Earnings Call: Q4 2019

Feb 11, 2020

I will now turn the call over to David Chaika, Vice President, Treasurer and Investor Relations. You may begin. Thank you, Regina, and good morning. Welcome to Masco Corporation's 2019 Q4 and full year conference call. With me today are Keith Allman, President and CEO of Masco and John Snaweis, Masco's Vice President and Chief Financial Officer. Our Q4 earnings release and the presentation slides that we will refer to today are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at 313-792-5500. Our statements today will include our views about our future performance, which constitute forward looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We describe these risks and uncertainties in our risk factors and other disclosures in our Form 10 ks and our Form 10 Q that we filed with the Securities and Exchange Commission. Our statements will also include non GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. Finally, please note that we have accounted for our windows and cabinetry businesses as discontinued operations for all periods presented. With that, I'll now turn the call over to Keith. Thank you, Dave. Good morning, everyone, and thank you for joining us today. I'll begin with some brief comments on our Q4 before I turn to our full year results and conclude with our thoughts on 2020. As Dave mentioned, our financial results have been restated to reflect Cabinetry and Windows as discontinued operations for all periods presented. Turning to slide 4. In the Q4, our top line increased 1% excluding the impact of currency, driven by solid growth in North American Plumbing and Paint. In line with our expectations, operating profit was down and our operating margin was 15.7% in the quarter. As we previously communicated, this was due to higher input cost due to the full impact of tariffs and an increase in variable cost as compared to the Q4 of 2018. Our earnings per share for the quarter matched prior year at $0.54 per share. Turning to our segments. Plumbing growth in the 4th quarter was led by our North American Plumbing business, which grew 5%. This was driven by record sales for both Delta and Watkins. Delta experienced growth in trade, retail and e commerce in the Q4 and Watkins continued to outperform the market with its industry leading portfolio of products across price points and channels. In our Decorative Architectural segment, Behr continued to perform well with mid single digit mid single digit Pro Paint growth and low single digit DIY growth. This was aided by increased year end ordering that pulled forward sales from Q1 of 2020, similar to what we experienced last year. We saw good results from the recently reset color solution centers, as well as other new innovations such as our EZ Pour Paint Can and our new Behr Ultra Scuff Defense paint. Our paint growth was offset by lower sales in our lighting business, an industry that has been significantly impacted by tariffs. Lastly, for the Q4, we made significant progress on our strategic plan by completing the sale of our Milgard Windows business for after tax net proceeds of approximately $560,000,000 and signing an agreement to sell our Cabinetry business for $850,000,000 in cash at closing and preferred stock with a liquidation value of $150,000,000 We now expect the cabinetry sale to close by the end of February. With the proceeds from the sale of Milgard and our strong free cash flow, we executed share repurchases of $456,000,000 in the quarter and retired approximately $200,000,000 of debt that was scheduled to mature in early 2020, further strengthening our balance sheet and reducing our interest expense. We were pleased with our 4th quarter performance and it concluded a transformational year for Masco. Please turn to slide 5. As we look back on the full year, we effectively navigated this challenging year while executing our strategy to transform Masco into a stronger, more stable, less cyclical and higher return building products company. For the full year, sales grew 2% excluding the impact of currency, largely driven by pricing actions as we mitigated the impact of tariffs and other inflation. Despite the challenges of increased tariff costs and slower end markets, Delta, Hansgrohe, Behr and Watkins each achieved record sales for the year. Delta gained share with bath fixtures at retail and its Brizo brand in showrooms, while also expanding its line of voice enabled faucets. Hansgrohe launched several new products early in 2019, helping to drive solid growth, particularly in Germany and China. Our innovation excellence was demonstrated at the recent Kitchen and Bath Industry Trade Show or KBIS, as we earned 2 of the best of KBIS awards. Our Brizo brand won the KBIS Best of Show award for its new Kinsu bath collection and our Hansgrohe brand won the KBIS Impact Award for its Rainfinity shower system. Watkins, our leading spa business also had another outstanding year driven in part by innovations such as its freshwater salt system. This unique water care system provides a maintenance free disposable cartridge that uses less chemicals to provide a simpler and cleaner spa experience. Behr continued to perform well in 2019, driving high single digit growth in propane. Propane is a large growth opportunity for us and we will continue to invest in people and capabilities along with our partner, The Home Depot, to gain share in the propane market. While we were pleased with our paint performance in 2019, the lighting category was one of the hardest hit by tariffs and this impacted our results. The headwinds we experienced in lighting in the quarter will continue for the next three quarters as we exit certain private label SKUs and expect some inventory reduction to occur in the retail channel. As we outlined in our Investor Day, we believe that our performance in lighting will stabilize by the end of 2020 and we will be positioned to return to growth at that point. Wrapping up our 2019 performance. We delivered on our commitment to drive shareholder value as we increased earnings per share by 6%, executed our strategy to make Masco a better company for the long term by completing the divestitures of our windows businesses and signing an agreement to divest our cabinetry business. And we deployed over $1,200,000,000 of capital by returning approximately $900,000,000 to shareholders through share repurchases, increasing our dividend for the 6th consecutive year and reducing our outstanding debt by approximately $200,000,000 to finish the year at a net debt to EBITDA of 