Masco Corporation (MAS)

Investor Day 2019

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Sep 17, 2019

All right. Good morning, and welcome to Masco's Investor Day. I'm Dave Chaika, Masco's Treasurer and Head of Investor Relations. I'd like to thank you all for joining us here in New York as well as all of you joining on the web. We hope you find today to be informative. You're going to hear from our senior leaders about the next chapter at Masco, our plans for growth and how we intend to allocate our capital, among other topics. But we also want to hear from you. As you can see on the agenda, we've incorporated plenty of time for Q and A throughout the morning to address your questions about Masco. We should finish about 11:45. We'd like to invite you all to join us for lunch in the foyer afterwards. We are going to ask our senior executives to rotate tables every 15 minutes or so, so hopefully, everyone has a chance to sit with at least 1 or 2 different executives. Before we begin, please review the language on the slide in front of you, which reminds you that statements in today's presentation will include our views about our future performance, which constitute forward looking statements. Today's presentation will also include non GAAP financial information, which we reconcile on masco.com. So with that out of the way, let's get started. Now I'd like to introduce our President and Chief Executive Officer, Keith Allman. Thank you, Dave. Well, good morning, everyone, and welcome. As Dave said, thank you very much for your attendance, both here in New York City and online. I really appreciate it. 5 years ago, the new leadership team at Masco put in place strategies to transform our business. Back at our first Investor Day, and I recognize many faces from that initial conference, we set a lofty goal. And that goal was to double our earnings per share from 2014 to 2017, and we delivered on that commitment. 2 years ago, at our 2nd Investor Day, we set another lofty goal: to grow our earnings per share at 18% compounded annual growth rate from 2016 to 2019. And I'm here to tell you that we are on track to meet that commitment as well. A lot has changed in the world in the last 5 years, and Masco has changed as well. In a lot of ways, this conference represents the start of the second chapter for the new Masco team. I'll talk more about that later. The objective for the day today is for us to give you information so that you can better understand the investment opportunities in Masco and for us to give you information to better understand our plans to continue to meet our commitments. With that, excuse me, I think we have the slides. The notes are not matched here. We need to change that up, please. So I'm going to talk about our performance since the last Investor Day. I'll talk in terms of how we've done with regards to strategy execution and I'll talk about the numbers. And then we'll move into Masco's next chapter. Bear with me here. There we go. Okay. Very good. Thank you. I'll talk about how this is, as I mentioned, is in fact a new chapter for Masco, particularly in light of our planned divestitures of our Cabinets and Windows business. And at a high level, I'll talk about our strategy. I'll talk about the how, how we plan to continue to drive above market growth and resilience, how we plan to continue with our demonstrated strong cash flow and shareholder value. Let's take a look at how we've executed against our strategy. We have been driving this strategy of full potential, leverage and portfolio consistently for the last 5 years. We've been driving it consistently because it works, and we believe that it will continue to work. Our businesses are running better, as you can see from our robust innovation pipelines and our continued market share gain in Plumbing and in Paint. Our operating system has built a winning organization as we continue to drive leverage across our enterprise through the sharing of best practices and the development of talent. And we've continued to actively manage our portfolio. I'm happy to announce that we've completed the divestiture of our U. K. Window Group business, and our planned divestiture of our North American Cabinets and Windows business is a continuation of that strategy. This strategy and our execution has delivered strong results. As you can see from this chart, our agile team has responded to the significant volatility that we've experienced from rising commodity costs and interest rates in 2018 to tariffs in 2019. I am reaffirming our 2019 full year expectation of 2 point $6.2 to $2.72 And that represents a compounded annual growth rate of EPS of 21% from 2016 to 2019. And if you go back all the way to the start of the new Masco team, that represents a 25% compounded annual growth rate. In addition to our strong EPS growth, we have also outperformed in terms of margins and cash flow. If you look to the left at EBITDA, you see the blue bars, which represent our actual EBITDA dollars. The green line there represents our EBITDA margin. You could see significantly ahead of a very competitive peer group. If you look to the right at free cash flow and our free cash flow conversion, we have been consistently above 100%, again, outperforming a very competitive peer group. And we've put this outstanding cash flow to work to drive shareholder value. We continue to reinvest in our business, and our business continues to be capital efficient, very capital efficient. Our CapEx as a percent of revenue consistently runs at about 2%. And importantly, we have returned over $2,100,000,000 to the shareholders. We've paid down approximately $100,000,000 of debt, and our debt to EBITDA is now at 2.1x. And we are investment grade rated across all three rating agencies. So looking back at our commitments made at the last Investor Day, whether you look at strategy, you look at earnings, you look at capital allocation, we have delivered on our commitments and have delivered industry leading shareholder return. So that's a wrap on our performance since 2017: continued execution against our commitments continued improvement in our competitive advantage and the quality and resilience of our portfolio and continued strong cash flow and balanced capital allocation. So let's talk about Masco's next chapter. After the planned divestiture of our Cabinets and Windows businesses, Masco will consist of 2 segments that have significantly similar operating characteristics and that support and strengthen each other. They both serve common channels and common customers, customers that we know very, very well, the repair and remodeling consumer. They both compete and win with strong brands and innovation. And the competitive advantage is fundamentally a deep understanding in that consumer that we know so well and the ability to translate that understanding into a robust innovation pipeline and influencer advocacy. They both compete and win in similar channels, as I mentioned. They fundamentally leverage that deep consumer insight into value creation. These businesses complement each other, and they complement each other with common tools and common expertise from product development to supply chain to channel service. With the planned divestiture of our Cabinets and Windows business, Masco will be higher margin. Our margin will go from approximately 15% to 17%. And while our balanced capital allocation strategy is unchanged, we do intend to use the majority, far and away the majority of our proceeds for share buybacks throughout 2020. In addition to the significant margin improvements, these planned divestitures will yield a portfolio with an acute focus on repair and remodeling. These portfolio moves are consistent with the strategy we laid out in 2014 when we spun out our Services business. Our business will remain approximately 80% focused in North America. But post planned divestitures, repair and remodeling will represent approximately 90% of our revenue and of our business. This will yield a portfolio with more repeatable results, higher margins, as I mentioned and a portfolio that is more resilient through economic cycles. Let's take a look at what I mean by that. This chart shows year over year revenue growth, with the blue line being our Plumbing and Decorative business, excuse me, and the green line representing our cabinets and windows. You can see the obvious improvement in our stability and resilience. From a revenue perspective, peak to trough change for our Plumbing and Decorative business was significantly less than the peak to trough change for our Cabinets and Windows business. But also take a look at the duration of the recovery. It took a full 6 years for our Cabinets and Windows business to return to positive growth, whereas it took our Plumbing and Decorative business only 2 years to return to positive growth. So significantly shallower and significantly shorter cycles. Now let's look at a similar comparison of margin. The blue line represents the go forward Masco, as I mentioned, and the green line represents our Cabinets and Windows business. Again, you can see the new portfolios demonstrated margin stability and resilience. Clearly, these changes will make improvements and drive improvements to our portfolio. This improved portfolio, together with our strong brands, innovation, channel expertise and service, form the foundation for our profitable growth strategy. So let's take a deeper look into that strategy for a minute, and let's begin with our brands. We simply are a leading brand everywhere we compete. Whether you look at the global luxury business of global projects and hotels and residences with Hansgrohe and Axor or you look at the North American showroom market or the North American trade counter market with Delta or lighting showrooms with Kichler or the DIY coatings market with Behr and of course, online with our presence. We simply have the best stable of brands in the home improvement industry. And we continue to feed those brands with what we believe to be their lifeblood of innovation. Many of you know this, but for those of you new to the Masco story, this may be new to you. Innovation is our legacy. Our founder, Alex Manougian, immigrated to the United States of America from Armenia in 1919. A short 10 years later, as a 29 year old entrepreneur, him and his Armenian friends, Ajemian and Sohikian, Manugian Ajemian Sohikian, MAS Company, Masco, was formed. And they began with 3 rehabilitated machining tools that they fixed. And they started machining innovative, hard to make automotive parts. It was from that humble beginning that we started. In 1950s, we used our machining expertise to innovate the single handle ball valve faucet at Delta faucet, and our spirit of innovation has continued ever since. Whether it's something as simple as solving a consumer problem to find a better way to rinse off a dinner plate or open and close a can of paint or designing a merchandising center to drive performance improvement at our retailers, innovation is what we do. And our revenue today, about 30% approximately 30% of our revenue today is from products that have been recently innovated. Now this is critical to our investors because this innovation, together with our brands, provides us with a must have position on the shelf. And this reoccurring innovation gives us the opportunity to continue to drive margin. Importantly, we take our brands and our innovation to market with unmatched channel strength and coverage. We have broad coverage across all channels: wholesale, retail, trade, dealerships, e commerce, you name it, we're there. We cover the spectrum of price points from entry level to the big middle to high, high end luxury. And we have strong brands across all of these channels and price points so that we can meet the consumer wherever, whenever they want to buy with what and how they want to buy it. So what does this mean to our investors? It means that with this strength of brands, innovation and channel coverage, we are prepared to create value across a number of possible scenarios. Let's take a look at a couple of different ones. Take the aging, affluent baby boomers. They want to redo their 2nd home or their luxury condo. We have the price point. We have the technology. We have the brands. We meet them where they want to shop with those brands that they know, that they trust and that in some cases, they actually love. That's powerful. Now take a look at another scenario. Let's take the price conscious, brand conscious millennials. They're entering the market. They're buying, but they have a particular taste. We have the same coverage, the same price point coverage and the same positioning to meet them whenever they click, buy now. Our innovation brands distribution are the foundation for our profitable growth strategy, and we believe that we are operating in a market that is fundamentally solid. While we have all witnessed the volatility in this past year, it's been a different year to say the least. But repair and remodeling, remember, is fundamentally about the consumer, and the consumer is healthy. Home price appreciation remains strong at about 3%. Consumer confidence remains strong with very low unemployment and continued wage growth. So our business today provides for a solid platform for value creation. High margin, less cyclical, more resilient portfolio of leading brands with broad distribution across channels and price point with a demonstrated track record of strong industry leading innovation and solid, solid cash flow, all driven by a strong consumer. So let's take a look at our plans to continue to deliver on our commitments. While some of our specific initiatives have evolved, we have not changed the fundamental strategy that you see on the chart behind me to drive value. We haven't changed because it's working, and we believe it will continue to work. Throughout the day, you're going to hear more about specific initiatives that our businesses are driving, but I'd like to touch on a few key ones. So let's start with full potential. Richard O'Regan is going to talk to you about how we will continue to grow our strong Plumbing segment. Jay Shaw will talk to you about our plans to continue to gain share in the Pro Paint and the DIY paint markets, And both of them will touch on our plans for the important channel of e commerce. Now let's move from full potential to leverage. We have been developing the Masco operating system in earnest for the last 5 years. MOS is our methodology to provide for a decentralized perspective from a business unit perspective but yet drive leverage across the enterprise, the entire enterprise through the sharing of best practices and the development of talent. Our culture of continuous improvement quickly identifies an improvement opportunity and matches a set of tools and expertise and talent to that problem. This ranges from shop floor productivity, delivery and quality to product development and commercial excellence on the sales side. Our leaders are measured, they're rewarded and they are promoted based on their ability to manage, to lead and to drive results through our operating system. The last pillar of our strategy is to actively manage our portfolio. We are pursuing bolt ons in our Plumbing and Coatings business. That's our focus. We look at other areas, of course, but our focus is on bolt on acquisitions in that those specific two segments. We're patient. If we don't find attractive opportunities that fit strategically, if we don't find opportunities that we believe we can deliver return on invested capital above our adjusted cost of capital in 5 years, then we will simply keep deploying our capital to buy back shares. As I close out my remarks and introduce Richard O'Regan to the stage, I'd like to leave you with 3 key messages. Number 1, over the past 5 years, we have developed a track record and a reputation for delivering on our commitments. That will continue. Number 2, our portfolio strategy and our planned divestiture of our Cabinets and Windows businesses will improve the quality of our portfolio and will drive above market growth and resilience. And number 3, with our balanced approach to capital allocation and our strong cash flow, we will continue to drive shareholder value. With that, I'd like to introduce Richard O'Regan to talk to you about our Plumbing business. Thank you. Thank you, Keith. Good morning. For those of you who are new to our Investor Day, I'm Richard O'Regan. I'm the Group President, Global Plumbing. For the rest of you, welcome back. We'll go ahead and get this synced up, if we could. I'm here today to talk to you about a story of success. 