Masco Corp (MAS) — Q1 2018 Earnings Call Transcript

Thank you, Regina. And good morning. Welcome to Masco Corporation’s 2018 first 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 first 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 Keith.

Thank you, Dave. Good morning, everyone. And thank you for joining us today. Please turn to slide 4. We had a good start to the year as our top-line grew 5% excluding the impact of currency. Our operating margin decreased to 160 basis points in the quarter mainly due to the planned growth investments we discussed last quarter and our Plumbing and Cabinetry segments. We are confident that we will leverage these strategic growth investments to achieve profitable growth and margin expansions in the second half of the year. Additionally, we have implemented price increases across all our segments and we expect our price-cost relationship to improve starting in the second quarter. While our operating profit declined, our adjusted earnings per share grew 13% to $0.45 per share due to lower interest expense and the benefit of the recently enacted tax reform. I’d like to provide you with some additional insights into the drivers behind each of our segments' performance, starting with Plumbing. Our Plumbing segment grew 11% or 6% in local currency. North American Plumbing grew 9% led by Delta Faucet and Watkins Wellness, our leading spa business and the acquisition of Mercury Plastics. Delta’s performance was led by its high-end Delta and Brizo showroom brands in the wholesale channel, strong growth in the e-commerce channel and strong sales from its recently re-launched Peerless brand in the retail channel. Watkins Wellness drove high single-digit growth as they leveraged their expanded product offering through their existing dealer network and through new channels of distribution. Outside of North America, our international Plumbing operation achieved 3% growth in local currency led by Hansgrohe, our leading international faucet and shower business. Hansgrohe continued to drive growth in both China and Germany with particular strength in its premium product line. Decorative Architectural segment sales increased 10% due to continued growth from both Behr and Liberty as well as the Kichler Lighting acquisition, which closed in early March. Kichler integration is going well and I am pleased to announce that Kichler recently received recognition for its product innovation receiving four awards for superior innovation, design, and aesthetics, highlighting Kichler’s fit with Masco and our focus on brand innovation and service. Congratulations to the Kichler team on this great recognition. Our pro paint sales experienced strong growth in the quarter and together with Home Depot, we began another expansion of this initiative. As we discussed last quarter, we are recruiting and hiring additional pro hub store employees and outside programs demonstrating our commitment to continuing to invest in this successful program. Turning to Cabinets. Our repair and remodel sales grew mid-single digits delivering another quarter of strong performance. We also made great progress executing on the program launch of our new Menards business by resetting over 300 stores with new displays showcasing our Cardell brand. Initial sales of this business are strong, and we’re confident that we’ll reach the $80 million annual sales run rate by the fourth quarter of this year. Our window segment grew 12%, excluding the impact of the divestiture of Arrow, led by mid-teens growth for Milgard, our leading Western North American Window business. Milgard experienced strong demand for its products across all its markets in the Western United States, as its value proposition and strong brand continued to resonate with dealers and consumers. Our UK window business offset a portion of this growth due to softness in the UK cabinet. Additionally, the bottom line was impacted by restructuring actions taken in the quarter. We also continued our share repurchase activity in the quarter by buying back 3.7 million shares for $150 million through an accelerated share repurchase plan. With this recent buyback activity, we now expect to deploy at least $100 million to $150 million for share repurchases or acquisitions for the remainder of the year. Our first quarter results were in line with our expectations and we are on track with our plan for the year. We affirm our expectation to achieve earnings in the range of $2.48 to $2.63 per share. Now, I would like to turn the call over to John who will go over our operational and financial performance in detail.