1.7 times. With our effective capital allocation strategy and strong operational performance, we achieved a return on invested capital from continuing operations of 29% in 2019. Before closing the book on 2019, I'd like to thank all of our employees, especially those at our Cabinetry and Former Windows businesses for all of their hard work and perseverance that made 2019 another successful year for Masco. Now turning to 2020. I'd like to share with you our view of our markets. For the repair and remodel market, which is approximately 90% of our revenue, we expect market growth to be in the range of 3% to 4% in 2020 with growth accelerating in the second half of the year. For the paint market, a subset of the repair and remodel market for us, we expect the DIY paint market to be flat and the Pro Paint market to grow low to mid single digits. For the new construction market, which is approximately 10% of our revenue, we expect mid single digit growth as we have seen an improvement in both starts and permits, particularly in the single family sector. As for our international markets, principally Europe, we expect a flat to low single digit growth environment. Based on these assumptions, we expect full year sales growth to be in the range of 2% to 3% excluding currency, margins to be approximately 16% and earnings per share to be in the range of $2.35 to $2.55 With our strong balance sheet and the $645,000,000 in after tax net proceeds from the sale of Cabinetry expected to be received in February, we will continue our balanced capital allocation strategy to drive shareholder value. We will likely deploy $500,000,000 to $600,000,000 of the cabinetry proceeds towards share repurchases shortly after closing. And with our expected strong free cash flow conversion of approximately 100%, we will look to deploy up to another $600,000,000 towards M and A or share repurchases throughout the remainder of 2020, subject to market opportunities. Now, I'll turn the call over to John to go over our Q4, full year and 2020 outlook in more detail. John? Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance from continuing operations, excluding the impact of rationalization and other one time items. Turning to Slide 7, we finished the year on plan. 4th quarter sales matched prior year and increased 1% in local currency. Currency translation unfavorably impacted sales in the quarter by approximately $7,000,000 In local currency, North American sales increased 1% in the quarter, driven by pricing actions and volume growth in our plumbing and paint businesses. This was partially offset by lower volumes in our lighting business. In local currency, international sales decreased 1% in the quarter driven by unfavorable mix, partially offset by pricing actions. We reported operating income of $257,000,000 with operating margins of 15.7%. Operating profit was impacted by mix and unfavorable price cost relationship and higher variable costs. For the Q4, our EPS matched prior year at $0.54 per share. Please note that this performance is based on a normalized tax rate of 26% versus the previously guided 25% tax rate prior to discontinued operations. Due to the move of Cabinetry and Window segments to discontinued operations and a change in the tax rate, we have provided restated adjusted EPS numbers for 2018 and the 1st 3 quarters of 2019 in the appendix on Slide 22. Turning to the full year 2019, sales increased 1% and grew 2% in local currency. Currency translation unfavorably impacted the full year by $77,000,000 In local currency, North American sales increased 2%. This performance was driven by disciplined pricing actions across both segments, partially offset by lower volumes. In local currency, international sales matched prior year. While we experienced some international market softness in 2019, Hansgrohe continued to drive share gains in its home market of Germany and in China. Our SG and A as a percent of sales increased 10 basis points to 18.9% for the full year. And for the full year, operating income decreased $16,000,000 or 1% with operating margins of 16.5%. Lastly, our EPS increased 6% to $2.25 for the full year. Turning to Slide 8, our Plumbing segment grew 3% in the quarter excluding the impact of currency driven by strong growth in North America. Foreign currency unfavorably impacted sales by approximately $9,000,000 in the quarter. North American sales increased 5% in local currency as we experienced improved demand from our wholesale, retail, dealer and e commerce customers. This growth was against an 8% comp in the Q4 of 2018. Growth was led by Delta as they achieved another record sales quarter through increased volumes across their product categories. Additionally, Watkins, our spa business, continued to outperform by also achieving another record quarter with its innovative new products and industry leading brands. Our international sales in the 4th quarter decreased 1% in local currency due to lower sales in Germany as Hansgrohe faced a difficult comp with sales growth of 7% in Germany in the Q4 of 2018. This was partially offset by strong growth in China. Operating profit in the quarter decreased $5,000,000 due to higher variable costs, partially offset by incremental volume. Turning to the full year 2019, sales increased 2% in local currency. This solid growth was driven by record years at Delta and Watkins. North American sales grew 2% in local currency as a result of early and aggressive pricing actions taken to mitigate the impact of tariffs offsetting lower volumes. Our international plumbing sales matched prior year in local currency as Hansgrohe has solid growth in Germany and China was offset by softness in other regions. Full year operating profit matched prior year due to a favorable price cost relationship as we priced ahead of feeling the impact of tariff costs in certain instances, partially offset by higher spending, unfavorable currency translation and mix. For 2020, we expect the Plumbing segment sales growth to be in the 2% to 4% range, excluding currency, principally due to our low growth expectations for the European Plumbing market. As a reminder, 35% of the Plumbing segment sales are outside of North America. We anticipate full year margins will be similar to 2019 as we experienced the full impact of the List 3 and List 4 tariffs in 2020. We expect the tariff impact will be the greatest in the first half of the year and we anticipate operating margins will be down roughly 100 basis points in the first half of twenty twenty before recovering in the second half