strategy, we returned $460 million to shareholders through share repurchases and dividends in 2017 and will invest a significant amount of capital upon the closing of the Kichler acquisition in early 2018. In addition to the acquisition of Kichler, we expect to deploy a minimum of $200 million to $300 million in share buybacks or acquisitions in 2018. I will now turn the call over to John who will go over our operational and financial performance in greater detail. John?

Thank you, Keith and good morning everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact in rationalization and other one-time charges. Before I get into the details, I should make you aware that my script today will be a little bit longer than it has been historically as we will be sharing with you some significant detail for 2017 and 2018. So, hang in there with me for the next several minutes. Turning to Slide 6, we delivered solid sales growth and operating margin expansion in 2017 driven by customer-focused innovation, new programs and productivity improvements. The fourth quarter was our 25th consecutive quarter of year-over-year sales and profit growth. We finished the year strong. Fourth quarter sales increased 5% and full year sales increased 4%, excluding the impact of currency translation. When accounting for the divestitures of Arrow and Moores, sales increased 6% in the fourth quarter and 5% in the full year in local currency. Currency translation favorably impacted our fourth quarter sales by approximately $30 million as the U.S. dollar weakened against most major currencies, including the euro and British pound. Our full year sales were not impacted by currency translation. North American sales increased 5% in the fourth quarter and 4% in the full year in local currency. Excluding Arrow, sales increased 7% in the fourth quarter and 5% for the full year in local currency. Consumer-driven demand for our industry-leading repair and remodeling products across all channels of distribution and across the price continuum drove this performance. International sales increased 3% in the quarter and 4% for the full year in local currency as our international plumbing businesses continue to drive growth and profitability. Excluding Moores, sales increased 5% in both the quarter and the full year in local currency. Gross margins expanded 10 basis points to 32.9% in the quarter, expanded 60 basis points to 34.2% for the full year. We successfully put price into the market across all four segments in the fourth quarter to offset rising input costs demonstrating strength of our brands and innovation. Our SG&A as a percent of sales decreased 140 basis points to 18.8% in the fourth quarter and decreased 10 basis points to 18.9% for the full year as we continue to leverage our volume and control our costs while making strategic investments in profitable growth initiatives. We delivered solid bottom line performance in 2017 as operating income increased 20% in the quarter and margins expanded 150 basis points to 14.1%. For the full year, operating income increased 9% and margins expanded 70 basis points to 15.3%, our highest full year operating margin in 15 years. For the fourth quarter, our EPS increased 33% to $0.44 and for the full year increased 28% to $1.94. These results exclude a loss of approximately $64 million that resulted from the sale of our UK cabinet business in the fourth quarter of 2017. Starting with the first quarter of 2018, our adjusted EPS calculation will assume a 26% tax rate, down from the 34% due to the recently enacted tax reform. Turning to Slide 7, our Plumbing segment achieved another outstanding year. This segment once again delivered profitable growth and margin expansion. Segment sales in the quarter increased 6%, excluding the impact of currency driven by strong growth in our faucet, shower, and spa businesses. Currency favorably impacted this segment’s sales by approximately $24 million in the quarter. North American sales increased 6% in local currency as we experienced strong demand with our wholesale, large retail, dealer and e-commerce customers. As Keith mentioned, the fourth quarter was an all-time sales record for Delta and was typically a seasonally slower quarter. Our European performance was also strong in the quarter as our international plumbing businesses grew sales by 7% in local currency as Hansgrohe’s focus on key markets continued to yield results with strong growth in both China and Germany. Operating profit in the quarter increased 11% due to incremental volume in a favorable price commodity relationship. These benefits were partially offset by approximately $8 million of increased strategic display investment with Delta’s plumbing wholesalers that we foreshadowed on our third quarter call. Turning to the full year 2017, sales increased 6% in both U.S. dollars as well as local currency led again by record sales and operating profit at Delta, Hansgrohe and Watkins. North American sales grew 6% as we experienced strong growth across all channels, including wholesalers, large retailers, dealers, and e-commerce during 2017. In addition, Delta Faucet’s luxury brand, Brizo, grew double-digits and continued to experience strong consumer demand in showrooms for its innovative products. Delta also gained share in faucets and showers with new product introductions in both retail and trade. Our European businesses continued to outperform delivering 6% sales growth in both U.S. dollars and