Thank you, Keith. And good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance, excluding the impact of rationalization, the inventory step-up for the purchasing accounting for the Kichler acquisition and other one-time items. Turning to slide 6, we delivered solid top-line and earnings per share growth in Q1. On a reported basis, sales increased 8% or 5% in local currency. Excluding the divestitures of Arrow Fastener and Moores, and the acquisitions of Mercury and Kichler, sales increased 7% or 5% in local currency. Foreign currency translation favorably impacted our first quarter revenue by approximately $49 million as the US dollar weakened against both the euro and the British pound. In local currency, North American sales increased 7% in the quarter or 5% excluding acquisitions and divestitures. Consumer demand for our industry-leading repair and remodeling products across all the channels of distribution and across all price points drove this performance. In local currency, international sales decreased 2% in the quarter. Excluding the divestiture of Moores, international sales increased 2% driven once again by Hansgrohe. Gross margins declined approximately 150 basis points compared to the first quarter of last year to 32.6%, principally due to the strategic growth investments we discussed on our fourth quarter call. The investments include increased display spending and depreciation in plumbing and launch costs related to the Cardell cabinet program at Menards, as well as a lag in price-cost in plumbing and cabinetry. These items aggregate approximately $30 million. Our SG&A as a percent of sales decreased to 10 basis points to 19.5% as we continue to leverage our SG&A while making strategic investments to drive profitable growth. We’ve achieved operating profit of $250 million with operating margins of 13%. Our EPS was $0.45 in the quarter, an improvement of 13% compared to the first quarter of 2017. As a reminder, our adjusted EPS calculation assumes a 26% tax rate. If you look to the balance of the year, we anticipate some of the strategic growth investments will continue into the second quarter. These investments will diminish in Q3 and Q4 leading to a stronger second half of 2018. Turning to slide 7, our Plumbing segment delivered another quarter of strong top-line results. Segment sales increased 11%. Excluding the impact of currency and acquisitions, sales increased 5%. This solid performance was driven by growth in our faucet, shower, and spa businesses. Foreign currency translation favorably impacted this segment sales by approximately $43 million in the quarter. Our North American sales grew 8% in local currency in the first quarter as we experienced strong consumer-driven demand for our industry-leading brands with wholesale, large retail, and dealer customers. We also benefited from approximately $10 million of pull-ahead sales as customers pulled orders from Q2 into Q1 in advance of the launch of Delta’s new ERP system in early May. Additional, our spa business continued to outperform the competition as Watkins Wellness leveraged its strong network, innovative new products and industry-leading brands to drive growth. Our international plumbing sales increased 3% in local currency and Hansgrohe’s focus on key markets continued to yield results with strong growth in both China and Germany. The main drivers of the operating margin decline in Plumbing were higher strategic growth investments including display costs and increased depreciation and as we mentioned on our fourth quarter call, a lag in price costs. These items collectively amount to roughly $20 million. The higher strategic growth investments will persist into the second quarter but then moderate in Q3 and Q4. We anticipate the price cost lag would dissipate in Q2 as our pricing and cost containment actions are fully realized. As a reminder, there will be incremental costs of approximately $5 million in each of Q2 and Q3 related to Delta’s ERP implementation. While we have recently made investments in our Plumbing business, we will leverage these growth investments, and when coupled with the improving price cost relationship, we expect in 2018 this segment will grow 4% to 6% with operating margins similar to our 2017 margins. Turning to slide 8, Decorative Architectural Products segment grew 10%. This performance was driven by another quarter of strong growth in various pro initiatives and our acquisition of Kichler in early March. Excluding the acquisition of Kichler, sales grew 4%. Operating income in the first quarter matched the first quarter of 2017. The benefit of increased volume was offset by strategic growth investments and increased legal and other variable expenses. We continue to face raw material cost pressure in the paint category, and we are diligently working to mitigate the impact of this inflation. And as a reminder, the acquisition of Kichler will increase our depreciation and amortization expense by approximately $20 million on an annual basis. Turning to slide 9. In the Cabinetry segment, sales declined 6% in the quarter, excluding the impact of the Moores divestiture sales decreased 1%, primarily due to declines in our new construction business. This build of business continues to be impacted by the effect of lost business in the second quarter of 2017, which we will anniversary here in the second quarter. Our repair and remodel business performed well in the quarter, with KraftMaid solid performance in our repair remodeling business delivering mid-single-digit growth to increased volume. In addition, the rollout of our Cardell program is on schedule, and we were pleased with this program initial performance. Segment profitability declined in the quarter by $12 million principally due to the approximate $10 million investment related to the Cardell retail cabinet win and a price cost lag. We expect this lag will abate in the second quarter as our cost control and pricing actions are realized. Turning to slide 10, our Windows segment sales increased 4% and excluding the impact of currency increased 2% in the quarter. Excluding the divestiture of Arrow Fastener, sales grew 12% or 9% in local currency. Foreign currency translation favorably impacted this segment sales by approximately $4 million. This performance was driven by strong growth across all channels in Milgard, which grew mid-teens percent in the quarter. Milgard’s strong growth was due to increased volume, a positive mix shift towards our premium window and door products and favorable pricing. Segment profitability in the quarter decreased by $4 million, largely due to the Arrow divestiture and restructuring costs in our UK Window operations. We ended the quarter with approximately $500 million of balance sheet liquidity, as well as full availability on our $750 million revolving credit facility. During the quarter, we repatriated approximately $425 million to partly fund the acquisition of Kichler. Working capital as a percent of sales increased 340 basis points versus the prior year to 18%, largely due to the impact of the Kichler acquisition. Kichler’s total working capital is added to the numerator of this metric but only 21 days of sales were added to the denominator. As such, working capital as a percent of sales will decline throughout the year as an increasing amount of Kichler sales impact this metric. Further, while Kichler’s business model lends itself to higher levels of working capital than most of Masco’s other businesses, we believe through our deployment of Masco operating system tools, there are significant opportunities to further improve this metric over time. During the quarter, we continued our focus on shareholder value creation by repurchasing 3.7 million shares valued at approximately $150 million. Finally, I am happy to report that Moody’s recently upgraded our credit rating to investment grade. And as a result of its action, our credit rating is now investment grade with three leading credit rating agencies, Standard & Poor’s, Fitch, and Moody’s.