2 years ago, I stood on a similar stage to this and I talked about the outlook for the Plumbing segment. And I gave some guidelines. And I'm here today to tell you that we have met those commitments. We've met those commitments at the top line and we've met those commitments at the bottom line. We've done that by identifying a strategy and executing on that strategy to outperform the marketplace. And you'll see as I go through today that that strategy will remain largely unchanged. It's through our brands, our innovation leadership, our market position and importantly our customer relationships that we are able to continue to outperform the marketplace as we move ahead. So let's look at our plan to do that. Today, I'm going to talk to you about the business and what we've done since the last Investor Day. I'm going to talk about that slightly modified strategy, the strategy around extending our North American leadership, around focus on key international markets and then about investing for growth. And then I'm going to say and talk about what that looks like in the future for us and what the results will be. So Plumbing segment. Fully through 2018, fully half of the revenue of Masco was driven by the Plumbing segment and 60% of the overall profitability. Like Masco as a whole, very much focused on repair and remodel, we do have a little bit of new home construction through some of our companies. And in our case, we're very much focused on just the small and midsized builder. We are a lower ticket, which allows us resiliency through the cycle. And as Keith mentioned earlier, during the last cycle, we had a 15% peak to trough and a shorter duration than the portfolio as a whole. We are the primary international engine for Masco through Hansgrohe, which has a global presence. But interesting to note that Watkins Wellness actually has a full 25% of their business outside of North America. On the next slide, I'm going to talk about our product breadth and how that provides us flexibility and an opportunity to respond to changing consumer demand. We are the global leader in faucets and showers with highly recognized brands. Hot Springs is the number one spa brand worldwide. BrassCraft is an absolute must have with plumbers and installers. You can see from the chart that we're able to leverage these brands across different categories and that has allowed us to enter adjacencies such as toilets and sinks and bathing. We have ample room to expand in rough plumbing, bathing and sanitary wear. A full 70% of our business comes from the high margin faucet and shower category. And I should note that within the Plumbing segment, our cycles vary differently. So in rough plumbing, about it's replaced about every 10 to 15 years, same with toilets and sinks and bathing. But in that case, our reputation for quality really helps us maintain a tremendous install base. When we're talking about something more fashion related like faucets and showers where you can refresh your look, that's about a 5 to 7 year replacement cycle. The reason this is important is that it allows us to meet the consumer no matter where they are in their replacement and renovation cycle. So this slide talks about one of our core competencies being brand. Let me talk to you about 2 others. Innovation, which Keith has mentioned, and distribution leadership. Since the last Investor Day, we have gained share and advanced our leading position. When you go out to a big box store, it's easy for you to see our retail strength. We're the number one share of shelf. What many of you probably aren't as aware of is we are also the number one share of wallet with Ferguson Enterprises, which is the largest plumbing wholesaler in North America. With Hansgrohe, we're the number 2 with Saint Gobain, the largest international plumbing wholesaler. So where that ends up leading us for Delta, in particular, is about 50% wholesale, 50% retail. For Hansgrohe, it's about 60% wholesale and then 40% retail and global project business. Emerging e commerce channel. We talk about it as a channel now. Later in the day, I'm going to get into some details about it. But we are number 1 with Amazon and all the major online players. Our core competencies of brand, innovation and distribution customer relationships provides us with a sustainable competitive advantage to grow above market. Now let's look at another one of our advantages, our flexible supply chain. North America, Europe, low cost countries. This allows us we have presence in all of these markets, and this allows us to be flexible and change based upon cost relationship and capabilities. We can react to things like tariffs if necessary. It allows us to establish centers of excellence and transfer of knowledge. So let's take a look at the results of these competitive advantages. We are on track to meet our commitments. Through 2018, we had a 5% compound annual growth rate on the top line. That puts us middle of the range in terms of meeting our commitments. We also met our commitment on the bottom line. How did we have these sorts of improvements? Through a number of levers. Through innovation, we were able to increase our average selling price. Our service levels in terms of shrinking lead times and on time delivery in full make us the preferred supplier, the go to. We our brand commands price in the marketplace. In fact, we've covered the tariffs that we've seen so far in terms of cost impact. Yes, we've also had some favorable commodity since the last Investor Day. But I think just as importantly, our execution of the Masco operating system has allowed us to drive out cost. Going forward, we may not see quite the same rate of improvement. We are seeing that the market is resisting continuing putting price into the marketplace due to tariffs. In Europe, we've seen some trade down and we just don't fundamentally know the impact on demand. But the advantages that I've talked about have demonstrated that we've dealt with this fluctuation in the marketplace already and we'll continue to do so in order to grow above market. Let's look at our plan for how we're going to do that. I'm going to talk about the 3 strategies for us to grow above market. The first, extending in North America our leadership position. 2nd, focusing on key international markets and third, investing to grow. I should mention that these are organic strategies. As Keith also mentioned, we will look at inorganic opportunities, but only as they relate to these strategic pillars and only if they fit within these. We will look at bolt on and platform opportunities. So let's look at how we're going to extend in North America. The consumer purchase journey is a complex one within our categories and it's different whether we're talking about wholesale or retail. But here's the key. In both cases and in all cases, brand is paramount. The consumer is more involved than they used to be, but our brands pull people in to the big box store and the showroom, the wholesaler showroom. So for instance, in the showroom, when we talk about that consumer purchase journey, there are a number of influencers. There's the plumber. There's an external designer. There's showroom associates and there's the consumer themselves. We are investing in each of these influencers to attract them to our brands. So last year, as an example, we trained over 3,900 of the designers and showroom associates at our Indianapolis customer experience center and we tracked the results. Those investments yielded a 10% to 15% increase in average monthly sales for everyone who attended our event. I talked to you in the past about our investment in showroom displays. We also track that. In that case, we see an average increase of 10% to 20% in average monthly sales after a showroom reset. The important point about those investments is that they're ongoing and will continue to yield and pay off. They are this established base. And as we continue to invest in those areas, we will continue to see growth above market. And then we have smaller aspects of our business such as bathing where we've seen a 12% compounded annual growth rate or toilets where we've seen a 38% compound annual growth rate. Now these are admittedly smaller parts of our business. But I think it's important because it demonstrates our ability to invest, get a return and grow above market. Simply said, we have strong momentum. But the momentum is not just about product categories as I've just gone over. It's also about price points. It's about being successful at both the opening price point and in our Luxury brands. We have grown both at the opening price point and in our Luxury brands at 20% CAGR. The reason this is important is it allows us to meet the consumer no matter where they are or what changing demand is. We have flexibility to respond. So we have the brands and the product categories. We have flexibility in price points and options, but also in channel. In talking about e commerce, it's a rapidly growing part of the market. And we are leading in all of our categories in the e commerce channel. But effective e commerce strategies require an investment throughout the organization. So whether it's about marketing providing the tools and merchandising to the team or whether it's about operations being responsive enough to meet the accelerating delivery demands of the consumer and customer or investing in analytics capabilities to make sure you get the right offering and that you're responding to those changing consumer demands. Our investments, they're paying off. The number one share leader with all major players. We have outgrown this already rapidly growing marketplace. We've invested in this channel. We have the infrastructure and that will continue to keep us poised for success. This is how we are extending our leadership position in North America. So that's the first pillar of our strategy. Let's look at the second, growing in priority international markets. So Watkins is 25%, as I mentioned earlier, outside of North America. But our really big gun is Hansgrohe with a global presence. 33 direct subsidiaries, 22 sales offices, 6 worldwide production sites. This provides us the flexibility that we need to adapt to changing market growth rates, capabilities and costs. And as we look at the worldwide market, we are very conscious of always looking at the greatest opportunity for the long run, both in terms of absolutes and in emerging markets and where that accelerating growth is going to occur. Few, if any, competitors have the ability to balance international market dynamics in the way that we do. And few have demonstrated success at leading in innovation and design like Hansgrohe. Here's two examples. Results speak for themselves. These two products were introduced in March, the Rainfinity shower collection and the luxury collection Axdor Eds by Jean Marie Massotte. We won the prestigious Red Dot and IF Gold Design Awards. But these are just 2 examples in a recent 2 recent examples in a very long line of recognition. In fact, we are the most recognized in the industry for design. But still, we have the opportunity to strengthen and broaden our global reach. Hansgrohe is an international wholesaler. As I mentioned earlier, we are number 2 with Saint Gobain, the largest plumbing wholesaler. And we have great positioning with reuter. De, which is the number oneecommerce pure play in Germany. We are expanding through our global plumbing, our global projects business. We have outstanding growth in hospitality and project business. As a matter of fact, we just won and if we could just catch the notes up with this, please. We just won the reference project in Miami, Aston Martin Residences with Axor Chaterio. It is 370 luxury condos with that collection in place. And then on a much smaller basis, we are driving our European DIY expansion in Europe. So large global presence, but that's only one of the competitive advantages that we have. The second is in bundled solutions. And here are some examples of those bundled solutions. In China, the kitchen sink and the faucet are often sold as a unit. We introduced just 4 years ago new high end custom designed granite sinks and sold them in conjunction with the faucet. We went from 0 to 35000 units in those 4 years. It opened up a whole new marketplace to us. Water filtration, multi sensory shower experience. Hansgrohe is continuing to enter with smart adjacencies. Another thing that you see up here is the shower toilet, also called an e toilet. This is a hot trend in automated bidets with a very high average selling price. As you should see, the Plumbing segment continues to lead the way by investing in new technologies, new capabilities and new categories. So the 3rd and final element of the strategy is investing in innovation for growth. From short run, high design faucets to exciting new manufacturing capabilities that allow for customization and personalization, a hot trend, to an Alexa enabled faucet that's featured at the Amazon headquarters, the Masco Plumbing segment is continuing its innovation legacy. From a dedicated innovation lab, which is pioneering agile development, which we benchmark on the software companies, we have been able to reduce development time by half To a Kickstarter launched glasswasher, we oversold our forecast by 4 times in 48 hours. To the development of connected products, we are building the capabilities to continue to outpace the market. We continue to innovate, to connect the home, to manage water and to transform your daily lives with water. Now, let me leave you with what