of the year. Also, given current exchange rates, we do not expect currency to materially impact our 2020 revenue. Turning to Slide 9, the Decorative Architectural segment declined 3% in the 4th quarter. This performance was driven by strong paint sales, which were more than offset by lower sales in our lighting business due to the loss of a portion of our private label business and inventory rebalancing with a key customer, which impacted volumes in the quarter by approximately $20,000,000 Perrier's solid mid single digit growth in pro and low single digit growth in DIY products was aided by approximately $20,000,000 of sales pulled forward from Q1 2020, similar to the pull forward we experienced in the Q4 of 2018. Operating income declined due to lower volumes in lighting and an unfavorable price cost relationship driven by the impact of tariff costs and higher incentives, partially offset by lower spending. Turning to the full year 2019, sales grew 3% driven by our propane initiative as we achieved high single digit growth and continue to grow share with the pro. Growth was also aided by the acquisition of Kichler in March of 2018. This performance was partially offset by lower volumes in our lighting and builders hardware businesses as a result of our disciplined pricing actions in 2019. Full year operating income decreased 1%, principally due to lower volumes and increased commodity costs, partially offset by selling price increases and lower spending. In 2020, we expect low single digit growth in DIY paint and mid single digit growth in propane. We also expect revenue in this segment will be impacted by the loss of a portion of our private label program and inventory rebalancing at a Kichler customer. The revenue impact of these items will be approximately $15,000,000 each in Q1 and Q2 and approximately $5,000,000 in Q3. This volume loss in the full year impact of tariffs will depress operating segment operating margins by approximately 300 basis points in Q1 before recovering in the balance of the year. For full year 2020, we expect sales growth in the segment will be in the 0% to 2% range with operating margins between 17% 17.5%. And turning to Slide 10, our year end balance sheet was strong with net debt to EBITDA at 1.7 times and we ended the year with approximately $1,700,000,000 of balance sheet liquidity. Working capital as a percent of sales finished the year at 15.7%, an improvement of 10 basis points over prior year. During 2019, we repurchased 7% of our outstanding shares for approximately $900,000,000 and we increased our annual dividend by 13% to $0.54 per share. We took further action in 2019 to strengthen our balance sheet by reducing our debt by approximately $200,000,000 and we initiated a plan to terminate and annuitize our U. S. Qualified defined benefit pension plans. We should complete this plan by the end of 2021. This will reduce our ongoing pension expense and contributions once completed. Lastly, we expect the sale of our cabinetry business to close in February and we expect net proceeds from the sale of approximately $645,000,000 after taxes and expenses. Going into 2020, our disciplined capital allocation strategy is unchanged. We will continue to prioritize investment in our businesses to drive organic growth. We will balance acquisitions with the right strategic fit in returns with share repurchases, and we will maintain an appropriate dividend. Including the expected net proceeds from the sale of our Cabinetry business, we expect to deploy up to $1,200,000,000 for share repurchases in 2020, subject to market conditions. This activity would bring our expected 2020 average share count to between 265,000,000 and 270,000,000 shares. We generated $660,000,000 of free cash flow in 2019 and we expect 100% free cash flow conversion rate in 2020. Lastly, for the full year 2020, we expect annual revenue growth of 2% to 3% with operating margins of approximately 16%. And as Keith mentioned earlier, our 2020 EPS estimate is $2.35 to $2.55 which represents 9% EPS growth at the midpoint of that of the range. With that, I'll now turn the call back over to Keith. Thank you, John. 2019 was a dynamic and transformational year for We continue to grow our plumbing segment with record sales at Delta, Hansgrohe and Watkins. We continue to gain share in pro and DIY paint with our leading Behr brand. We simplified our portfolio with the divestitures of our windows businesses and signed an agreement to sell our cabinet business. And we continue to execute on our capital allocation strategy. As we enter 2020, the fundamentals of our business and our core repair and remodel market are healthy. Consumers remain confident and wages are growing. Home price appreciation is increasing. Housing stock continues to age. Existing home sales have improved and household formations have steadily increased. With these favorable fundamentals and our continued focus on executing our strategy, Coupled with our strong balance sheet and liquidity, we will continue to create shareholder value in 2020 and are well positioned to deliver on our 2021 EPS target of $2.80 to $3 that we put forth at our Investor Day last September. With that, we'll now open the calls up for Q and A. In order to ensure that everyone has a chance to participate, we would like Our first question will come from the line of Stephen Kim with Evercore ISI. Yes, thanks very much guys and appreciate all the detail here. I guess first question really relates to the margin guidance that you've given. I'm curious, first of all, when you look at the kitchen business, I guess, within Deckard, can you give a sense for what kind of a margin impact you think the private label program being discontinued at your retail partner, What that is representing and how much you think some of the margin guidance you're looking for particularly here in the Q1 is being driven by other impacts to the margin? Yes, Steve. Good morning. It's John. I think the margin impact from the loss of the private label business is relatively modest because it is indeed a private label program. I think the bigger impact on the margin in the segment is due to us absorbing the full cost of the tariffs here in the 1st part of the year. Thanks. And then, I guess might as well stay on the Decart segment and particularly Kichler. I'm curious as you look at that business, obviously there's a lot that's happened. The tariffs coming in shortly after the acquisition was an unfortunate event. And there's continuing to be issues in China due to the coronavirus, one can