Thank you, John. I am pleased with our team’s execution. We are on plan and we are off to a good start in 2018. Fundamentals driving our business remain strong. Demographics, namely the large millennial group are increasingly favorable and should drive household formations and housing for years to come. Home prices are appreciating, up over 5% year-over-year, boosting consumers’ confidence to invest in their homes. Consumer confidence is up 8% year-over-year, the highest level it's been in 18 years. And US residential housing stock is aging, a key driver of repair and remodel spending with 70% of homes in the United States now over 25 years old. We are executing our strategies to capitalize on these strong fundamentals. In Plumbing, we are driving strong top-line growth while investing for the future across our diverse plumbing platform, particularly at Delta and Hansgrohe. In Decorative, we are investing behind our powerful Behr brand to continue the growth of our pro paint initiatives along with our partner the Home Depot. And we are excited about the opportunities with Kichler, our new lighting business. In cabinetry, we are on track with a significant new retail program launch and continue to drive sales growth in our repair and remodel business. And in windows, we are increasing share with our market-leading Milgard brand. Our leading brands on a strong execution generate robust free cash flow and we will continue to deploy that cash flow with a disciplined and balanced approach to acquisitions with the right fit and return, share buybacks, and dividends to create value for our shareholders. With that, I will now open up the call for Q&A. Back to you, Regina.

Thank you very much, everyone. I appreciate all the details provided. Specifically, I would like to inquire about the strategic and price cost lag. You shared a lot of information, but could you offer a breakdown of how much was attributable to strategic growth versus price cost in your segments for the quarter? Additionally, regarding Plumbing, you previously mentioned an expectation of around $4 million in the first half of '18. Has there been any change in that expectation for strategic growth?

So yes, Stephen, good morning. If you think about that $30 million of strategic growth and price cost that you called out, and obviously a big chunk of that $10 million is related to Menards spending for the recap program we’re launching under the Cardell brand. As it relates to the Plumbing segment, there are really two pieces there. One is what you highlighted, some of the display spend that we incurred in the quarter. The other portion of that is increased depreciation and as you may recall, I think we have placed two new facilities in Hansgrohe, our distribution center last year and we’re investing in a new plating facility for them over in Germany and Ireland, so that is causing our depreciation to tick up a little bit. But that obviously was funding future growth for that business, which has performed very strongly globally for the last several years. The last piece of that is all in, I come to have plenty investment of achieving a display spending and the depreciation roughly split evenly about $5 million each, so $10 million in aggregate. The third $10 million is really price cost. And that affected principally the Plumbing segment, but also a little bit in the Cabinetry segment as well.