these investments will result in. I've talked about extending our North American leadership, focusing on key international markets, on investing to grow. This will allow us to continue our legacy of growth above market. The momentum that our core competencies of brand, innovation and distribution have brought us is outstanding. Together, our proven track record and our demonstrated ability to meet our commitments should give you the confidence in Masco Plumbing Segment's ability to outpace the market. Thank you. And with that, I'm going to ask Keith to come join me for any questions you may have. I'd remind you that we have a couple of presentations left to do. Obviously, we have our Decorative segment to talk about and we have a financial review that John is going to give. So if you could keep the questions related to those for a later time, we're going to have another 2 question and answer sessions. So if I do postpone your the answer it's not because I'm blowing you off. It's because I want those guys to earn their paycheck. It's John Lovallo from Bank of America. Thanks for taking my questions. And Keith, you may want to punt on this first one just given your comments, but you did reiterate the $2.62 to $2.72 in EPS. I'm just curious if that's contemplating the List 4 tariffs and if you guys have quantified the impact from List 4. Yes. That is in there, but we'll get into a deeper discussion with that with John. He's going to go into detail on tariffs. Okay. That's fine. And then I guess the question I have really is on the spa business, which the Watkins Wellness, which is a very good business. But in light of the spirit of portfolio rationalization, I mean, is this core to what you guys are doing? And is it potentially more valuable in someone else's hands? No, it's core. It fits what we're doing in a couple of different ways. Number 1, it's an industry leader. Number 2, it really is successful due to its ability to manage and develop a dealer network. So when you think about Masco's core competitive advantage and what we do well, as I mentioned, brand innovation and channel coverage and channel service, This is right square in that channel service. So the successful things that we're doing with regards to dealer development, for example, is the same that we would do across large retail chains or across plumbing wholesalers or other dealer networks. So very similar in terms of Masco operating system tools that we can leverage there. It's an international our 2nd most international business. So that fits with our strategy as it relates to diversification. And it fundamentally relies on innovation to drive value. When you look at what these spas do, with regards to, let's say, our freshwater salt system and reduces the amount of interface that you need to take care of the quality of the water. It's just square on with the tailwind around the baby boomers. And the fact that as this large cohort of people are aging, therapeutic wellness and that whole trend around wellness, low impact fitness, hydrotherapy, etcetera. So it fits from a macro driver perspective. It fits from our competitive advantage of what we drive. We know it well. It's a strong international business. Yes, it fits, and it's performing very well. Mike Rehaut, JPMorgan. Thanks for the presentation so far. First question and then I had a follow-up. On the you mentioned, Richard, the share gains that you've been able to achieve consistently. I was just trying to get love to get a sense of what that might be quantifiably. When you think about the growth that you've had over the last few years, are you talking about maybe 1% or 2% above market in for I was thinking specifically about Delta in the U. S. And Hansgrohe internationally where those share gains are coming from? And maybe give us a sense of what they've been? Yes. So it's a relatively balanced story in terms of share gain. We've done particularly well with Delta. Strong very strong in the wholesale showroom. We've done well with what we refer to as our focused product, which is the higher end showroom specific broad range at Delta. But having said that, we also introduced and had great gains in terms of our opening price point with Peerless. So we've seen it at both ends as far as Delta is concerned. Within Hansgrohe, we've been very fortunate. So we continue to grow in our core market of Germany and gain share. And we see in some of the more emerging markets a continued and significant growth. China continues to perform very well for us as it has for the last 3 years. So it's a pretty broad based share gain and it's something that we think we're poised to continue with. I think the e commerce share gain that we realized in this segment is another important aspect of it, not only because it's such a tough channel and you have to be it makes us better to compete in that channel, but it's also, as you well know, a high growth channel for us. So I think that e commerce in terms of the product and how we interface with the consumer over the web is an important aspect of our share gain. Great. Second question, just on the operating margin target that you laid out, 18% to 18.5%. A little different than 3 years ago when it was, I believe, 18% to 19.5%. So I was just curious on what the difference is there, if you could give us any more detail on that. Yes, sure. So a couple of primary drivers for the difference in that margin. Number 1 is tariff and the tariff impact. So I mentioned that we're covering cost, but we're not necessarily covering margin when it comes to tariff. So that has an impact. And then when you look at the growth rates in Europe, that's a significant part of our overall portfolio. And we're seeing a definite trade down, a definite mix impact in Europe. So that also is adjusting that margin rate. Those are the 2 primary drivers. Another driver is a we're leaning into growth a little bit more with our investments, and those take some time to pay off. Hi, Kem Zener, KeyBanc. Richard, Keith, thank you. Richard, specifically to what you just said and Keith mentioned about growth impacting margins, Hansgrohe, which has its own annual report for a long time exceeded, the implied U. S. Margins, if I could say that simplistically. We've seen the margins come down. Obviously, they did very well in the U. S. Is what that tells us. But what is prospects because tariffs obviously aren't impacting Hansgrohe as much. What are the prospects for that business getting to, let's say, North America type margins? Thank you very much. So I would speak to just the different structural issues associated with 33 different subsidiaries. I talked about 22 sales office. It just has an implied overhead cost that is you don't have the same burden when you're in a single market. So that is a structural difference between the businesses. But I think overall when you do apples to apples in both cases, our businesses are outperforming the competition in terms of those margins. Eric Bossard, Cleveland Research. The revenue growth outlook of 2% to 4% think is less than what you've achieved. Do you want to break through that a little bit and explain what's different versus the last few years, especially considering the exciting growth opportunities that you've outlined today? Sure. In this case, it's primarily a reflection of our view on the macroeconomics. We simply see the market beginning to slow and we anticipate that in our expectations. We continue to grow we believe we will continue to grow above market. We think that 2% to 4% is above market, but it's primarily a reflection of macroeconomic conditions. We're strong in Central Europe. There's probably going to be a bit of a slowdown in Central Europe. I think, ultimately, as the impact of tariffs as it relates to price elasticities washes through the system and there's the appropriate level of inflation and the market, so to speak, digests all this volatility. I think it will come back. But over the next couple of years, I think these tariffs could have a demand dampening effect on the low end. So there's a combination of the macros in Europe, for example, and then some of the impact of tariffs. Right. Richard, this question is for you. You mentioned that you're looking at both bolt on and the platform opportunities for For you, meaning me? No, it's not me. Could you please clarify what you meant by platform? Would it be like similar like Fichler getting into a new market? So what that means? No. Thank you for that question. When I say platform, I'm just talking about something within our existing categories of plumbing products. The only difference between bolt on is integrating it into one of our existing companies. Mike Dahl, RBC Capital Markets. Richard, 2 part question on mix. You articulated that European trade down is one impact on the operating margins. If you look at some of the growth categories, whether it's the adjacencies mix as mix as well? And on the e commerce part, could you give us a snapshot of, I guess, what average selling price and margin differential there is on that currently versus the rest of the portfolio? Thanks. Sure. So you might be it might come as a surprise. The e commerce channel for us is actually highly attractive. We do not believe that that's going to have impact on margins per se. Interestingly, because the consumer who comes and shops online is actually not a price shopper And they're interested in the assortment and the design opportunities and the associated accessories. So the package is actually better overall. And so that is not a concern at all. In addition, just to help manage that, we have in place a minimum advertised pricing policy in place that we strictly enforce that helps us to maintain our margins in that area in terms of aligning with what is the minimal acceptable pricing. So e commerce is not a concern. Now the categories that I talked about in terms of toilets, in terms of bathing, where we've had some true real success in terms of growth, those do have a fundamentally lower margin profile, but there's still a relatively small portion of our overall mix. And with 70% in faucets and showers, we're fully confident that we're going to be able to continue with the to maintain our margin profile. Keith Hughes, SunTrust. Just following up on your question on your point on European trade down. What specifically is going on in the market that you're seeing that mix move down? I think that's for you Richard. Yes. So the mix that we're seeing is truly a trade down from the very high end design, axor to sort of we have a good better best strategy and we're actually seeing from better to good by a significant margin. Still investing, market still growing, but in essence we're ending up getting a lower average selling price with similar or perhaps to his comment about demand, what's the impact on demand fewer units? Why is the consumer doing that? Do you have a feel for why? While we continue to see strong consumer confidence, I think there just is some concern that they would rather potentially reinvest less given what the signals that we're seeing in the marketplace. I think that's the best answer that I can give unless you have a No, I think that's it. Steve Kim, Evercore ISI. I just really wanted to follow-up on Keith's And also And also whether or not there's any perceived change in the frequency of turning over the look, if you will, in the bathrooms or the kitchens? Are you seeing like delaying of projects as well? Or are you or do you anticipate that in your outlook, for example? It's a very mixed bag. We so if you take global projects, so the big hospitality projects, the big residences that Hansgrohe participates in, it is becoming incredibly competitive. So you're seeing just the marketplace come in at much lower and then they value engineer. So they do go from a higher end product to a lower end product to meet that bid quote for that project. So we're definitely seeing that happen. In the U. S, it's mixed. As I talked about earlier, we've had great success in our showroom product and we continue to grow significant share at those higher price points. But we just anticipate and particularly with the tariff impact we have seen an impact on demand where while we have put through price and we've maintained there is a unit volume impact and we anticipate that that will have a trade down effect may have a trade down effect as well. Steven Ramsey, Thompson Research Group. So the struggles with getting pricing from here, are you saying you expect that to persist through 2021? Or do you expect to make that up with the unit growth in certain markets or across the board? The general answer is we anticipate making it up. We think we have the momentum and we have in place between our brand and our innovation which continues to draw in the marketplace that will outperform the market. In terms of the tariffs, we do anticipate and we're seeing some pushback with the consumers' ability to absorb price increases. Now we have the resiliency and flexibility as I talked about in my charts to go from the high to the low end. So we'll adapt wherever that consumer decides to buy. Truman Patterson at Wells Fargo. Thanks for taking my question. Just thinking about the e commerce channel, I believe you guys said it was about 10% of sales. Where do you think that can go over the next 5 to 10 years? What portion of your business do you think that can grow to? Because generally, there's a thought out there that there's a natural cap on the e commerce channel. Consumers like to see, touch, feel the product prior to buying. I liken that in a similar fashion to what we saw in plumbing, call it, 10 years ago with private label coming on. There was that question, jeez, it was where is it going to cap out? It indeed cap out in the case of private label somewhere around 22%. What that number will be for e commerce remains to be seen. I do to your point, Truman, there certainly are other categories. The efficacy of online transactions for categories is different. And some, it works very well, some not so well. Fundamentally, you need to be able to have a reasonably weighted package with a lot of value in it. So we don't know where it's going to go. We do know that it's going to have a greater influence in the future than it does today. And that influence is not only on commerce, but it's also on brand building. So we are investing in both of those areas. So and that's why we're the number 1 across that channel. An anecdote in regards to that. Back when I was Vice President of Sales at Delta, we were certain that it was going to cap at 6% and we're now at 10%. Do we see it going much above 15%? I don't think so. But as Keith points out, it's going to continue to grow. The key is being ready for it. So, Bachelor 1 capabilities, the ability to have small lots, understanding how to deal with shipping, understanding how to deal with returns and most importantly, understanding how to build a brand through that interface and that websites through the intense digital content to absolutely accurate product information and PK or product knowledge in terms of and the right software