imagine affecting your supply chain. I'm curious, I guess, number 1, you didn't I don't believe you mentioned anything with the coronavirus, if you could maybe talk about how that might be factoring into your outlook at all? And then 2, if you believe that there is any adjustment or has there been any adjustment in your improvement plan in Kichler in light of what's happened as you've watched things develop over the last 3 months since the last time we spoke to you? Has there been any change in your strategic thinking around how to approach improving the results in that business given the changing world? Stephen, this is Keith. I'll take that and we'll talk about the coronavirus first. When you think about the revenue that we have in China, it's about 3% of our revenue. So I want to keep that in perspective. Obviously, China plays an important role in our supply chain. So it's important to us and it represents about 3% of our revenue. As of now and it is a fluid situation without a doubt, we are not expecting a material impact on our performance from the coronavirus. It is a fluid situation as I mentioned. When you think about first of all, in terms of our factories and where we stand, I guess most importantly, none of our employees as we know sitting here this morning have been infected by the virus and we're very thankful for that. We've instituted significant precautions, travel restriction, hygiene guidelines. We've eliminated gathering and meetings. We have a small manufacturing force that started about 15% of our biggest factory that started yesterday and we'll be ramping that up throughout the week. So that represents about a 1 week delay from what we had anticipated due to the Lunar New Year. So not a significant delay, but definitely a slower ramp up than we anticipated. From a supply chain perspective, a very similar story with our biggest suppliers where they are ramping up, they are bringing people back from the countryside where they were out on Chinese New Year and they're coming back and there is a planned full ramp up. So right now as I've talked to our biggest suppliers and to our own factories, we are cautiously optimistic, but it is a fluid situation. In terms of the demand over there in China, again, that's 3% of our volume. As you may know, a lot of the building products are sold through retail malls and small dealers. Most of those are still closed and they will start to open up over the course of the next 10 days. Our sales teams are all working from home. We're reviewing the revenue and the orders as they come in. We've reserved spots in terms of premium freight to help us maintain our delivery performance as we ship some of our products back to a large degree back to Germany. So my point is we're taking precautions. We're thankful that none of our employees have contracted the virus. It's a serious situation. We're taking it seriously. We have contingency plans developed. And at this point where we stand, we don't expect a material impact on our business. With regards to Kichler, no question about it. Kichler has been growth challenged in 2019. I mean the overall lighting industry was significantly impacted by the tariffs. And we were firm on our pricing and we were aggressive, one of the first out in the industry in building products in terms of pricing for these tariffs. And we did suffer a loss of a portion of our private label business. And as John mentioned, there is an inventory rebalancing at one of our large customers that we expect to take place and we've outlined the impact across the quarter. So certainly the tariffs were not expected when we made this acquisition. In terms of your direct question regarding if we've changed our improvement approach, we really haven't. Certainly, there was a change as it relates to pricing for tariffs, but I've already discussed that. But fundamentally, we had a work plan to drive what we thought would be improvements in our cost structure and in our total cost productivity. We've done that. We're ahead of that plan and we're going to continue to drive that and we expect to continue to outperform our plan as it relates to productivity and costs. With regards to the top line, it's really about having the right products and the right commercial programs and relationship in the industry. And the Kichler brand is very strong and we have in some cases 2 3 generations of customers that we continue to serve. And we're focused on new products and we've reinvigorated our new product development process. We just executed a launch in January and we're receiving very positive feedback on that. We've looked at and we've teak our dealer programs to simplify and incentivize our dealers and our Kichler team is very focused on executing this plan. So without a doubt, there were some volume challenges in 2019. They're going to continue through the first two quarters and then a little bit into the Q3. And then as we exit 2020, we're going to be on solid footing to return this business to growth. Great. Thanks very much. Your next question comes from the line of Matthew Bouley with Barclays. Good morning. Thank you for taking my questions. I want to follow-up on the decorative side just around that Q1 guidance for the 300 basis point decline. It sounded like you're saying that that's largely reflective of the tariffs flowing through. And obviously, your full year guidance suggests that the margins will recover through the kind of more weighted to the end of the year as you anniversary those tariffs? Yes. I think kind of more weighted to the end of the year as you anniversary those tariffs? Thank you. Sure, Stephen or Matthew, let me give you a little bit of color here. So if you think about how the tariffs impacted us starting in 2019 and how they phased through our P and L through the course of the tail end of 2019 and going into 2020. We had about $60,000,000 of incremental tariff costs in 20 impact the P and L in 2019. We expect another incremental $90,000,000 to impact the P and L in 2020. And most of that $90,000,000 should be in the first half of the year. I mean, if you consider that $60,000,000 started to flow through our P and L kind of the middle of the Q3 and really hit us the full effect hit us in the Q4 of 2020. So we should experience the full impact in the 1st two quarters of the year and then it continued a little bit in the Q3 and then should dissipate as we get into the Q4 of last of this year. So we've implemented the pricing to mitigate the $450,000,000 of tariffs, but we're also continuing to work on margin