And then when you talk about the price cost improving beginning in 2Q, I believe Keith, that was your expression. Just wanted to be clear there and you’ve laid out, I think the strategic growth investments, so we can model that. But on the input price lag, price cost lag, could you give us a sense, are you actually expecting that to flip positive in 2Q or simply diminish the negative headwind in 2Q? At what point, I mean do you anticipate that will actually flip positive?

Stephen, John here. As we look at it, I think what we’re doing is the pricing that we put in the market and across our segments is actually just recovering prices. So, I think by the end of the second quarter will be flush with the raw material inflation that we’ve incurred in the market.

Okay. And as part of that are you expecting input costs to continue to inflate from here in your outlook or is that, are you anticipating it just sort of where we are right now?

Looking at our range of businesses, the base metals copper and zinc have increased in the second quarter, starting in early last year, and have been trading within a narrow range since then. We do not expect significant changes in either copper or zinc, so we anticipate that these will remain relatively stable for the remainder of the year. Most of our other product categories should also be stable. However, we will closely monitor the input costs for paint, which are now nearing $70 a barrel and affecting the derivatives used in paint production. We are paying attention to how the engineered resins and CIO2 prices evolve. As mentioned earlier this year, mid-single digit inflation in the input costs for paint is plausible for 2017.

I guess maybe shifting to the growth side of things. Keith talking about some of these investments you’re making in Plumbing across the new displays and then some of the investments John, you just mentioned with Hansgrohe. Is there a way to just kind of help us understand some of the timing of the fruits of all that investment? And maybe just elaborate on where do you see growth kind of heading in that segment as we move through the year and into next year? Thank you.

Matt, when we make growth investments, we see returns over time, and that’s certainly true for the investments we’ve made to support our Hansgrohe business. We have invested in a new logistics center in Germany that not only supports our base business but is also crucial as we aim to become a leader in the e-business market, which requires faster delivery and higher fill rates. We have made investments in various segments, including pro paint and plumbing, where we are focusing on field industry and personnel to enhance revenue, with productivity improvements expected over time. Our goal is to start leveraging these investments, especially in plumbing, during the latter half of the year. While our growth expectations remain unchanged, we anticipate that margins will be in line with last year. Given the price cost pressures and the growth investments in this segment, we believe this is a solid performance.

Got it. Thank you for that. My next question, I wanted to ask about cabinets, alongside some of the investment spending with Menards, did you actually recognize revenue from that new business during this quarter or is that still something that we’re going to expect to more meaningfully impact the top line as we move through the year? Thank you.

Yes, Matt. It’s John. We did recognize a little bit of revenue here in Q1. But to your point, I think you’ll see as the year progresses, that you will see greater and greater revenue come from that program as it begins to approach its run rate of about $80 million on an annual basis.

It’s a good program for us. We’ve worked hard to capture a chunk of our business. It supports our profitable growth objective in this segment. And as John mentioned, it will be an $80 million program and we expect to hit that run rate by the end of the year.

Thank you. Regarding Plumbing, the price commodity effects in the first quarter typically take about two quarters for cost increases to materialize, and usually you can adjust prices ahead of that even in the fourth quarter. I would like to understand the mechanism behind the shorter impact in the first quarter. Did it relate to the pull-forward of sales related to the ERP implementation, and could you elaborate on that?

Sure. Regarding the price of commodities, remember that commodity prices started to rise in the second quarter of 2017. As a result, the impact on our profits and losses was exactly what we expected in the first quarter. Additionally, we don't implement price increases for every customer simultaneously, which caused a slight delay in introducing the price increases to the market. We are confident in how our team has responded to commodity inflation and how they are actively balancing inflationary pressures with both pricing strategies and cost control measures within their operations. Concerning the acceleration of sales, I don’t believe that the $10 million pull forward had any significant impact on the price-cost dynamics. It was more about our customers choosing to maintain their inventory while we implement our ERP system.

Nishu, this is Keith. When considering the impact of our growth investment continuing into the second quarter alongside depreciation, display spending, and some ERP spending changes, it's important to note that last year in the second quarter, we saw strong margin performance, exceeding 21%. Therefore, we expect our Plumbing margins to decrease in the second quarter by a similar amount as last year, but we anticipate an expansion in the third quarter as we leverage our growth investment. For the full year, we expect Plumbing margins to be comparable to last year. Given the efforts and funding we are applying to growth and our pricing strategy in relation to costs, we believe this will result in strong performance.