to drive that. So there's a significant amount of work that we have been doing, and we think that will continue. It's important for us. Hi, Matt Bouley, Barclays. Thank you for taking the question. Keith, you just kind of highlighted 3 different reasons why you kind of took down top end of the margin guide by about 100 basis points. Are those impacts effectively equivalent? Or is that more weighted to the tariffs? Just trying to understand if the tariffs did eventually go away, how you think about kind of the long term profitability of the segment? Yes. Tariffs is a big impact on this segment. Certainly, our continued investment that will have some growth that we have to work our way into it contributes to it as well. But yes, I would say tariffs is the biggest. Okay. Thank you for that. And then, just for my follow-up, I just wanted to ask about China since Richard you did mention that's kind of one of your growth regions. Could you kind of frame Masco's exposure today? What's kind of the longer term target in China? And is it really simply going after and investing in these product adjacencies as you mentioned? Or is there some type of expansion of your go to market strategy as well that you envision? Primarily, the driver in China for us is organic growth. We have we are the share leader in terms of the luxury brand over there with Hansgrohe and Axor, and we have broad distribution. And we're able to make money there with low market share because of the high gross margin that we have in that product because the affluent buyer in China loves these European brands. So fundamentally, it's about organic growth. Now we would look at opportunities if there was an inorganic opportunity that could leverage or provide for us what we need to leverage through our existing channels and our dealer network, we would look at that. I think when we talk about Coatings, we'll talk a little bit about how that might be a potential but not significantly material. Fundamentally, we're driving organic growth because that's the best return on our investment, and we're able to steadily continue to do that. Colin Varon at Jefferies. So you called out M and A. Could you just talk about the size of the North American market and the size of the opportunities out there? And possibly what categories you see are the most attractive opportunities? When you say size of the North American market, you mean size of the North American plumbing market? I wasn't quite sure. Yes, the plumbing market. What do we say in North 5,500,000,000. So $5,500,000,000 So $5,500,000,000 is in terms of the size of the market. We'll talk more about M and A, and John is going to go into some detail with regards to our capital allocation. But fundamentally, we're looking at what we call bolt on and different things, different people. That means different things to different people. Heard often from many of you, that represents about 10% of your market cap. That's bigger than what we're talking about. And so I think if you think about that $500,000,000 range or less, that's kind of how we think about a bolt on in our existing spaces where we can either leverage with the target leverage our distribution network or we can get something from the target as it relates to innovation or something of the like. But I'd frame it in that ballpark of in terms of what we mean by bolt on. Okay. We're a little bit ahead of schedule. Let's take a break now and reconvene at 9, let's say, 955, reconvene. We're going to get started again in just a minute here, if everyone can get back to their seats. Okay. Next on the agenda is Jay Shaw, who is going to cover our Decorative Architectural Products segment with you. Thanks, Dave. Good morning, and welcome, everybody. My name is Jay Shah, and I'm President of Masco's Decorative segment. I've been with Masco for 16 years, and I became Masco's Group President for the Decorative Segment in November of last year. Prior to that, I was President of Delta Faucet Company for 5 years. I'll share with you today what we are doing to continue the successful track record we've established in our Decorative segment. I'll start with an overview of our Decorative segment and the sources of our advantage. I'll then proceed to talk about our journey in the lighting segment or the lighting category with our acquisition of Kichler Lighting in March of last year. The vast majority of our time, I'll be talking to you about our coatings category, which represents the largest part of the sales and operating profits for this segment. And then I'll share with you a bit about the future guidance or outlook for this segment. The segment is made up the I think we got some sinking issues again here. All right. Our Decorative segment is a $2,700,000,000 segment and has a long history of generating consistently high profits and cash flows. This segment also has very little exposure to new home construction and nearly all the revenues are generated in North America. So we're very well positioned in this segment. I'll share with you how we're advantaged as well as the initiatives we're driving in order to continue to grow above market and sustain our high levels of profitability. So this segment is made up of 3 market leading categories market leading businesses, I should say, participating in multiple categories with market leading brands. What is common across all these categories is that they're low ticket purchases, they have high functional and design utility, there's a high degree of attachment to most major remodel projects, and they have a high, higher mix of discretionary R and R demand. All of this supports a very resilient business model that delivers consistent performance. In this segment, we also have a history of delivering new and innovative products that draw consumers to our brands and help grow our channel partners' businesses. For example, we were the first to market with a patent primer in 1 with Behr Premium Ultra. We also launched the industry's 1st guaranteed 1 coat hide paint with the broadest color palette with Behr Marquee. At Liberty, we launched an innovative customizable shower door program and leveraged the Delta brand to go from $0 to $65,000,000 in just a few short years. And now we're the market leader in shower doors at The Home Depot. So these are all good examples of leveraging innovation capabilities combined with our the power of the Masco market leading brands and channel partnerships to grow our business. To this end, we also have very deep and broad channel partnerships. We generally are a leader across most of our categories and key customers. So for example, we're the number one paint supplier by a large margin to The Home Depot. We are also the number one primary supplier across all channels other than manufacturer owned stores. We are the leading supplier of branded cabinetry hardware, bath hardware and shower doors, and we are the leading supplier of branded lighting to Lowe's. We're clearly viewed as a key strategic partner to our customers, and we work in close collaboration with them in order to grow our collective businesses. Ultimately, our collective strengths combined with our strong execution are reflected in our superior financial performance. The strength of our brands, innovation and channel partnerships have allowed us to grow consistently and generate a sustainably high level of profits. You see here, we're projected to deliver on our financial commitment we set 3 years ago, a 4% to 6% top line growth with a margin range of 16.5% to 18.5%. You do see in 2018 the effects of the acquisition of Kichler in March of 2018. And also, you see on the operating profits, a margin slight margin decline, and that's also associated with the acquisition of Kichler, which indexes below our overall category average. I'll tell you that even excluding the growth from the acquisition, we would have delivered and we project to deliver within our growth guidance of 4% to 6%. So now let's talk about our entry into the lighting category. On many fronts related to post acquisition integration, we are at or ahead where normally we'd expect to be at this point. However, we have faced considerable pressure from China tariffs. These tariffs have placed an undue burden or pressure on the business and delayed our time line relative to where we normally expect to be around this time. I'll discuss more of this with you shortly, but first let's talk about why we entered lighting in the first place. So we entered the highly fragmented $6,000,000,000 U. S. Residential decorative lighting industry because we like the industry fundamentals. We like the projected industry growth rates. We like the industry profit pools, and we like the market fragmentation. We also liked Kichler's overall positioning within the industry. We liked its scale in this very fragmented industry. And we also liked our ability to be able to create value in this category, which closely resembles our other decorative fixtures categories. Kichler's leading position and scale in this fragmented industry provides us with ample opportunity for growth. Kichler also has great breadth of participation across all channels and categories within the lighting market. This also positions us well as channel partners look to consolidate their buy to a few strategic suppliers who can supply them with a full assortment. The lighting industry is also very highly connected to some of our other Masco categories. First off, many design inspired home remodel projects also involve lighting, plumbing fixtures, decorative hardware and paint. We are, as Richard pointed out, the number one fashion plumbing supplier to Ferguson Enterprises, the largest plumbing wholesaler in the U. S. They have rebranded, in fact, our showrooms as kitchen, bath and lighting galleries. And lighting is one of their top showroom growth initiatives. Also, lighting has high penetration in the online channel. How we market, sell and fulfill on the online channel deploys the same playbook in plumbing where we have become the market leader at Delta. Also Richard talked about gaining advocacy of designers and influencers and architects. In lighting, we often target the same designers and purchase influencers as in the fashion plumbing industry. So as you can see, this is very familiar territory to us. We know what it takes to win in the lighting category. So now let me take you through our journey in the 1st 18 months and our path forward. So we have made a lot of progress in this business. We've installed an entirely new leadership team. We've embedded a culture of structured problem solving, continuous improvement and planning under the Masco operating system. And our cost productivity initiatives have yielded significant cost out savings for the business. We've accomplished all this against the backdrop of significant China import tariffs. Our demand has, in fact, been hampered due to the high price elasticity, I should say, in certain channels and key price points. The tariffs and related pricing and their impact on volume and margins have overshadowed the significant progress and improvements that the team has at Kichler has made. But we're still in the middle of all this, but we do see turning the corner after all the tariffs and related pricing are digested in the middle of 2020. So then what's beyond that? Beyond managing through the tariffs, as we move forward, we look to continue to drive productivity initiatives to improve our margins. And we will be focused on targeted segments of the market that are most attractive to us in terms of profitability and growth. So in the showroom channel, we expect to launch with a broader new product release in early 2020, followed up with another broad release in 2021. This will also be in conjunction with new customer and contractor advocacy programs. E Business in this category has high penetration. We are under indexed in this channel. Our goal is to become the industry leader as we've done at Delta in our Plumbing segment. As a matter of fact, to enable this, we brought in 2 of the top e business leaders who had led that transformation at Delta over to Kichler. As a matter of fact, we've also brought in one of these leaders to go to Liberty Hardware. So we have the playbook to win in e business in this category. Longer to grow above market as we leverage our existing positions excuse me for a sec As we leverage our existing positions and penetrate deeper across categories, channels and price segments, including the premium price segments. Our focus right now is to get the business better before we get bigger. However, we do like the longer term prospects for this category in our Kichler business. So now let's move on to our coatings category. The coatings category represents the largest part of the segment in terms of sales and profitability. The Behr Paint Company is the 2nd largest architectural coatings company in the U. S, which is a $12,500,000,000 architectural coatings market. Behr is also the number one DIY brand in the U. S. In 10 short years, we have parlayed our DIY success and our partnership with the Home Depot, have grown our business in the Pro segment, which now represents 25% of our overall coatings business. Our success starts with our brands. We have developed 2 of the most coveted brands in the industry. In the consumer space, Behr is rated number 1 in customer satisfaction according to J. D. Power in the all important interior paint category. Berry is also the market leader in brand awareness, brand consideration and conversion in the consumer segment. Kiehl's is the number one primer brand in North America, and it has a very strong and loyal following amongst professionals and consumers. Brands convey a promise. Quality is the most important promise or attribute in the paint category for customers. According to recently released quality ratings by a leading independent consumer testing agency, Behr took the top 3 spots in the interior paint category. As a matter of fact, we also took the top spot in exterior paint as well as exterior stains. This is not a first for Bayer. As you can see, we've consistently demonstrated our quality leadership for multiple consecutive years. Quality matters in this category, and our Bear and Kills brands stand for quality. So you take all this, you take innovation leadership, the best brands, the highest quality, combine that with the best partnership in the industry with the number one home improvement retailer in the world, the Home Depot, and we have the unmatched formula for success. Home Depot is integral to our success. Equally, our brands are integral to driving consumer and pro footsteps into The Home Depot. Now let's talk about how we plan on growing in this category. Our 3 prongs for growth remain unchanged. We look to grow our coatings business through extending our DIY leadership position driving pro growth, which represents the largest growth opportunity for this segment, and growing in adjacent coatings categories where we can leverage our brands, innovation and distribution. So let's start with our DIY leadership. The U. S. DIY paint market is