local currency as Hansgrohe’s performance continued to benefit from its investments in brand, design and innovation. Full year operating profit grew 7% due to volume growth in a favorable price commodity relationship partially offset by strategic growth investments. Delta will continue its investments in showrooms by rolling out new displays for the plumbing wholesale customers. We are expecting this spend to be an incremental $4 million in the first half of 2018 split equally between the first and second quarters. Delta is also in the process of implementing a new ERP system, which we expect to incur approximately $10 million of incremental expenses in 2018 mainly in the second and third quarters. For 2018 at this time, we expect Plumbing segment sales growth to be in the 4% to 6% range, with margins similar to 2017. Turning to Slide 8, the Decorative Architectural Products segment grew an outstanding 12% in the fourth quarter as we continue to experience strong double-digit growth of our BEHR PRO initiative as well as mid single-digit growth in our core DIY products. We estimate sales in the quarter were aided by approximately $6 million of incremental sales to the hurricane-impacted regions of the United States. Liberty Hardware also contributed to the top line as they benefited from the $6 million load in of its new retail cabinetry hardware program in the quarter. Operating income increased 17% due to increased volume and an improvement in the price commodity relationship partially offset by approximately $7 million of reset costs related to Liberty’s retail program win that we previously discussed on our third quarter call. Full year sales grew 5% driven by strong performance of our BEHR PRO initiative as we achieved double-digit growth and continued to grow share with the PRO. Our PRO sales were more than $400 million for 2017. This outstanding performance continues to demonstrate our commitment together with the Home Depot to invest in and capitalize on the significant opportunity. Due to the success of this PRO initiative, we will invest in additional hub store employees and outside sales reps in early 2018 to support future growth. We expect this incremental investment will be similar to our investment in 2017. The solid sales growth in 2017 was also attributable to Liberty Hardware’s continued share gains from successful new product introductions and program wins in the retail channel. Full year operating income increased 1% principally due to operating leverage on higher volume partially offset by an unfavorable price to commodity relationship and strategic growth investments. Please turn to Slide 9, as we look into 2018, this segment will be impacted by two items I would like to provide further detail on, the new revenue recognition standard and the acquisition of Kichler. First, the new revenue recognition accounting standard will have minimal impact on the segment’s full year results, but will affect revenues and operating margins each quarter. This new standard will decrease segment revenue by approximately $10 million in each of Q1 and Q4 and will increase revenue by approximately $10 million in each of Q2 and Q3. This change will also impact segment operating margins decreasing segment operating margins by approximately 100 basis points in each of Q1 and Q4 and increasing segment operating margins by approximately 100 basis points in each of the second and third quarters. Our other segments will not be significantly impacted by the new revenue recognition standard. Moving to the acquisition, as Keith mentioned, we expect to close on our acquisition of Kichler shortly, this results will be included in this segment. Including this acquisition and assuming a March 31 close, we expect segment sales growth will be between 21% and 23% with operating margins in the range of 16.5% to 18.5% in 2018. A portion of this margin reduction is due to the impact of purchase accounting for intangible assets and the related amortization expense. Additionally, we expect an approximate $35 million impact in the first 6 months following the closing of the transaction due to the step-up of inventory as part of purchase accounting. We will exclude this inventory step-up adjustment in our adjusted numbers. As we think about the existing business in this segment for 2018 excluding Kichler, we believe core sales should grow in the 4% to 6% range similar to what we guided at our Investor Day and existing margins may contract modestly from 2017 levels due to price commodity headwind and further investment in the hub store and Pro sales reps. Turning to Slide 10, in the Cabinetry segment, sales declined 5% in the fourth quarter and 4% for the full year principally due to the exit of certain low margin builder business in the first half of 2017, the impact of Texas and Florida hurricanes and additional loss builder business resulting from a builder consolidation in the second half of 2017. In addition, we divested our UK cabinet business, the Moores Furniture Group in the fourth quarter. Excluding the impact of Moores, sales declined 1% in the fourth quarter and 3% for the full year. This activity masked a very successful year for KraftMaid. In the retail channel, KraftMaid experienced mid single-digit growth as well as year-over-year share gains in 2017. In the dealer channel, KraftMaid drove mid single-digit growth in 2017 through increased volume, favorable mix and price as its new products continue to resonate