recovery efforts through cost out opportunities, supplier negotiations and looking at other resourcing opportunities that we may have. The one thing that I should point out is we might face a little bit of margin compression because what we are experiencing is cost recovery on these tariffs. So we don't have necessarily margin dropping to the bottom line. That said, we should expect to resume some margin expansion in the back half of the year once these tariffs work their way through the P and L. So I hopeful hopefully that's helpful to you. It is. Thank you for that. And then secondly, just kind of bigger picture around Kichler, Just hoping you could elaborate a bit around kind of the longer term growth plans. I mean, kind of how you envision this business positioned from a channel perspective? Or what, I guess, needs to change that you think would allow this business to kind of return to growth after you've moved past some of these near term losses? Thank you. Similar answer to how I answered Stephen's question. I think there was specific events that occurred in this business as it relates to tariffs and some losses in private label business and inventory rebalancing by a significant customer. As those things, particularly the tariffs begin to or the loss of the private label rather begins to flow out through the year, this business will be on solid footing to return to growth. In terms of the specific strategies, it's really about leveraging the strong brand and the deep channel relationships that we have in Kichler. And Kichler is one of the few businesses in this industry that have a broad presence across all channels. So it is a multi channel strategy for us. And fundamentally at the root of that strategy is good products and great service. And we're working through different programs as I highlighted earlier in terms of new product launches and commercial programs to drive incentives and to align, not unlike what we did as we revamped several years ago when we were down at Delta and went through this process to revamp our product development, shore up our assortment and make sure that our incentives were aligned to the specific needs of the channel. A little bit unique here in lighting is the movement to the e commerce channel. And we have put in a leadership team actually several players from Delta Faucette Company that were instrumental in driving our share leadership in e business down to Kichler. We have a great team down there and we're focused across all channels, e business, landscape, retail and showrooms. So, it really is a multi pronged approach, but at the core of it, it's commercial programs. It go I've said it, but I'll say it again, everything we do here at Masco is focused on productivity cost productivity and that will continue as Kichler as well. That's a component of the plan that we're outperforming and we intend to continue that. So as I mentioned on my earlier answer, no significant change to the strategy. There were some defined events that happened to this business and we're going to get through it. And at the end of the year, we're going to be on solid footing and we're going to continue to grow. Okay. Appreciate the detail. Thank you. Your next question comes from the line of Michael Wood with Nomura Instinet. Hi, good morning. I wanted to see if you can elaborate a bit more on the incentives that you called out impacting paint profitability in the presentation? And what are you seeing in terms of consumer reaction to these incentives? And if you could just talk about maybe what's changed in the industry in terms of how competitors are behaving with price and incentives in paint? Mike, I think there might be a slight misinterpretation. It's incentives between ourselves and our retail partners. It's not necessarily consumer based incentives. Understand. So just to clarify that you're saying that the actual price and incentives offered at the store have not necessarily changed. This is between you and large customers. Yes. Largely due to volume rebates that we have with our major customers. Great. And in terms of the market share gains that we should expect going forward for the business overall, If I do just rough back the envelope math for the end market assumptions overlaid to your business, I get a roughly 2 percent growth rate and you're calling for 2% to 3%. Is that the typical share gain that you'd expect or is there something kind of impacting that that's preventing it from being larger? No, I mean, it's the share gains we were expecting. As you recall, we've got now a propane business that's now $500,000 and so it's harder as when you get to the law of large numbers and it's harder to gain share off of that base at the same rate that you were gaining share at when it was a much smaller business. But we continue to invest behind that business. Our channel partner Home Depot continues to invest behind that business. We think we have established a very successful and winning model to attract a pro contractor into their stores and to buy paint. It's and it focused them on one of the highest ranked quality brands in the industry. So between ourselves and between ourselves and the Home Depot, we think we've established a terrific business model here. Okay. Thank you. Your next question comes from the line of Mike Dahl with RBC Capital Markets. Good morning. Thanks for taking my questions. John, just to pick up on that last question, if we think about the paint business, I think that pull forward into Q4 looks like it was probably a couple of cents and maybe that's borrowing from 2020 by the same amount and a point of top line in that segment, I think. So if you think about paint specifically, when you have DIY as a market flat, pro low single to mid single flat, you've got that one point headwind. I guess, do you expect to perform in line then with the broader paint market even with that comp headwind? Or do you still think you can outperform that those overall numbers? Yes, Mike. So to react to your comments, one, I think your math is largely right on the pull forward and the bottom line impact. As we think about the growth in both DIY and Pro, we do think we can outpace the market in both instances. We're still even though we're at a $500,000,000 business now, we're still have a relatively light market share and we still think there's further share to be gained in the Pro. And as we look at our performance on the DIY portion of the business, again, because of our alignment with the key our channel partner, The Home Depot and the growth rates