approximately a $5,000,000,000 market. Year over year growth in DIY ebbs and flows based on factors such as housing turnover, household formation and demographic shifts. So for example, as baby boomers age, we do see some of them shifting more to DIFM. On the other hand, we see millennials entering homeownership and spending even more on DIY projects than their predecessors. The one constant that remains is that DIY paid projects continue to be the easiest, highest impact and highest ROI home improvement projects out there. So we're optimistic about the long term fundamentals of the DIY paint market, And we're very well positioned within our market with market leading brands, and we can grow above the market rate of growth. So our formula for our growth in DIY is to engage the consumer throughout their purchase journey from inspiration through purchase. We have invested heavily in media, technology and people to drive the highest brand awareness, consideration and conversion in the industry. Color selection is the most challenging part of a paint project. In the middle, you see the new color solution center that Home Depot is currently rolling out to all of its stores. We expect that rollout to be completed by the end of the year. The new CSC was designed to continue to simplify the consumer's purchase journey in selecting paint. Early results from the rollout are very favorable in terms of consumer reactions as well as impact on gallons sold. Our strategy to improve the consumer experience is working, and we are driving industry leading conversion and growing DIY share. Another element of driving demand is our cadence of launching new products. We continue to roll out innovative products to drive consumer pull. You see some examples up here that are currently under test at the Home Depot. In addition, we're excited about the launch of the new Easy Pour Spout container. This new container provides compelling benefits for the consumer as well as the retailer. For the consumer, it reduces the hassle, the time, the mess of opening, pouring and resealing paint cans. For the retailer, the easy twist off cap reduces the time to tint paint. This frees up the associates' time to engage more with the consumers and sell more gallons. The rollout of the new container starts with our marquee line next month and will be extended into other lines in 2020. So again, here at Behr, we continue to invest in being the market leader in bringing out relevant innovation for our consumers and our customers. So now let's talk about our PRO strategy, which represents, again, the biggest growth opportunity, both near term and long term. In 10 short years, we've gone from having a nominal share in the Pro segment to the 4th leading position in the U. S. Behr's Pro business is now in excess of 25% of our overall coatings business. And with only an approximately 6% share of the National Pro market, we see a lot of room for growth. We have a full assortment of products for our Pros, and we continue to add. Beyond our DIY lines available to the pro, we also have a full line of kills primers and specially formulated Bayer products. Additionally, and what's important in this segment of the market is that we invest along with Home Depot in introducing a new array of value added services to attract, retain and gain a greater share of the pro. These services include things like factory tinting, job site delivery, pro financing, pro rewards and loyalty programs and new technologies to better track, manage and support these customers. We have surrounded now the Pro with the right products, the right services and the right personal touch with our network of outside and inside dedicated pro reps. We've developed a large bulk of loyal pro contractors, and now our focus is on gaining a greater share of their business. The final leg of our growth strategy in coatings is to grow in adjacent products and categories. We have established a tremendous franchise in paints, stains and primers. Brand studies that we've done validate that we have the license to extend our brand into an array of related categories such as aerosols, interior stains and finishes, applicators and roof coatings. With our brand license, our channel access and our innovation capabilities, we will be bringing more innovative solutions for our consumers and professionals who value quality. We're only getting started on our journey here. Our longer term possibilities are very promising and can be further accelerated through targeted bolt on acquisitions. So now let's talk about what all this translates to. So we have a strong business with strong brands, a track record of innovation and exceptional channel partnerships. Most importantly, we have demonstrated our ability to execute. We have headroom for growth. We expect to continue to outperform in our core DIY paint business. The Pro Paint segment remains our largest growth opportunity. We're only getting started in product adjacencies and coatings. In decorative hardware, which I didn't talk about much, we will grow through leveraging innovation in our family of Masco brands to launch new programs like the shower door program. At Kichler, our focus is first on improving profitability. But longer term, there's plenty of growth opportunity in this very fragmented lighting market in which we are very well positioned. Over this forecast period, as you can see, we expect to grow in the 2% to 3% range. The rate is higher than the overall market expectation for the DIY paint market, which indexes heavily in our overall business mix. Margins are projected in the 17.5% to 18% range, driven by volume leverage, productivity and pricing. We have demonstrated our ability to deliver results, and we're confident we'll continue to do so going forward. Let me wrap by saying that I'm very proud of our brands, our companies and ultimately our people who work hard every day to drive value for our consumers, our customers and who create value enduring value for our shareholders. So I thank you again for your time, and I look forward to our Q and A session now. At this point, I'd like to invite up on stage, Keith Allman, along with Jeff Philly. Jeff is a Masco Group Vice President as well as the President of Behr Paint Company. Behr is a Jeff is a nearly 35 year veteran of Behr Paint Company and a highly respected leader in the overall coatings industry. Good morning. This is Alvaro Lacayo from GDOT Research. Thanks for the presentation. I have a question regarding the promotional environment in paint and what we've seen at your channel partner as well as your main competitor. How does that impact the business for you guys? And how is that incorporated in the guidance that you're providing through 2021? I'll let Jeff speak to the environment because he's living it, and then I'll talk about how it's incorporated in the guidance. Yes. Of course, we don't control what happens in the retail landscape. So we're focused more on what we do control, and that is product quality, innovation, new product launches. That's really what we control. It's really up to the retailers to battle it out in the aisle. Our focus is to drive consumers into our retail outlets and make sure that we provide a compelling product and value proposition. And if you look at our past history, we've been able to successfully continue to drive margins in this segment and hold our margins in this segment. I would say while there's been some changes in the promotional environment that it's there's always been changes going on in the promotional environment, whether it's the length of time that there's a particular promotion around a holiday or the deep how deep the discount goes. So my point is this isn't anything that's new to us, and we've been in this environment for 20 plus years, even more. So yes, the promotional environment ebbs and flows. You might say that there's a little bit of more promotion going on. We don't control that, but we certainly know how to compete in that environment. It's not new to us. Mike Dahl from RBC Capital Markets. A question around the margin guidance for 2021. Looks like it's fairly flat to what we expect for 2019. Just thinking about the breakdown between Coatings and Kichler, this should be a time where there's some margin recapture at Kichler if we're at least thinking out 2 years from now. So how are you incorporating kind of the margin cadence at Kichler? And then what does that imply for the core coatings business? Sure. So again, this guidance is for 2 year horizon. And we do expect continued headwinds related to tariff activity into middle of 2020. So some of that guidance reflects the fact that we've baked that into the margin consideration, both at in our lighting category as well as in our decorative hardware category. So you could imagine that there's going to be some headwind there. However, overall coatings, we would expect to continue to drive share. We're heavily invested in our business there, and we'd continue to invest in a very disciplined manner. And we'd expect to do well on the margin front there and hold our margins. Megan McGrath from Buckingham Research. I wanted to get your view on the DIY versus pro market. In terms of the overall share, are you expecting pro to gain share in the market overall? And how much of your growth is based on moving towards the Pro overall? And how much of your growth is Yes, Yes, over the last several years, we've seen the pro paint market outpace the DIY segment. What we've seen over a long period of time, however, is when the macro economy gets more challenging, we see a shift back to DIY. So our outlook near term is that Pro will probably outpace DIY. But if things get more and more challenging from a macro environment, we expect the DIY to hold up very well and not be as volatile as maybe the Pro segment, especially with respect to new housing starts. That's where you really see a drop off when the economy gets a little rough. But the DIY segment has been really, really resilient, especially during more challenging economic times. And then to further help you with guidance. So as we look at the two components of our business, we would target the DIY markets to be somewhere around flattish to low single digit, the pro market to be somewhere low digital low middle low single digit to middle. And but our business overall index is more heavily on DIY. Thanks. Mike Rehaut, JP So maybe just working off of your growth targets for the next 2, 3 years, 2% to 3%, I guess you just Jay, you just broke down DIY versus pro. I was curious, are you then kind of saying that your blended end market growth is maybe 1% to 2% and you have another point from share gains and maybe above market growth. I was just trying to triangulate your own initiatives, particularly on Pro. You also obviously have a lot of upside from expanding Kichler and some of the adjacencies. And if those different initiatives are kind of that 1% above market, if we're not missing anything in terms of various initiatives that you have in place to drive top line? Sure. I'll clarify that. So as we look at the overall segment, the 3 broad buckets. There's lighting and decorative hardware, and there's paint broken down between pro and DIY. Lighting and decorative hardware would probably reflect more or less the growth rates market growth rates of what we see in Fashion Plumbing. So 2% to 4% is what Richard guided. However, in the next couple of years, there will be some headwind, particularly next year as it relates to the impacts of the tariffs and the impact on demand of those tariffs into next year. On the pro side of the business, it's the guidance I just gave earlier. However, on that side of the business, pro and DIY, we'd expect to continue to gain share over the next couple of years. Thanks guys. John Lovallo, Bank of America. So Pro is 25% of the Bayer business today and presumably lower margin than DIY. What are you expecting in terms of that percentage through 2021? So what does that 25% become? And how much of a headwind to your margin outlook is that? So the there is a mix element that would drive some impact on the margins, but that wouldn't be significant because we're going to be growing also our DIY business, which is which index is higher. There's the other element, which is the amount of investment we put into the business, and we have invested ahead of our growth. And so there'll be some impact of that. But we don't plan on increasing the level of investment other than through when it's warranted. So we're very disciplined around increases in investment, and we're very eager to make those increases investment to the extent that we could drive significant amount of growth, share gains. And again, when we do drive share gains, whether it's DIY or Pro, we drop down a lot of profit dollars, and it's all accretive to our margins. When we initially started into Pro, there was a significantly more a significantly larger difference in the margin profile between Pro and DIY. As we get momentum and we're starting to get some critical mass, we still are investing in pockets of growth ahead of revenue. When you put in a new outside sales rep, for example, it takes time for that person to bring together a book of business that's going to be profitable and that against their own salary and then profitable with regards to the margin that we're targeting. So it's not that big of a difference between DIY and Pro, but there is a difference. So de facto, when you talk about faster growth rate on Pro than you're talking about DIY, that would imply some margin pressure. All of that is encompassed in our guidance. I would like to add that our ROA on as we drive additional gallons through our plants is really strong. And we're going to continue to be disciplined in our investments behind the Pro right along with our channel partner. And we're both very focused on growing share in the Pro Paint segment. And we look at this as a very long term play. And as we highlighted during Jay's remarks, there's a lot of upside for us here. Justin Speer with Zelman and Associates. Appreciate the time today. Just a couple of questions on tariffs. And this may be broader than just the Kitchener Lighting business, but with the trade tensions still being pretty tough and tenuous, are there any expectations for shifting your supply chains out? Are you seeing your competitors doing anything different? And conversely, if tariffs are removed, how does that affect your margin targets? Okay. I'll take that and then I'll let Keith add to it because I know he deals with this across the entire business. But it's obviously a very dynamic environment. A lot of shifts, a lot of increases occurring in tariffs, and we're very aggressively in the process working our supply chains in order to mitigate the impact of the cost increases. We're also working very aggressively in the marketplace to either put in new pricing or to be able to gain additional share to offset any sort of negative impact associated with the tariffs. So it remains a very dynamic environment. In terms of shifting supply chain to other markets, that is more