with kitchen designers and consumers. Segment profitability increased $6 million in the quarter and declined $9 million for the full year. The fourth quarter performance was driven by continued improvement in operating efficiencies and favorable pricing. The full year was impacted by a loss volume, expenses related to new product launches and the impact of antidumping duties and countervailing tariffs on imported Chinese plywood. Turning to 2018, segment sales will be reduced by approximately $40 million due to the sale of Moores split roughly evenly between the first, second and third quarters, with some improvement to operating profit. In addition due to the recent retail win under the Cardell brand as Keith mentioned, we anticipate approximately $12 million of investment spend mainly in the first quarter as the new store displays are set. We believe annual sales from this program will be approximately $80 million at maturity and we expect to be at that run-rate by year end. We also believe this program will be accretive to the segment’s margins, excluding the investment spend. For 2018, we expect sales growth excluding the Moores divestiture in the range of 5% to 7% and expect continued margin expansion despite significant investment in the Menards program. Turning to Slide 11, our Windows segment sales decreased 3% in the fourth quarter and matched the full year 2016. Excluding the sale of Arrow Fastener, sales increased 6% in the fourth quarter and 5% for the full year. This strong performance was driven by growth in Milgard, our leading Western U.S. window business, which was 7% in the fourth quarter and 8% for the full year. Milgard’s solid growth was due to favorable pricing, increased volume and the positive mix shift towards our premium window and door products. Segment profitability in the quarter decreased $2 million, but increased $54 million for the full year. Fourth quarter was impacted by cost increases, the divestiture of Arrow, softness in our UK operations, partially offset by favorable pricing. The full year performance was primarily driven by the lapping of last year’s warranty expense, favorable pricing and cost savings initiatives. We are extremely pleased with the rapid turnaround in Milgard in 2017 and remain confident that the improved performance will continue in 2018. As a reminder due to the sale of Arrow Fastener, our first half sales and operating profit will be reduced by approximately $30 million and $6 million respectively, split roughly evenly between the first and second quarter. 2018, we expect sales growth for this segment to be 6% to 8% excluding the Arrow divestiture with margin expansion though not likely in our long-term range of 10% to 13% due to the ongoing rollout of ERP at Milgard. And turning to Slide 12, our year end balance sheet was strong at approximately $1.3 billion of liquidity. We continued to produce some of the best working capital results in the industry with working capital as a percent of sales was 13% at year end. This was slightly elevated from the prior year principally due to higher inventory to support our growth and new program wins. We expect to improve our working capital metrics in 2018. During 2017, we repurchased more than 9 million shares valued at approximately $331 million. We also increased the dividend by $0.02 to $0.42 per common share. Since 2014 we have returned more than $1.6 billion to shareholders through share repurchases and dividends. We took further action in 2017 to strengthen our balance sheet by refinancing high coupon debt and thus reducing our interest expense by approximately $3 million per quarter. Going into 2018, our disciplined capital allocation strategy is unchanged. We continue to prioritize investment in our businesses to drive organic growth. We will balance acquisitions with the right strategic fit and returns with share repurchases and we will maintain an appropriate dividend. We will utilize our strong liquidity in 2018 as we plan to fund our acquisition of Kichler with $550 million of cash on hand. In addition, we have $114 million debt maturity to come through in April which we plan to pay off. We also expect to use another $200 million to $300 million in share repurchases or acquisitions in 2018. We generated more than $560 million of free cash flow in 2017. We expect to generate more than $800 million of free cash flow in 2018 due to stronger earnings, the benefit of tax reform and disciplined working capital management. This amount does not include any free cash flow from Kichler. Our 2018 EPS estimate is $2.48 to $2.63. This range includes the change in the tax code and the expected results for the Kichler acquisition for the last three quarters of 2018. Before I turn the call back over to Keith, let me highlight one other required accounting change. There is a new pension accounting rule, this new rule will move approximately $17 million of pension expense and operating expenses to the other income expense line on the income statement in 2018. The effects will be to increase operating income by $17 million in 2018. There will be no effect on either net income or EPS. As the majority of our pension expense is recorded in general corporate expense each of our segments will have only a minimal benefit. 2018 general corporate expense is estimated to be $85 million which reflects the pension change and other anticipated cost reductions. With that I will now turn the call back over to Keith.