that they're experiencing and the folks that they draw to their stores, we think we can outpace the DIY market growth as well here in 2020. Okay. That's helpful. Second question also following up on another question earlier about the kind of price tariff margin impact. I think you were answering the question in aggregate, including Plumbing and Lighting, talking about that pace of margin and kind of the recovery on tariffs. But just to clarify, is that also specifically true for Plumbing? And it looks like within Plumbing, second part of this is your second half margins have to be up year on year to get to that flat full year if you're down 100%. And so is that incremental actions around price, supply chain, raw materials benefiting you or is that just pure volume leverage to get you to that? Yes, Mike. So again, you're right. My prior comments were about the enterprise wide and not specifically with respect to any single segment. As you break down the Plumbing segment, you're right, the margin expansion that we expect in the second half of the year is required given the margin headwinds in the first half of the year due to the impact of the tariffs. What we expect in the back half of the year, that's largely volume driven. We don't expect any further pricing actions or anything else incremental outside of volume to drive that margin expansion in the back half of the year. Got it. Okay. Thank you. Your next question comes from the line of Seldon Clarke with Deutsche Bank. Hey, thanks for the question. Just continuing on the last question, how should we think about volume and price within your revenue guidance for Plumbing and Decorative? So as you think about I would consider most of the TV volume is we indicated earlier with the impact of tariffs flowing through, we kind of laid out our top line estimates. I would expect modest pricing, very low impact at all on pricing because of the pricing we put through on the tariffs back in 2019, early in 2019, I should say. And so most of that is all most of the growth that we have outlined for you today, both with the Decorative Architectural segment as well as the Plumbing segment and therefore the company in total is volume driven. Okay. And then just kind of continuing on to 2021, you reiterated the expectation for $2.80 to $3 of earnings. And I think you guided to something like a 16.8% underlying margin, which obviously implies another 80 basis points improvement on top of this year. What's like the right bridge to think about as on how to get there? Is that still going to be volume driven or are there some cost actions that you you see down the line or pricing actions that you see down the line a little bit longer term? There's a couple of things that would be driving our 2021 performance. Firstly, we anticipate that the tariff headwinds are behind us. In terms of the overall market, when we think about R and R, as we mentioned in the earlier remarks, we expect an acceleration through 2020 and we believe that will hold into 2021 based on improving fundamentals, increase in our supply and the strong consumer. So with the tariffs behind us, the market improving and continued growth as we've talked about it in terms of market share gain in pro DIY paint in our plumbing business with that drop down together with our planned repurchase share repurchases in 2021, that's what gives us confidence in that $2.80 to $3 range for 2021. Okay. So is $16.8 still kind of the right number to think about roughly? Yes. Yes. Nice, Tom. Okay. Appreciate the time. Thanks, guys. Your next question comes from the line of Michael Rehaut with JPMorgan. Thanks. Good morning, everyone. The first question I just had, I just wanted to break down the tariff impact. And I guess, John, you had said earlier that you estimated it was about a $60,000,000 impact in 2019 and incremental $90,000,000 in 2020. I was just trying to get a sense for the offsetting actions to those headwinds through price, cost, specifically productivity, I think is if you want to throw that in there, if you feel that that was either supply chain or other things that you did specifically to offset. But just trying to get a sense of the offsetting actions there to get to like net headwind or such? How do you see that flow? How did you see that flow through in 2019? And how do you expect 2020 to shake out when you think of those offsetting actions? In round numbers, Mike, I'd say, let's call it 90% of our mitigation actions were through price. So that was the biggest lever that we pulled in 2019. So that leaves about 10% in terms of the cost of the tariffs mitigated through supply chain resourcing negotiation with suppliers and that sort of thing. We'll continue to do that. The majority of our movement out of China is our existing suppliers that have established production in other low cost countries and we'll be ramping that up. We'll be moving some to in some limited cases to some new suppliers. But that's a longer term play for us and it's going to take a while to do that. So fundamentally, when you think about the mitigation, it was mostly price and we've put that through aggressively and early 2019 and hence now with the combination of the timing of the tariffs and when they hit and more importantly the flow of inventory through our system into the P and L. That's why we have that overhang and that $90,000,000 headwind heading into 2020. But Mike is, I guess, as we to maybe supplement Keith's comments here. As we exit 2020, we don't think there's going to be a net headwind. We think we've got between the pricing actions and the supply chain actions that Keith mentioned, we think we've got the impact of the tariffs fully covered. All right. That's helpful. Thank you. Secondly, I just wanted to circle back to Kichler for a moment and apologies, I know you've answered a bunch of questions, but I'm just trying to make sure I have some of the numbers right and how to think about the business as it is by the end of this year. John, I think you said that private label and inventory rebalancing would each be $15,000,000 in the first couple of quarters going to $5,000,000 in the Q3. Was that right? Maybe just to be clear, collectively, the private label and inventory rebalancing will be $15,000,000 in each of Q1 and Q2. So total impact in the year, Mike, of $35,000,000 from both of those actions. Okay. So I was just trying to get a sense of as the business has and I assume you had maybe a $15,000,000 hit in 4Q. So you're talking somewhere in the range of $50,000,000 to $100,000,000 $50,000,000 to