of a 2 to 3 year out process. It takes a bit longer. And also we find it's difficult to find the kind of supply chain that's been established in China on a cost competitive basis in other markets. So we have to look at it from the perspective it's an overall risk mitigation strategy for the future. But in terms of the cost benefit associated with that, I think that's probably not an immediate benefit in terms of shifting supply chains. With regards, Justin, to the overall company and the impact of tariffs, John is going to share with all of us in his presentation coming up some detail around that, and then we'll pop back up and we can cover that. Ken Zener, KeyBanc. Jeff, rough math, you've been through 2 recessions at least it looks like, 2. Paint as a category, can you talk about how it's changed? Because I mean, you're basically offering GDP type plus growth rate. So when you look at DIY, I understand your pro initiative, and I think that's obviously doing well. But the DIY homeownership, the demographics, the lower price point, it just seems so muted. Can you kind of put it in the perspective of a recovery that we had seen given your large industry perspective? And it just seems like it's much flatter than it was. And Keith obviously points out that margin is stable, so that's good. But why is the growth not there versus what we saw in the past despite rising housing stock? Well, with respect to the DIY segment, I think Jay highlighted this during his remarks. The boomer population was heavy, heavy DIY population. And we've seen as the boomers have aged, they've gone to more DIFM, hiring contractors to do their painting projects for them. When times get tighter, more difficult, even when unemployment goes up, one of the easy DIY projects homeowners take on is a paint project. So we're optimistic from that perspective. We know the housing stock is aging over time. Paint is going to continue to be needed. Now with the millennials becoming the largest population of first time homebuyers with all of the how to content online. Yes, we're pretty optimistic that millennials are going to kind of replace the boomer population, and it's going to continue to be a very resilient business. Of course, it's about share gains. And what we're doing with our channel partner is really making the paint buying process easier. We know that 80% of consumers that are embarking on a paint project, projects start online. So our online content, I think, is among the best. And engaging consumers early on and walking them through the entire process, including how to paint, I think, is really going to bode well for our growth and continued share gains going forward. Eric Bostarck, Cleveland Research. Two questions. First of all, on Lighting, I think the initial comment was that it's at or ahead of where you expected ex tariffs. Can you just expand? Is that on the cost side or is that on market share? And then the second question is in terms of growing paint and especially with a bit more narrow portfolio at Masco, are you evaluating and expanding the paint exposure in the U. S. Outside of Home Depot? Or do you feel like that's the optimal way to best grow that business going forward is just with one focused retail partner? With regards to Kichler's performance and Jay's comments, where we're ahead primarily is in the cost side and where we put in the Masco operating system to drive leverage with regards to how well we procure product, how well we work with our suppliers to develop them, both in terms of quality and cost, logistics cost improvements through leveraging ocean freight and that sort of thing. So primarily, it's on the cost side. Lots of movement on the revenue side as it relates to elasticity and tariffs. With regards to our inorganic approach to paint, specifically in the United States and to your question, Eric, of if we would look for something outside of the Home Depot, where we're really looking is to leverage this, Behr brand and where we could apply it through the Home Depot. So where there's other products that fit well with Home Depot and with Baer. Now that's not to say that we wouldn't look at other opportunities where we could potentially have effective growth in secondary retail or something other than that. We would look at it. But our focus is more on how can we stay a little bit closer to the core and leverage the Bayer franchise and certainly an important relationship with Home Depot. Jeff, I don't know if you wanted to expand on that or not. I think that's well said. I we're with Home Depot and all stores in the U. S, Canada and Mexico. And our Canada business, we're growing share. We're a market leader in Canada. Mexico, gaining share as well. And so we have a great footprint. As Jay highlighted, we're also looking at adjacent categories extending into aerosols, applicators, interior stains. And so we think we've got a lot of room to grow with Home Depot and really across our 25,000 retail outlets with the Kilz brand. Okay. So I think we're ready for our next speaker. So John Stavijs, our CFO, is going to come up and talk about our financial outlook. And then I'll be back with John for some Q and A. John? Hi, good morning. Is this mic on? Mic's on? Okay, great. Thanks. So a big welcome to everyone in the room and welcome to those of you that have joined us on the web this Many of you have followed Masco for a long time. And those of you that have, the change is the one constant at Masco. Coen. And obviously, this portfolio moves we're talking about today is yet another piece of evidence of that change. This morning, you've heard from Keith, from Richard and from Jay about the transformation of the business over the last 5 years. And we're really proud of our accomplishments. We've reshaped the portfolio, We've improved our business, and we've grown our margins. But despite these accomplishments, it's not about what we've done, it's about where we're going. So let's talk a little bit about where we're going. So here's the agenda that I want to cover with you today. Four simple topics. 1, talk about what the business looks like today on a pro form a basis. So that is taking the cabs and window segments out of our results and showing you both the Plumbing and Decorative Architectural Product segments. Then walk you through the five key fundamentals that we look at in terms of the macroeconomics that we think drive the repair model industry and then hence Masco. Give you a little bit of a glimpse into our the future, how we see Masco looks and then talk about capital allocation, because we're going to have a lot of capital to allocate over the course of the next several years. So this is the pro form a that we've seen over the last 4 years, so 2015 to 2018, for solely the Plumbing and Decorative Architectural Products segment. And so what you can see here is we've demonstrated strong results with the top line growing at 7% and the bottom line operating profit growing at a CAGR of 12%. And as Keith mentioned earlier, these segments deliver high margins, with 2018 adjusted margins of roughly 17%. But what you can also see is that in 2018, had we enacted these transactions, we would have had share dilution to the tune of about $0.34 a share. Now that is unmitigated share dilution, and we think we can greatly reduce the impact of this dilution to both share repurchases and cost savings measures. Now as Keith mentioned, we believe the long term fundamentals of the repair and remodel industry are very good and supportive of industry growth above GDP. So let's take a look at the 5 factors that we consider for that impact the R and R industry and both Masco in total. The first of the 5 is home price appreciation. And many of you know, for the vast majority of Americans, their home is their largest asset. And so if they see that asset appreciating, they're much more willing to invest in that home. And you can see here on this chart, there's a high correlation between home price appreciation and R and R spend. Now we have seen a little bit of slowing recently in home price appreciation trends, but the rate is still healthy, above inflation and very supportive of an R and R spend over the course of the next several years. The second thing we like to look at is the average age of the housing stock in the United States, in which you can see here, there's really 2 things that take away. 1, homes in the U. S. Have never been older. And 2, there's never been more homes in the United States than there are today. And so the average age of the house has increased due to the undersupply of housing over the course of the last 12 years. To give you a little perspective on this, 41% of the homes today are over the age of 45. It's up from 30% back in 2015. And so what's really going to happen is, if you look at that orange line on this chart, it's really going to be tough to change the slope of that line unless 2 things happen. Either 1, there's massive building that takes place or 2, massive destruction that takes place. So clearly, this is going to be a nice benefit for us over the long term as older homes just simply need more investment in R and R in the form of R and R spend. The third thing that we like to take a look at is household formations. And this is another one that's hard to argue with, because household formations is largely just a demographic story. Millennials are beginning to form households, and that's playing out in the data that we've seen in 2018 and here in the 1st part of 2019. And what we expect to see is that over the course of the next decade that this cohort that's coming through the system is going to form 12,000,000 new households between now and 2028 or on average 1,200,000 household formations per year. The other thing that we know is that as younger homebuyers come into the market, they are much more likely to take on DIY projects than prior generations, 50% more likely to take on DIY projects today. And that bodes well for us, particularly for our paint business, which is one of the simplest DIY projects that a consumer can undertake. The next thing that we look at is existing home turnover. And in the near term, existing home turnover has peaked most recently in 2017, and you've seen them come down a little bit in 2018 and the 1st part of 2019. The thing that we see driving that is 2 things. 1, we see a lot of millennials coming into the market, and they're not coming out of an existing home. So there's really only one transition there. There's not that 2 turns as if someone's coming out of an existing home and purchasing another existing home. The other thing that we see is the rise of companies buying single family rentals. And again, that leads to a little bit lower existing home turnover because, again, no one's coming out of the existing home to buy that single family rental. Now we know that when existing home turns, there's a great deal of spend that goes into that home as a new homeowner adjust that home to their liking. Now as we look at existing home turnover and compare that against like home price appreciation, Of the 2, home price appreciation is the one that we watch a little bit more closely because we know that 90% of R and R spend goes into homes that have been owned more than 2 years, only 10% of R and R spend goes into homes that have recently turned hands. The last piece that we look at, the 5th piece that is important to us is consumer confidence. And right now, we all know consumer confidence is high. As you can see on this chart, the consumer sentiment and the R and R spend is highly correlated. As we look at the U. S. Consumer right now, they are healthy. Job growth has been very good. Unemployment is at historic low levels. Wages are rising. And their personal balance sheets are in very, very good shape. Disposable income is rising, their savings rate is increasing and household debt is decreasing, all leading to a much more liquid consumer, one that's willing to invest back in their home. Now there are 2 issues before I get into the future outlook that I want to take on directly. A couple of you have already asked some questions about it, so why don't we dive into them. The first one is on tariffs. And let's talk a little bit more and give you some current updates as to how we see the recently announced tariffs and how that will impact our business. So let me orient you to this chart. What you see here are a couple of columns. One is the List 3 tariffs. And this List 3 tariffs is the cost of goods sold impact for both our Plumbing and our Decorative Architectural segments for the List 3 tariffs at 30%. The List 4 column shows the same forward for both the Plumbing and the Decorative Architectural segment, assuming a 15% tariff rate. So you can see in aggregate, our cost of goods sold or the amount of products that we import from China is approximately $825,000,000 based on what we know today as the current tariff rates. You can also see the total tariff impact on the List 3 tariffs is $158,000,000 Now if you consider the 25% tariffs that were in place before this recent announcement, we feel that we have largely offset the impacts of the 25% List 3 tariffs through pricing and through cost out opportunities and through supplier negotiations. We still have some work to do to offset the rise, the incremental 5% increase in the tariff as well as the List 4 tariffs that are going to go and that are in place. So we've got about $70,000,000 of work to do with our businesses either in terms of pricing, cost out opportunities or supplier negotiations. As Jay was just mentioning, one of the things we also look at is moving production. And as Jay referenced, moving production to another low cost production country or re onshoring it back to the United States to one of our domestic manufacturing facilities takes time. Given the strength of the infrastructure in China and the weak infrastructure in other low cost countries, it just doesn't happen overnight. And so we've got a task force that's led by Scott MacDuller, our Head of the Masco Operating System. But Keith, myself, Jay, Richard all participate on the task force to evaluate our actions and how our businesses are proceeding against both the near term mitigants in terms of pricing, supplier negotiations and cost out opportunities as well as the longer term mitigation actions of sourcing alternatives and onshoring back to some of our domestic production facilities. The other question that we've been getting from you quite a bit is, what does Mascall look like during the next recession? And this is a chart that Keith showed you earlier in the day. And really takes a part of current portfolio and it shows you the blue line shows you the sales performance of the Decorative Architectural Products segment and the Plumbing segment over the course of the last nearly 15 years. The green line shows the Cabinetry and Windows segment over that same period of time. And as Keith mentioned, which is the takeaway from this slide is the fact that both the duration and the depth of the recession on our paint and our plumbing businesses was much shallower than compared to our cabinetry