And then on paint. Obviously, the outline volumes in the market have been kind of soft, but there has been outperforming also very strong performance on the pro side. Just trying, if you could give us a sense of how DIY volumes and the momentum in pro paint continued in the first quarter?

We think we’re about flat in DIY all-in and overall for the DIY market that low-single-digit. We really haven’t come out low-single-digit growth, we really haven’t changed our opinion on where that will fall out. In terms of pro, we continue strong growth in that segment and we are continuing to invest even more into that. So overall, when we think about the paint market, we think it’s pretty good particularly, when you look at our performance versus that market with the strong BEHR brand, our outstanding partner in Depot and our quality and service levels.

It’s Neal BasuMullick for Mike. So, I guess continuing on, you touched a little bit on this. But can you talk a bit about what you’re doing right on price cost?

Well, I think what we’re doing right is continuing to perform like we demonstrated over the better part of a decade. And that is over the price commodity, over the commodity cycles as we go through them, while, there is leads and lags on both sides of that. We’ve been able to come out flush and mitigate those impacts over time. I think, what we’re doing extremely well in this segment is working with our partner Home Depot to keep these pressures in balance strategically and to together invest for growth in this segment and that’s really paying off. I think our relationship with Depot has never been stronger as evidenced by our performance overall in both DIY and pro. And I think I’d point to that as something we’re doing well as well.

And then I guess kind of factoring that what do you see as the pace of margin recovery through the year? Specifically, how much do you think you can pick up in Q2?

It's important to highlight that, as John mentioned, the decor segment has been more impacted by revenue recognition accounting standards than any of our other segments. If we adjust our margins for decor, they were 19% in the prior year quarter and 17.2% this quarter. The main factor behind this was the acquisition of Kichler, whose margins are in the low double-digit range, which is lower than the high teens typically seen in this segment. If we factor in the Kichler acquisition, it accounts for approximately 150 to 200 basis points on average per quarter. Considering our base business, the inflation we've faced in paint rods, our efforts to enhance the price-cost relationship, the expansion of our pro initiative, and the addition of hub store employees and external pro representatives to boost volume, we anticipate modest margin erosion for the full year. Given the investments we're making and the current state of commodities, we consider that performance quite good.

Yes, thanks so much. And good morning, everyone. Just maybe sticking on the just Keith your comment on the modest margin erosion. I think prior to the Kichler acquisition you had made a comment that you expected margin degradation given price cost headwinds that would less than the 2017 levels, obviously that was before the Kichler transaction. So, I was wondering if we can maybe just parse out, do you still expect kind of the base core business to still see margin compression this year, what your prior comment inclusive of Kichler as well, just any kind of greater clarity there would be helpful?

Sure, Sam. After restating for the accounting changes, our revised long-term margin expectations with Kichler are between 16.5% and 18.5%. We have been performing at the higher end of that range and anticipate continuing that through 2018. Regarding the base decorative business, that's what my previous comment was about. We do expect some modest erosion in that base business.

That's helpful. Could you provide an update on Kichler, which you've owned for about two months? What are some positive and negative surprises in that business now that you have control over it? What opportunities do you see for margin expansion, considering its role in driving the business forward?

No negative surprises whatsoever. The surprises for me really have been positive. I knew going in through the due diligence that they were particularly focused on the consumer and that they were product-driven and understood the trends ahead of the actual trend being realized and we had a very short development cycle, that’s really impressed me and has been a positive side. In terms of the integration process, very smooth, very smooth. We have integrated treasury, risk management and legal. We are rolling out the introduction of the Masco operating system, and they’ve been very receptive and very eager to be part of the team. We have met with a significant number of key customers, and that transition has been seamless. This is a good business for us. It fits in many ways in terms of the channel and the overlap. It fits with regards to the importance of influencers in this purchase journey in terms of designers and showroom associates which is very close to a lot of the work we do in plumbing and what we do in the aisle and paint. So, we’re excited about being able to add value to Kichler. And honestly, we’re excited about being able to learn from them as well. So very positive integration.