maybe $75,000,000 depending on how things traversed in 2019 of a hit to revenue from your original purchase. You've also talked a lot about the different types of cost actions that you've done to improve the business. I was just trying to get a sense of with all the moving pieces, how you would characterize the margins today or by the end of 2020 rather, I think is more importantly for that business relative to where you purchased it? Are you kind of in line, still a little bit behind or even ahead given some of the company specific actions? And how do you think about any potential further improvement in 2021? Yes, Mike. So with respect to the margins, we don't break out margins by individual company. You can appreciate the question. As Keith mentioned in his comments a couple of minutes ago, we continue to work and successfully work on the supply chain and cost out initiatives at Kichler. Clearly, the volume has been a little bit more of a headwind than we had anticipated would have anticipated when we bought the company. But that's about as much as we can say on that topic. Okay. Thank you. Your next question comes from the line of John Lovallo with Bank of America. Hey, guys. Thank you for taking my questions as well. Just sticking with lighting here, and I don't mean to beat a dead horse here, but just from a broader industry perspective, I'm just curious, there's been a number of headwinds obviously and you guys have handled them fairly well. The question is though, is there any concern that there's something structurally changing in the lighting industry similar to maybe what we're seeing in cabinets and flooring as it pertains to consumer preference that is creating a headwind here? No. We don't view it as a structural change. If there was anything that would be approaching a structural change, it would be the shift to e commerce. But that's really we're seeing that honestly pretty broadly across a number of our product categories. So no, it's not a we don't view it as a structural hit. It was definitely a significant change when you talk about an industry that's by and large imported from China, we had the kind of tariffs that we had come into there. So it's that's more of a one time event as it relates to the change versus a structure. There's it's a significant component of the remodel process and it continues to be that. It certainly is a design cue. It's very design forward. What it takes to win in this industry as it relates to consumer intimacy and understanding design trends and having a product, a new product introduction process that's solid. Those things haven't changed. So we know how to compete in this industry. And the change really has been that tariffs that came in and we're going to put that behind us throughout the course of 2020 and then we're going to return to a growth footing. Okay. Thanks, Keith. And then John, just on the SG and A front of $310,000,000 in the quarter, that was up fairly meaningfully on a dollar basis and also as a percentage of sales. Can you just help us understand maybe some of the key drivers under that, please? Yes, sure. John, as you may recall, last Q4 was actually one of the lightest quarters we had in SG and A in a long time. So maybe it was more of a low SG and A comp that we were up against. The one thing that you may recall that we called out in the Q4 call of last year is we did have a $4,000,000 gain on the sale of a building, which did not occur, which would be a headwind against that comp. But I think it was more just extremely tight or low SG and A last year on a kind of a one off basis as opposed to anything else. Okay. Thanks guys. Your next question comes from the line of Justin Speer with Zelman and Associates. Good morning, guys. Appreciate it. I just wanted to unpack some of your margin forecast. You mentioned the 300 basis point headwind in the Q1 being more out of the Decorative Architectural segment being more tariff affected. But then I'm trying to reconcile that with the fact that you obtained price. Are you just saying that it's volume deleverage or is there something else? Is there a lag in your pricing relative to the cost rolling through? And help me understand that. And then also on top of that, just any tailwind from lower raw material costs across your business and easing transport costs? Any other factors that are offset that we need to be aware of? Yes. So Justin, a couple of questions in there. Let me try to address those. So in terms of the margin degradation from the Q4 to Q1, there's a couple of things going on there. One is lower volumes, right? We referenced the fact that we lost a portion of the private label program. Also with the pull forward in paint, that $20,000,000 obviously comes out well, that should indicate we have lower volumes in Q1 or anticipating lower volumes, I guess, I should say, in Q1 in the Decorative Architectural segment that would help drive that operating profit margin lower. In terms of raw material costs, and the third thing I guess I should say is on the margin side, is the tariffs because it's cost recovery that will drive margins lower as well. On the offset side, obviously, we always work on cost productivity. In terms of commodity costs specifically, the input costs to paint have moderated here in the since a year ago. But recall, the way things work with particularly with our paint business is that, there we tend to be price cost neutral over time. And so that may have an that would impact margins. So there's really as prices moderate, input costs moderate, there may be some impact on pricing as well. So I think that puts it all together. Did I hit all your questions? Well, I guess I'm just trying to understand it because I know there's a lot of unevenness with the paint because last year, I guess in the Q1 of 2019, your comps were down 7%. I know some of that was Kichler, but that was because you had pull forward the prior year. So I would have thought that those would have kind of evened out, such that you wouldn't have as much of an impact there from the coating side and obviously of the Kichler business. But I'm just trying to reconcile your comment that it's mostly tariffs that are hitting you. It's not the tariff cost, it's that you're trying to get price and you've lost share as a result of that or losing business and that's affecting your margin profile in the Decorative Architectural segment? No, I don't know if you maybe I didn't communicate right, but I think, as you go into Q1, I'd say there's going to be lost volume. We talked about the lost