Thank you, John. 2017 was a good year for Masco, as we successfully executed against our strategic initiatives. We continued to grow our Plumbing segment with our three largest plumbing businesses Delta, Hansgrohe, and Watkins each achieving record sales and record profits. We continue to gain share in the pro and DIY paint markets with our powerful Behr brand. In cabinetry, our KraftMaid brand gained share in its repair and remodel market as it continued to resonate with kitchen designers and consumers. And in windows, we significantly improved our operating performance at our Milgard windows business unit. In addition to our segment performance, we executed against our capital allocation strategy by investing in our business, committing significant capital to two acquisitions, repurchasing approximately $331 million of our shares and increasing our dividend for the fourth year in a row. As we turn to 2018, the fundamentals of our business remain strong and consumer confidence continues to improve, due in part to the recently enacted tax reform. With our continued focus on executing our strategy, coupled with our strong balance sheet and liquidity position, we will capitalize on the strong industry dynamics by continuing to invest in our leading brands, innovation leadership and operational excellence. We believe, we will generate over $800 million in free cash flow in 2018 and earnings per share will be in the range of $2.48 to $2.63 per share. With that, I will now open up the call for questions and answers.

Well, thank you and good morning, guys. Thanks for all the great information that’s hugely helpful to us. Maybe I can start off with Keith, the Kichler acquisition, just maybe talk a little bit about if you would sort of what the thought process you went through to acquire this, I mean lighting is a different business obviously and as you went through this process what you thought your game plan would be over the next couple of years with this company and any other thoughts around costs and synergy opportunities there?

We approach our acquisition pipeline and where we targeted based on a market company value framework where we look at the overall market to determine attractiveness. We look at and determine shortlists for targeted companies. And then when we get in and look at those specific companies, we think about what kind of value we can bring. So that MCV format is what we do and have been doing for several years. We have been looking at the lighting industry for a couple of years now and we like it a lot, it’s a big industry about $6 billion in terms of revenue where we will play. It’s relatively fragmented with – which gives us the opportunity for a nice organic growth and share gain. And historically the growth profile on this industry has been in the mid single-digit range. It has similar products and is sold in a way that’s very similar to what we currently do, it’s sold through home centers, through showrooms, plumbing showrooms as well as new channels for us with electrical distributors, etcetera. And we have strong relationships with those – with those channels. Lighting is often specified by a designer who is coordinating an entire project and the showroom associate is key to that assisted sale and that is a very similar to what we do in many parts of our business currently at Masco. We know how to service that customer base and how to make a difference for them in terms of making their business more successful. So when we look at that all those factors in terms of the total industry, we like it a lot. With specific regards to Kichler and why that was on our target list and why we like Kichler so much, it really comes down to a couple of things. They have very strong brand and a very intense focus on design and innovation. They have extremely well-established distribution and a focus on customer service and operational excellence. I have met some of their customers that are two, three, I even met a fourth generation customer. And I really like what I hear with regards how we are serving – servicing them and the longevity. In particular what’s attracted to me for Kichler as a company is its culture. There is no doubt in my mind that they are product driven and customer service focus. And you can just sense and feel a permeation through the whole company that they respect individuals and individual contribution and people, so very consistent with the culture that we are driving here at Masco. So the market is very attractive to us. The company is a very good company. And in terms of our value creation, we certainly see opportunities in operational excellence. We are very good at this at understanding the customer at designing and procuring from China. This will help us with logistics efficiencies. And we think we can help through the Masco operating system to improve Kichler. And quite frankly I think that through MOS, we are going to be able to take the good ideas from Kichler and apply them to Masco. So if we look across MCV market company value, this is a great acquisition for us.

Alright, that is great. Thank you. I appreciate it. And then the second question I had is you all laid out in ‘17 your – that you thought you would spend $1.5 billion through ‘19 on M&A and repurchase, you are already – you are two-thirds of the way there, you outlined more for ‘18, any thoughts about pushing that number up or how do you think about it now that you are pretty far down the road versus your target?

Our capital allocation strategy remains unchanged. We continue to focus on investing in our business and returning cash to shareholders through M&A and share repurchases while maintaining our financial strength as previously discussed. I have also mentioned at the investor conference that we have the flexibility to increase our efforts if necessary. Our balance sheet is solid, providing us with opportunities to do more, but my overall view is that our capital allocation approach has not shifted. A target of an additional $200 million to $300 million for acquisitions and share repurchases is a reasonable expectation.

Yes. Steven, the one thing I would supplement Keith’s comments and I completely agree with what he said is that due to tax reform we will probably have an incremental $200 million of cash to spend. And so could we allocate that $200 million to one of the legs of our capital allocation strategy over the course of the next 2 years, absolutely that could be the case because that took the form of either incremental acquisitions or incremental share repurchases. Definitely that’s a potential that’s out there for us.