If I can just sneak one more in just John on freight costs this quarter or for the year. How you’re thinking about that? What is the percentage of COGS just an overall kind of update on freight as it relates to your price cost discussion that you’re getting earlier? Thanks.

In terms of freight or distribution logistics costs, for the most part, a lot of our products are sent on standard distribution runs. And we’re not expecting around incurring much incremental inflation. We are seeing just a touch of inflation on some of the more ad hoc or short-haul runs that we make. And so, at this point in the game, it’s not really that impactful to us. Keeping a close eye on it, but if I make certain that it doesn’t exacerbate over the course of the year. But right now, we think we got that in pretty good control.

This is Chris on for Susan. Thanks for taking my questions. Can you mention Cabinet sales?

Chris, could you speak up just a touch?

Yes, sure. So, you mentioned before that your lower Cabinet sales and build to direct channel due to your margin rationalization efforts in that business. Once you left that impact, how quickly do you expect to return to positive growth and what do you expect your run rate growth to be exiting 2018?

Yes, for the full year 2018 excluding the divestiture of Moores, we expect the top-line growth in this segment coming at 5% to 7% range. And so we can pivot to growth further quickly. Once we get the anniversary of this lost business behind us.

And turning to Windows, I mean you had strong performance at Milgard this quarter. Can you just walk us through some of the aspects driving the favorable pricing environment there and just the overall strength you’re seeing on that side of the business?

Really, Milgard's growth was driven by their brand strength and their value proposition. This business has done exceedingly well with regards to lead times and fill rates. And we found clearly when we stub our toes and don’t do well that affects us. And we’ve got some of the problems that we’ve had a year ago, well behind us. We’ve got a new leader in that business and a new leadership team, and that focus is really what’s driven the growth. That value proposition resonates with dealers, so we’ve got an outstanding dealer network out there and that’s very productive for us both in terms of big box and dealers and also the build a business that we choose to do out there. So, it’s really the Milgard value proposition that’s driving the growth.

And the other thing Chris that I would point to you. As you recall this time last year, and we were in the midst of the turnaround and I’d say that we did have a relatively easy comp in Q1 compared to Q1 of last year. In the comps we’re going to be a little bit more difficult. So, you might not see the same mid-teens growth out of Milgard as you go deeper into 2018.

I would say we’re expecting full year sales growth in that range of 6% to 8% excluding the Arrow divestiture on that. And on the margin side, we’re going to see some expansion, but I’d remind you that, we do have continued ERP expense. And the ERP implementations are going very well and we will have continued ERP expense. So, while we are expecting margin expansion for the year, we probably won't make it to that long-term guidance for that 10% to 13%.

Hi. Good morning, guys. First question is on cabinets. You talked to mid-single-digit growth in repair and remodel. Can you split that between home centers and dealers and then also just discuss what you are seeing if any variance on price points and promotions?

Yes, so a couple of questions and again in terms of our remodeling growth between the various channels of distribution, we are really not breaking that out obviously, traffic stands across both home centers and dealers and both are positive. And so, we are feeling good about how that performed in the quarter.

I think the retail promotion environment was a little bit elevated year-over-year in Q1 but just a touch. We would expect maybe a slight increase in promotions for the full year but really not a whole lot. I think the retailers who view this class, this aisle, is something that has a lot of add-on sales obviously so I think that’s lucrative for them. And obviously as you know Dennis, they set their price and their promotional schedules, and we support them where it makes profitable growth sense for us. So, pleased with the promotional levels. I think we are competitive where it's at.

And then the other part of my three-part question there was on the price plan ‘18, anything that stands out as far as within the cabinet business?

Our semi-custom product is performing really well and it's clearly positioned at the higher end of the spectrum. Analyzing the market data is challenging as it's based on just a few months of information, but the semi-custom aspect is thriving. We are exceeding market performance and gaining market share. In summary, the semi-custom area where we compete is quite strong.

I am very confident in our preparation. We have been working on this for a long time. At Delta, we have moved some of our high-potential talent to this project. We have also hired external personnel in both program management and quality. Regarding Milgard, although we faced some initial challenges, I can say that our last two planned implementations with Milgard are going very well and it was one of our largest projects that we recently completed. There is always some inherent risk with ERP systems, but I have strong confidence in the Delta team.