and windows business. So that's one piece that's important. And to keep in mind, this was during the weakest economic period since the Great Depression. So to have only a 2 year pullback in our sales, is just quite a remarkable event, particularly considering that the Great Recession was a housing led recession. So the other piece about performing through the cycle that we think about is the structural benefits that we've enacted. Since we are changing the portfolio, we are moving to a lower ticket set of products that are much more repair oriented. And so that's got some benefits. The other thing that we take a hard look at is the fact that our cost structure is highly efficient. Many of you know that we are a low capital intensity business. CapEx as a percent of sales runs about 2%. But at the same time, over the course of the last decade, we have done a great job of variabilizing our cost structure. And so if a recession comes, we're able to take a to be nimble and take address our variable cost structure by eliminating shifts and reducing other spend. At the same time, we've got strong cash flow. And what we experienced during the Great Recession was a significant improvement in working capital. And we expect that would happen again if there was an economic pullback. Because oftentimes, we well, in the last recession, we did see significant cash generation and we expect to see that again. And the last thing that Jeff mentioned is in an economic pullback, we often see a big shift from the do it for me projects to consumers taking on projects and doing it themselves. We would expect that scenario to happen again if there was an economic pullback. So those are the 2 big questions that I wanted to address head on. Now let's take a look at how we see the business developing going forward. You've heard from both Jay and Richard, and this is how we see it developing. So we expect revenue to grow from about $6,700,000,000 to between $7,000,000,000 $3,000,000,000 in revenue. The main driver in our view of this is the fact that the market, driven by GDP, will slow over the next several years. So we'll still see some growth, but the GDP won't be as strong as it's been over the course of the last several years. Despite the fact that we're going to see an overall slower market growth, we do continue to expect above market growth from our businesses over the same period. So you can expect approximately 2% to 3% top line growth from our businesses because of the slower overall macroeconomic conditions. In terms of operating profit, we believe we can grow operating profit from about $1,100,000,000 to about $1,200,000,000 dollars by 2021. It's our intent that we expect to have operating margins remain flat during this period, even with the fact that we've got a lower overall market growth and the fact that we are simply recovering costs on a lot of the pricing that we're putting through with tariffs. Our operating profit growth, as you can see here, comes from the fact that volume is growing nicely, partially offset by a little bit of inflation, dollars 10,000,000 or so. So putting this all together, this is how we see the next couple of years developing. We see 2% to 3% average annual top line growth through 2021, again driven by slower market conditions. We see operating margins holding flat at about 16.8 percent. And we see EPS in the range of $2.80 to $3 a share. This is a 10% compounded annual growth rate from 2018. But the main point I want to walk you away from, and hopefully, you've taken this away from the conversations that you've heard earlier, is Imasco is turning into a cash flow story. As we look to grow overall operating profit dollars while holding our margins flat. Now let's take a look at how we intend to allocate our capital over the course of the next several years. You can see here, that there's really not a significant change to our capital allocation strategy whatsoever. It continues to be a balanced approach to allocating capital to drive shareholder value. The first thing we intend to do is reinvest in the business. And as we've said repeatedly, CapEx runs a little light at 2% to 2.25% of sales. Working capital levels as a percent of sales will be a little bit higher, about 16.5%. The reason that it's a little bit higher is we exit the made to order windows and cabinets business. Those businesses naturally carry lower levels of working capital. And so working capital as a percent of sales will increase just a little bit as we exit those businesses. At the same time, we intend to maintain our investment grade rating. And that means to us keeping our gross debt to EBITDA below 2.5 times. Well, right now on a pro form a basis, we're at 2.4 times. So we're right around that threshold, where but still under where we want it to be. The 3rd area for capital allocation is dividends. And what we intend to do there is have a dividend payout ratio of approximately 20% with annual increases. Of course, the annual increases are always subject to Board approval. And finally, we intend to deploy our excess free cash flow to either share repurchases or acquisitions. And in terms of share repurchases, we will consistently be in the marketplace, but we will be opportunistic as we were in the Q4 of 2018 when we saw the market pull back. And we went in and purchased heavily. We bought $300,000,000 worth of shares in the Q4 of last year as we saw that to be a significant opportunity for us. At the same time, I think many of you saw the announcement today that came out. To back this up, our Board has recently announced a $2,000,000,000 share repurchase authorization replacing our old share repurchase authorization of $1,500,000,000 that was that we pretty much had finished up. And finally, as Keith has mentioned, we're looking at selective bolt on acquisitions to complement our current businesses. So here's another pictorial of how we intend to allocate our capital. You can see we have a lot of capital to deploy with $3,700,000,000 of capital through 2021. The green bar represents the fact that we expect about $1,000,000,000 of proceeds from the disposition of the Cabinetry and Windows businesses, and that's after tax. We expect our the remaining businesses, our Plumbing and Decorative Architectural businesses to generate cash from operations of approximately $2,700,000,000 from 2019 to 2021. Offsetting those two numbers will be CapEx of about $500,000,000 during that period, dividends of about $600,000,000 And that dividends, I should tell you, that's dividends to our Masco shareholders, but it also reflects the dividends to our Hansgrohe and minority interest, which is a cash outflow every year that we have to account for. And so those two numbers aggregate $600,000,000 over that 3 year period. And then we look to pay down a little bit of debt. We've got a March 2020 maturity of about $200,000,000 We look to pay that off. And then as we have done over the course of the last several years, we've been contributing in excess of the required minimums to our pension plans to bring down our pension liabilities, and we intend to continue that practice. So between the debt reduction and the contributions to our pension plan as well as aggregate approximately $300,000,000 So that leaves $2,300,000,000 to deploy to share repurchases and or acquisitions. And again, the way I would expect to deploy this the cash, once we dispose of the businesses, I would expect to deploy at least 50% of those proceeds immediately after the plans divestitures are complete. And the balance will be deployed depending on market conditions. So to wrap it all up, the past 5 years, we have executed on our plans to grow the business, delivered on our financial commitments and positioned the company for long term success. As I said earlier, Masco is going to be a cash flow story with a resilient portfolio of high quality, high margin businesses with high share, great brands and strong channel relationships. We are confident in the future story of Masco and the next chapter. And we're confident the portfolio transformation we are undergoing sets us up to have a more resilient business through the cycle focused on low ticket repair and remodeling products. We are confident that we have multiple growth drivers in Plumbing and the Decorative Architectural Products segments and favorably industry fundamentals. These should support long term growth for years to come. And we are confident that we have a stronger business model that generates strong free cash flow, providing us numerous growth opportunities to grow the business and to drive shareholder values over the next several years. So that concludes my remarks. I'd like to Keith to invite Keith back up to close out the day, and then I'll come back up for some Q and A. Thanks, John. Okay. We are getting close to the end. I see the next going back and forth. Thank you once again for your attendance, both here in New York and online. You had any number of places to choose to invest your time and you chose to invest in Masco. So I appreciate that very much. Also, I'd like to put out a big thank you to the Masco team who helped develop and deliver the day today. Certainly, not limited to, but definitely including our Investor Relations department, Renee and Dave, the leaders, but then Ryan and Liz and Colleen, just to name a few. So thank you. I appreciate that very much. I'd like to make just a few summary comments before John and I take some questions and answers. While we believe the consumer and fundamentally the repair and remodel market is solid, We do expect that our growth rate, from a market perspective over the next couple of years will be a slower growth rate than what we've experienced over the last couple of years, but still a growth rate. And it's in that environment that we will continue to drive our business, outperform the market and gain market share while keeping our margins our high margins and our strong cash flow intact. Together with these earnings and our balanced capital allocation and expected proceeds from the divestiture of Cabinets and Windows, we will drive 2021 EPS to be in that $2.80 to $3 range. Masco's portfolio has never been stronger. As I said in the opening, over the past 5 years, we have developed a reputation and a track record of delivering on our commitments and we will deliver on these commitments. Our portfolio strategy and the planned divestiture of our Cabinets and Windows businesses will improve the quality of our portfolio. We will drive above market growth and we will have above market resilience. With our continued balanced approach to capital allocation and our strong cash flow, we will generate shareholder value. So with that, I'll have John come on up and we'll have some Q and A. Mike Dahl from RBC Capital Markets. Just a couple of clarifying questions on the guidance. John, does the guide include the full $2,000,000,000 of share repurchases in that bridge? And then second, when you divest cabinets, divest windows, how are you thinking about your corporate overhead? And I didn't see anything specific in the guide around the cost savings. So where does that come in around things like that? Yes. So a couple of thanks, Mike, for the question. A couple of assumptions baked into that 2021 EPS guide. First, we'll go through the details. 1 is a tax rate of 26%. The second is general corp expense of about $95,000,000 That's up, like, from about $90,000,000 here in 2019. And that reflects the fact that while we can get a lot of the costs or we expect to get a lot of the costs out, from the separation of those businesses from Asco, In the near term, we probably can't get all of that out. The third thing that it assumes is an average fully diluted share count of 250,000,000 shares in 20 21. Now obviously, share price plays into that, but that's based on our assumptions today, how we came up with those numbers. John Lovallo, Bank of America again. The $1,000,000,000 in proceeds that we saw up there, is that a placeholder? Because that would seem to imply somewhere around a 7 or 7.5 times multiple in 2020 for those businesses. I mean or is that kind of what you guys are seeing out there in terms of demand? That's what we're seeing out there right now. That's what we expect to receive, John, on net attacks. And that was greater than $1,000,000,000 Greater than 1,000,000,000 Thanks. It's Mike Rehaut, JPMorgan. Thanks. On the headwinds that you kind of highlighted from tariffs on Kichler and Liberty Hardware, just trying to get a sense of because there's a question earlier about driving some improvements in the margin in the decorative business over time as you'd expect some synergies from Kichler, the expansion, etcetera. Should we be expecting a little bit of a dip in 2020 from a margin perspective in that segment? Obviously, I'm not trying to front run 2020 guidance, but you certainly referred a few times to some of the headwinds persisting into through mid-twenty. Just trying to get a sense of how meaningful that headwind is to the company as you think about the next 12 months from a top line and a margin perspective? So So I think, Mike, there's a couple of things that go into that, and Keith, feel free to supplement. As we look at Kichler or any of the companies that we see that are impacted by tariffs, that will extend into, obviously, 2020 and create a little bit of a top line what we perceive as a top line headwind as consumers absorb the inflation that's coming at them as a result of the tariffs. In terms of some of the other operational issues that we are enacting at Kichler, Jay and the team are working those hard. And we do expect that over the course of time that those will flow into the P and L. Are they going to flow through exactly in 2020? That remains to be seen. The $200,000,000 incremental tariff that you outlined, it was a little unclear as you went through that and then you referenced a $70,000,000 number. Can you just talk about the recovery expectation and timing of how that plays out? Sure, Eric. So just to be clear on that one, the aggregate impact of all the tariffs that are as known today is that $200,000,000 So that's again the List 3 tariffs at 30% and the List 4 tariffs at 15%. The $130,000,000 that I referenced was the List 3 tariffs at 25%. And that's really what we knew until kind of the second, 3rd week of August when these most recent round of tariffs emerged. And then as I said, we think we've largely offset the impact of those tariffs through our near term actions of either price, supplier negotiations or cost out measures. The delta between and that equates $130,000,000 The delta is the incremental tariffs that we face through the 5% increase from 25% to 30% and the new List 4 tariffs at 15%. And so that's where there's a go get for us. Now we have to go out and either put additional price into the marketplace to continue to negotiate with our suppliers or seek out other cost savings initiatives within our operations to mitigate the impact of those. So is that clear? Thank you. Matt Bouley, Barclays. Just a follow-up on that. You just mentioned the sort of 130,000,000 