Thank you. I also have some questions on the acquisition, Slide 9 show the dilution of margins in the segment, does those estimates include or exclude that $35 million step up in amortization from purchase accounting?

They exclude, Keith.

Exclude and I believe in your guidance range you exclude that as well, is that correct?

That’s correct.

Okay. If you do some interpolation that would imply a good to lower margin that we will receive from a lot of your businesses in Kichler, is that correct and what kind of manufacturing center do you use, what things do you do – can you do in the future to get that up?

Yes. So Keith, there are a couple of things, right. Inherently, this is a little bit lower margin than either the pain of our hardware business that we have. It’s by a low double-digit margin business. It is being impacted by as I mentioned some amortization expense, due to intangible amortization. Roughly for the first 3 years of acquisition will keep the margins suppressed in that segment and then we will start to see some growth as that kind of rolls off. So we should see some margin expansion over time. And as Keith mentioned we do see some opportunities to improve the operational efficiency of Kichler through our Masco operating system and the discipline that, that applies. And we also see some things that we can translate from Kichler back into Masco. So other things like sourcing synergies and procurement savings and logistic savings, we can realize, yes, we think there are some and we will call those out as those get more crystallized. Quite honestly, we haven’t closed on the transaction yet. So we are still working our way through some of those details.

Okay. Just to clarify the low double-digit number you talked about that does already exclude the step-up, is that correct?

That’s correct.

Okay, alright. So, that’s not going to – that does not going to change several years out on an adjusted basis, it’s not going to change several years out.

No, what will change with the intangible amortization, which will be about a 3-year period.

Hi, good morning.

Good morning, Scott.

I wanted to just go back to cabinet real quick and congratulations on the retail win. But if I look back at your slides from the Investor Day, Cardell was an even a brand mentioned. So, I know you acquired it a few years ago. So, maybe Keith, can you just talk to how it fits in the wheelhouse of KraftMaid and Merillat?

Fundamentally, where we see Cardell is right in that same bandwidth if you will with regards to Merillat, maybe in spots, it can go a little lower in terms of price points, but when you talk about the build-to-order more of the semi-custom aspect of it, it can go a little bit higher as you well know depending on the content of the different types of the content that you put in the box, the price continuum can be pretty broad. Cardell is a well-established brand. It’s been around for a while, while it’s been quiet for the last couple of years. It does resonate. I would encourage you to go take a look at the displays in Menards if you get an opportunity they look fabulous. It’s a good brand for us to have in our stable as it relates to giving us the opportunity to go into other customers and other channels and address some of the issues and conflicts that sometimes can arise with that. So, it fits very nicely and played, I would say, a strong role in our ability to get this business together with the broad offering that we can offer and putting to use the structural competitive advantage that we have in our cabinet business to come in at a very attractive price point.

Hey, guys. Good morning.

Good morning, Tim.

Maybe back on that last question, John, I guess maybe for the whole business as you kind of think about price costs, is the right way to think about it for a team that you margins are a little bit more negatively impacted in the first half and wind up recovering more of that in the second half or just what’s the right way to think about the cadence of price cost for the business over the course of ‘18?

Yes, generally speaking, Tim I think you are on the right track. The way we are seeing commodities right now has been a little bit more inflation here in the first part of 2017 going into the first part of 2018. So, I think your analysis is right that as we think about the business over the course of the year, we are likely to see a little bit more headwind in the first half of the year and a little bit less pressure in the back half of the year as we are starting to put price into the market.

Good morning, just wanted to follow-up on some of the Kichler questions, if I’m looking at your guidance for next year, it seems like it implies a high single-digit to low double-digit growth rate for this business, you talked about some of the operating benefits that you get through the Masco operating system, but can you maybe talk about where you guys have strength that is going to help accelerate top line growth over the mid single-digit levels do you guys talk to for the lighting industry?

So Michael, good morning, as we think about growth for this business, we do think it’s in that mid single-digit range. So perhaps we can work with you offline on getting some better clarity on that. But as we look at this business, it’s a nice solid growth and very much in line with the core of our other businesses.

And I would say that as we look at that Kichler and lighting, it has demonstrated historically the ability to get price somewhat I would say commensurate with commodity changes, so we like that part of it. So there is a little bit of an attribute there in terms of the growth. We have nice overlap and understand significant number of their challenges or their channels. We think we can bring value as it relates to plumbing showrooms and matching finishes and coordinated suites and those sorts of things that can help the top line as well, but fundamentally looking at a mid single-digit growth rate.