Yes, we’ve incorporated a lot of the lessons learned on the prior ERP implementations. The Delta team and to Keith’s point have done just a tremendous job of preparing for this. And we are very confident in their ability to execute.

Keith, could you share what you anticipate the normalized growth rate and up-margin rate will be for Kichler over the next three years? Also, since you primarily source from China, are steel tariffs or any other tariffs affecting you, and do you have options for alternative sourcing?

Well, there are a couple of questions in there. In terms of the overall margin that low-double-digit margin that we’ve talked about in the past we’re obviously going to continue to drive that up. We see opportunities from support and synergies not only in the working capital area but also in some of the gross margin areas around procurement costs and those sorts of things. With regard to tariffs, the primary commodity here is glass. And then on the steel side, we’re really at this point haven’t seen any tariffs because it’s not tariffs are targeted or being levied towards value-added products. So, so far, we’re in good shape there and I would tell you that, when you look at the decorative lighting fixture industry, it follows a very similar model. So, should there be any price or excuse me cost pressures, we’d be in the soup with all of our competition. So, it really comes down to supply chain management to vendor development etc. So, we’re pretty confident in our ability to compete in those areas. And we see improvement opportunities as we start to get more into the business.

Stephen, as it relates to growth, we think the growth of Kichler will be very similar to the overall segments growth of 4% to 6% over time.

Okay. 4% to 6%. All right. That’s helpful. And then the other question I had is, we’ve had a lot of news in the paint side, the DIY channel over at Lowe’s. Do you think as you get into the second half of this year in the first quarter of this year, promo spending for you all in this sector increases?

No. I wouldn’t characterize it that way. I mean, we’ve seen some promo increase in the last quarter as different brands and different products are launched and that's normal. But I’m not particularly expecting any significant increase in promo. If you look across the different players in the industry, I think our partners demonstrated some of the best discipline.

First one, I think on Hansgrohe, it looks like it was a 3% year-over-year. That seems like it’s a bit of a slowdown over the past couple of quarters. I think it’s been running kind of in the high-single-digits. Anything you could point to there?

Yes. Generally, saw good growth in Germany and China as I mentioned in our prepared remarks. So, we did see a little bit of softness in the UK and a little bit slower growth in some of the Southern European countries, but now the stronger growth as we experienced in prior quarters. So just a little bit of a pullback in some of their core markets, but overall, their home country of Germany has done well and their emerging market growth has been just terrific.

We are experiencing solid growth, particularly around higher-end brands, and in our strong segment. This reflects a favorable performance in the market, as both ends of the price spectrum are showing growth.

Okay, that’s helpful. And then my second question would be, I just want to make sure I understood this correctly. In terms of the raw material pricing dynamic, I think you’d mentioned in segment quarter you’ve going to catch up on the pricing side, is that really by the end of the second quarter would you still anticipate a negative impact in 2Q?

I think there will be modest impact in Q2 and will improve as we go through the quarter.

Good morning. This is Stephen on for Kathryn. Plumbing, the margin came in lower than expected. I guess can you maybe balance the mix impact? I am a little surprised with the strength in Watkins, I figured the margin decline would be less than it was?

The margin was really driven by our growth investment as we talked about in displays and in some depreciation of those assets that we put into support growth, new plating line, a new distribution center over in Hansgrohe. We had a little bit of a price commodity lag. So together those as John mentioned are about $20 million.

Not much of a mix impact in the quarter, we have a little bit of mix but not much at all.

Alright. And then maybe stepping back with a higher-level view. If this strength in trend to lower price point starter homes continues throughout the year, do you see any product gaps in your portfolio that you need to invest more in or acquire or do you expect one segment to benefit more on volume side than another? Thanks.

We have focused on ensuring a wide range of products where it makes sense, even though the initial price point typically has lower margins. However, these margins are not as low, and the gap is not as significant as it used to be, thanks to improvements in procurement, shop floor efficiency, and variable cost management. Overall, we are in a solid position. This can be illustrated by our Watkins spa business, a leader in its field, which has shown strong performance at the high end. Additionally, we have aligned efforts to offer reasonably priced quality products for online sales, which is going very well. We have recently re-launched our Peerless brand, which focuses on entry-level plumbing products, and it has gained traction and is being well-placed on shelves. To achieve profitable growth at Menards, we have implemented effective value engineering and brand positioning, particularly for entry-level products and semi-custom packaging. Our strategy is to meet our customers where they are shopping, especially in e-commerce, and meet their performance expectations as well. This has been a dedicated effort over several years.