dollars that you've been able to mitigate approximately. So if a scenario emerges where the tariffs do go away, how much of that $130,000,000 of mitigation actions would you expect to keep? Or are there items like pricing that might then reset to a lower level? Just trying to understand what would happen in that scenario. I think when we think about commodities, for example, and you look over time how we have been able to perform through cycles of rising and falling commodity prices, over time, we're flush We tend to hold on for a little bit when the commodities go down, and that's a little bit of a benefit. But ultimately, we end up adjusting that back for competitive and market share gains reasons. And correspondingly, when the commodities come down, we tend to we would give that back in price over time. My point is that when you look at that sine wave, if you would, above and below through a whole cycle, we tend to be flush. My belief is that's how tariffs would play out as well. If tariffs were to go away or change in one form or fashion, that it would take some time to adjust. But ultimately, we would adjust our net pricing, if you would, as it relates to total cost inputs, be it tariffs, commodities, exchange rates, logistics, labor, etcetera. We would adjust that to be competitive, and so that would be flush over time. Sam Darkats, Raymond James. Two questions, if I could. It would seem stand to reason that one of the primary reasons why you would sell cabinets and windows would be a rerating of the valuation to reflect the remaining businesses. See if you can educate us as to that rerating might look like, what are you seeing in the private market values, private market transactions for attractive plumbing and paint decorative architecture businesses at present? And then I got a follow-up on that. I'm going to fall short of giving you a number of which I think it should be rated at because I hate to sell myself short. But when you look at the nature of these businesses, I think there's you'd want to compare it to businesses that are in consolidated industries that have solid market share. I think these business perform very well. So a potential look would be to a Coatings company. A potential look would be to a big box retailer, for example, a national chain where you might equate the valuation of something along those lines. But fundamentally, we set out in 2014, frankly, to do this to our portfolio. And we made the change initially with installation services. I've got a lot of questions looking around the room 5 years ago of why are you keeping cabinets? And the answer was because I think we could add value because we know how to run it, we can fix it. And that's what we did. So fundamentally, we believe that there is an increase in shareholder value by improving the quality and resilience of our portfolio and that we have plenty of room to grow with this portfolio, whether you look organically in North American Architectural, a little bit in Global Architectural and clearly when you look at Global Plumbing. So that was the thought process, and this has been 5 years in the making. And we're happy that it's getting behind us, and we're focused on growth. In terms of yes, I think this is a more valuable mascot. In terms of where that shakes out remains to be seen, but I am incredibly optimistic. Which logically leads me to my follow-up, which would be, if you do believe the re rate is likely to occur over time, however, that time ultimately is defined, then why only commit half of the proceeds right now to share repo? Why wouldn't you just do all of it and capture the discount today as opposed to do it more ratably over time? It would stand the reason you would want to Get that question a lot. Have gotten a similar question but of a different type, I guess. Why don't you take out debt? Why do you need such there's all kinds of different type, I guess. Why don't you take out debt? Why do you need such there's all kinds of questions as it relates to why don't you dive deeper into a particular strategy or not? We believe, and I think our track record shows, that our balanced approach to capital allocation is effective. And whilst we could always make arguments on more or less in one particular direction or a higher or lower leverage, etcetera, we like the balanced approach. We think it's prudent. It's somewhat of a risk allocation, if you would, and we like it there. Yes. And Sam, the only thing I would supplement is I think what we said clearly is that at least half goes to share repurchase. And depending on market conditions, we may go faster or slower. And so it's we wanted to give you a framework to think about how we're going to allocate it, But we will be dynamic depending on what the market conditions look like. At least half go immediately to share repurchases with the form of an ASR or something of the sort. Collin Verint at Jefferies. So you called out the performance of the pro form a business during the Great Recession. Could you talk about how you think about a more normal recession from a macro perspective as well as how you think Masco would perform going forward in terms of sales margin and free cash flow? Yes. Depending on the nature of the recession, if it's a kind of a garden variety recession, we would expect a very modest pullback, but we would expect also to be able to, as I mentioned, offset some of the profit decline that would come with the volume loss with reduction of variable costs within our facilities. And it's hard to describe what does a the next recession look like. But we feel very confident that we can do a lot of things to offset the profit loss from volume due to the recession. The efficiencies of our factories is not linear. And what I mean by that is, at a certain utilization rate, as that rate goes down, we hit a point where it gets tough to be efficient. However, there's a range of utilization rates at which our factories hung. And we are at a very high utilization rate right now. If you look at our CapEx as we caught up with this growing demand since the Great Recession, we really haven't put a lot in. We put in a customer service center that was focused more on demand generation down in Indianapolis for Delta. We put in some warehousing and high-tech warehousing in Germany really to focus on developing capabilities for small lot sizes, small shipments and leadership in the online space. But we've really we've come up with what we call virtual factories through the implementation of the Masco operating system where we can take an existing factory and up the output without the capital. So my point is, we're at high utilization rates right now. So we have some room to come down and still be at good utilization rates that enable our factories to So we would attack this issue should it come through things like consolidating shifts, focusing on maintenance and material handling and support teams that are more variable overhead than fixed overhead per se. So that's why we're confident that while we can't call if a recession would come or how deep it would look or what it would look like, But we're in pretty good pretty darn good shape as it relates to utilization and knowing how to flex variable overhead. And of course, we'd go after the discretionary spending where we could, not wanting to mortgage our future whatsoever. And Colin, just to add on to Keith's comment. Even though we're at high utilization rates, as Keith said, we're not looking to sink a new facility, have a significant capital expenditure, I should say, in capacity addition in the near future. So even though we've got high capacity utilization now, we still have ample room in our current facilities. Thanks. Keith, SunTrust. Two questions. You had given us a number for 2018 pro form a, dollars 2.16 of EPS. Do you have one for 2019 or something within that range you gave? And then second question, is there any kind of update you can give us on the cabinets and U. S. Window sales? So Keith, the answer to your first question is no. We have not put one out just yet because that would be a pinpoint, and then it would be giving exact guidance for the balance of the year. So we've chosen not to do that for the purposes of this presentation. In terms of the status of the divestitures, was that the question, Keith? Did I hear that right? Yes. The it's a competitive process. It's going very well. The interested buyers are putting a lot of work across both of the businesses to understand it. It's going very well. I'm not going to get into specifics. But as I said at the last time I communicated regarding the timing, we would expect to close these deals in the Q1, if not sooner. So we're happy with where it's going. And by indication of the level of work that's being put in, it's a competitive process. And we've got one done. And we've yes, we finished the U. K. Winter Group. This is Oliver Ollacayo from GDOT Research. Just wanted to clarify the question on overheads that was asked earlier. So you're divesting these businesses and you've got a very efficient operating system in place. Maybe if you can give some granularity as to why you can't take some overhead out given that it looks like it might be a little bit higher than it already is. So yes, I mean, the way we look at here, you're talking about our general corporate expense specifically? Yes. So as you take a look at that number, there's a variety of people at this corporate center that support all of our businesses. And so despite the fact that you're unplugging several companies, you still have basic fundamental operations that you need to perform: human resources, tax, financial accounting. And even though you're unplugging some people, you can't fully limit all those costs. We have taken a hard chunk of that. In aggregate, that's about a $15,000,000 headwind to us if we were to not take any actions. We think we can get after about $10,000,000 of that as a result of some of the cost actions we're taking. And so we'll have about $5,000,000 of costs that we won't be able to take out in the near term. Megan McGrath from Buckingham. Keith, I wanted to clarify your comments earlier about when you said over time you would expect to be flush in terms of the tariffs. Was that a top line commentary or also a margin commentary? I think what people are going to want to try to do the math is, is there margin percentage upside if the tariffs go away? I probably was a little long winded in that answer. And I was attempting to equate how I view the tariff situation, and that is very much a parallel to how I view commodity costs. So when they come in, our prices go up. When they go down, our prices go down. So should there be an improvement in our performance if the tariffs go down? My point is we would not be able to keep all of the price that we put into the market if the tariffs go down. I do, however, believe, based on what we're seeing, at least in the short term here in terms of elasticity of demand, that we would see an uptick in demand if the tariffs went off. Because I think Richard earlier said you were covering tariffs from a revenue perspective, but not from a margin perspective. So I just wanted to marry those 2 ideas. That's correct. So we're able to go in the market and we're driving. If we get hit for $100 in cost due to tariffs, we go and we go after $100 of price. We're not able to go after that price plus the margin on that. Steven Ramsey, Thompson Research Group. So just to confirm, to circle back, in the Lighting business, are you done with M and A there just given the margin profile of lighting and where you want to be? Or bolt ons still something you would be looking to do in the lighting business particularly? As Jay Shah mentioned in his remarks, we're focused on making that business better before we get it bigger. We like the space. We like the company. It hasn't started out like we had planned for it to start out, principally driven by the stress put on that whole market, frankly, with tariffs. So our focus is on improving that business before we start adding to it. Okay. One more. Thanks. Ravi Janney from Anchor Vault Capital. I just wanted to clarify the point on corporate expense. Just how is that why is that not coming down over the next 2 years? And then separately, if you could just comment on the recent moves in commodities. How is that factored into your margin guidance outlook over the period? So on a corporate expense perspective, we allocate cost to our business units. When those business units go away, that allocation comes back. In addition, when there's less businesses in our portfolio or less, in some cases, people, for example, we can lose some leverage, be it at health care expense and things like that. So when you look at it, as John mentioned, that nets to about $15,000,000 of costs coming back. Our costs are going up at about $5,000,000 I think to the $95,000,000 Yes. We're able to offset that. We're able to take $10,000,000 of cost out, Ravi. And so we're just not able to get it all out in the near term. We'll continue to plug away into that over the long term. Okay. Was there a second question, Ravi? Commodities. Commodities in terms of? Yes. Again, we view that as something that if the commodities go up, we might take a little bit of a benefit in the short term, but ultimately, we give that back. And over time, we're flushed with the price commodity price cost. Mike Dahl. Mike, you have one more? And then we're going to the last question. Sorry to keep this going. One more. Mike Dahl, RBC Capital Markets. Keith, just around the rerating story, the cash flow story that Masco is turning into, I guess, just kind of a follow-up to Eric's question earlier. What's the time frame that you're evaluating this against? And if we're sitting here in 2 years at the next Investor Day and the stock has not rerated higher, what should we expect your message to be around how you're looking at the business, the portfolio? I don't have that expectation in the least bit. While we could talk about I suppose we could talk about theoretical scenarios of what could happen, what could not happen. I really don't have an answer for you. I expect this portfolio move to be value creating. I expect that the focus it gives us and that the stability it gives us and the resilience it gives us, that will be a positive in the market. And we have room for growth both organically and through bolt on M and A should we find the right targets with the right strategic fit where we can earn our returns. So Masco is stronger with this new portfolio. We have great brands and a great innovation pipeline. And our Masco operating system is driving leverage across our business while at the same time allowing for and promoting what's special about Masco, which is a decentralized culture at the business unit level. So this is a good time for Masco, and we're on solid footing because of our new portfolio and our portfolio moves. And I'm excited to see what's going to happen and what we're going to drive over the next couple of years. So thank you, everyone.

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