programs and so that's going to be the main contributor to the margin degradation, followed by the tariff impacts. Of the 2, volume is a much greater impact than the tariffs on the margins in KeyBanc. That makes sense. And then lastly for me is just who are you losing share to in the Lighting business? Is there perhaps another player that doesn't source from China that's advantaged post tariffs? Because I was under the impression that everyone was kind of in the same sandbox, so to speak, in terms of the supply chain. Is it or is it something else? Well, I think the industry is down. I think the impact of the tariffs industry wide has been in effect. We're not we haven't really identified any single competitor that's particularly taking more share than another one than across the board. Okay. Thank you, guys. Your next question will come from the line of Keith Hughes with SunTrust. Yes. Thank you. Can you give us in 2019, what was North American Plumbing growth? North American Plumbing growth was 2% I think for the full year. Was that all volume or is there pricing in there? There was a little bit of pricing in there. Well, yes, I mean if you consider the tariffs actually a fair amount of pricing in there. We put in price to offset the tariff impact probably in Q1 and Q2 of last year. Okay. And so you're not expecting and I think you said this earlier, you're not expecting any price in this plumbing guidance that you've given us for again, let me ask it this way. In North America, you don't expect any price coming in 2020 in plumbing? Not much, Keith. There might be a little bit that we put in, but not a ton, no. Okay. That's all. Thank you. Your next question comes from the line of Phil Ng with Jefferies. Hey, guys. Can you give us a sense how we should think about the pace of the buybacks as you layer that in 2020? And then any update on the M and A pipeline? In terms of I'll take the share repurchase question, Phil, and I'll let Keith talk about the M and A pipeline. In terms of the way we're thinking about it is, I think we mentioned, we'll probably do a large portion, maybe a good chunk of the proceeds that we get from the chemistry transaction shortly thereafter the proceeds are received. So and then through the balance of the year, we look to deploy the balance of the $500,000,000 to $600,000,000 that we discussed. And but we'll be they'll probably be more opportunistic depending on how the market plays out. In terms of M and A pipeline, Keith, why don't you take that one? Phil, our pipeline remains solid. We continue to drive it. Overall, I would say that the M and A activity was a little bit slower in 2019 than I expected with the global trade uncertainty and some of the business valuations being influx because of that. But it seems to pick up have picked up lately. We like some of the things that we're looking at. Most of them are fairly small. I would say that seller expectations still remain high, so we're going to be patient, but solid pipeline. Got it. And just one last one for me. On the lighting stuff, I mean, obviously, there's some tariff dynamic and share loss. As we think about 2021 when you work through some of these issues and you kind of Keith mentioned you expect to return to growth. Should we expect margins in that segment decorative to kind of get back to that 18% to 19% range? Well, we're going to continue with that growth. We have a good drop down on that incremental volume and we'll continue to drive that. So I would expect that margins would be improving as we compare 2020 to 2021. Okay. Yes. Phil, you mean your fall we laid out 17.5% to 18% margins in that segment for our Investor Day in September and we our thought process around that has not changed since September. Got it. Thanks a lot. Our final question will come from the line of Truman Patterson with Wells Fargo. Hi, good morning guys. Thanks for taking my question. First one to touch on the coronavirus again. Could you dig into that a little bit more? What portion of plumbing products have a component piece sourced from China? And Keith, I believe you mentioned contingency plans as well. Just trying to understand what's going on there. And it does seem like it's intensifying. Could you discuss your current inventory balances and maybe an update of your supply chain if plants actually remain shut for another week or 2, will that actually impact the product that you can get on shelves? Our factories are coming up to speed. Really that represents about a week of delay over what would normally be have been a delay related to the Chinese New Year. So they're coming up a little bit slower than what they would normally. We have about 15% of our workforce our biggest plant, for example, and that's going to be coming in through the course of the next week, week and a half. As I said earlier, from a volume perspective, a lot of the retail home improvement malls and dealers remain closed and they'll be opening. Anticipated, again, there's a lot influx here, but they'll be opening over the course of the next week or 2. So with China representing 3% of our revenue, as I said in an earlier answer on the Q and A session here, we're not anticipating it to have a material impact on us. In terms of contingencies, as I said, we're looking at premium freight to help us with some of the delivery so that we can maintain our keenly paying attention to the health of our employees and we've got different procedures and policies to make sure that we're paying attention to that 1st and foremost. It's a fluid situation. We're watching it closely. And as I said, we're not anticipating it to have a material impact on our results at this time. Okay. Okay. Thanks for that. And then on the R and R side, pretty slow in 2019. It looks like your guidance has R and R picking up a little bit here. Are you actually seeing activity start to recover early in 2020? And if so, do you think weather has had any impact on that? I'm just trying to understand how sustainable any kind of near term green shoots are? Yes, I think the weather has been pretty good, all things considered and what it could have been. We're calling R and R at that 3% to 4% growth range and we see it accelerating towards the back half. When we're looking at the numbers and the economic indicators that we look at, generally, there's lag from those numbers to R and R. So we feel confident in that 3% to 4% R and R with acceleration in the back half. Ladies and gentlemen, that will conclude today's conference call. Thank you all for joining and you may now disconnect.