Keith in your opening comments, you mentioned you’re very pleased with the quarter and on-plumbing an aggregate. Could you comment on 2 or 3 surprises in the quarter either positive or negative that maybe you didn’t anticipate three months ago that you’re taking action on today?

I expected the Kichler integration to go well; it’s exceeded my expectations. I knew that there would be a price cost lag, and that we would be able to manage that. And that lent as expected, I would tell you, we got a little bit of a logistics headwind that I wasn’t quite ready for, so to speak; we didn’t expect as it relates to some of the rules and how over-the-road truckers manage their time. And that’s driven the cost up a little bit. Oil started to pierce north a little bit more than I probably expected. So, in the cost basket, there’ve been some higher than expected, lower-than-expected but on average, I think we’re about ready for it. So, I think, I would characterize this quarter significantly more as on plan than I would surprises.

Most of the questions have been answered, but with a heavy share repurchase in the quarter, what is the ending share count?

I think it’s around $3.10 billion.

And you highlighted in the prepared texts, another share repurchase number. Is that in addition to what we saw in the first quarter?

Yes, that was either, again, we were careful with our wording there. We said either $100 million to $150 million of either additional share repurchases or M&A throughout the balance of the year.

Given the moving pieces in decorative. Just curious, how should we think about margins for the full year and to offset some of these headwinds you are seeing. Is that more on the price side to cost side and then in a rising raw material environment. How quickly can you kind of pass that through?

As we talked a little bit about before Phillip, you think about the base business now separate that, because we’re in the middle of the Kichler acquisition. The base business, we would expect margin erosion, slight margins, modest margin erosion is how we’re characterizing it. When you think about the effect on this segment from the Kichler acquisition that would be in a range of 150 to 200 basis point reduction.

And then in terms of your ability to kind of pass that through from a pricing standpoint is it like a quarter lag, 2 quarters? How should we think about that?

We have a significant customer concentration. So, we don’t talk about specific pricing actions in there. And I go back to my prior comment over the long term of price commodity fluctuations we tend to stay flush.

Okay, that’s helpful. And just one last one for me from a top-line perspective, pretty encouraging strong start in light of some of the weather-related issues, some of the other companies have talked about. The market obviously nervous about higher rates. Just curious how inflated is your business and any early reads on the spring selling season? Thanks.

We don’t believe that rising interest rates are going to put a break on housing, full stop. The 10-year bond is up about 45 basis points since year-end. Mortgage rates are about 4.5% and we have that level of 2014. We are almost if not, almost there to 85% repair and remodeling which is significantly less than sort of the interest rates. Our home equity lending is a very small part of the R&R market financing nowadays. The biggest driver in our opinion is expanded real wage growth and home price appreciation, consumer confidence; all those are positive. Our affordability, particularly when you look at historical standards, is still very good. Our view is that the market can digest a steady gradual increase in interest rates and that recurring model is a spend that’s more around a lifestyle decision as opposed to say a tax decision or an interest rate decision. So rising rates, generally signal a good economy and we do well in good economy. So, we don’t expect a break in ’18 or ’19 as it relates to rising interest rates.

Good morning, gentlemen. The last question is basically without the rising interest rates, which categories, realizing you are obviously 85% R&R and we have a favorable view of R&D tied to rising prices with the homeowners equity, how if rates are going up though, full stop, I heard you guys, which categories would be more susceptible when you think about price points, so think about paint versus cabinets which might be more tied to cabinets, faucets under renovation. Could you just discern it your comments a little bit by price point if you would? Thank you very much.

I don’t think it’s so much price continuum variation as it is new construction versus R&R. So, I would look more to the higher new construction segments as potentially being more impacted by that. But as I am out in the market and I look at the issues around new construction, it’s not rate; it’s more capacity and skill trades and the ability to get the jobs completed. So, I would maybe twist my answer and not go on a price continuum discussion, it’s more of a new construction impact than as I said we’re about 85% R&R.