Earnings Call: Q1 2019

Apr 25, 2019

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Masco's First Quarter 2019 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. President, Treasurer and Investor Relations, you may begin your conference. Thank you, Amy, and good morning. Welcome to Masco Corporation's 2019 Q1 conference call. With me today are Keith Allman, President and CEO of Masco and John Snubais, Masco's Vice President and Chief Financial Officer. Our Q1 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 questions 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 measures. Our references to operating profit and earnings per share will be as adjusted unless otherwise noted. We reconcile these adjusted measurements to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I now turn the call over to Keith. Thank you, Dave, and good morning, everyone. Thank you for joining us today. Please turn to Slide 4. We experienced a slow start in 2019 as a combination of factors impacted our results. Some of these factors were anticipated, such as sales pull forward into the Q4 of 2018 and a large ERP implementation in our Windows business. However, other factors were external and not anticipated, such as inventory rebalancing in certain plumbing and decorative channels and softer end market demand early in the quarter. Despite our slow start to the year, we saw sales trends improve in March and believe that markets are now performing as we expected. For the quarter, excluding the impact of currency and acquisitions, sales decreased 2%. Operating profit decreased $20,000,000 principally due to lower volumes in our Plumbing, Decorative and Windows segments. These were partially offset by pricing actions we took across all segments. Our earnings per share decreased 2% due to the lower operating profit. Turning to our segments, excluding currency, Plumbing sales were flat. Volume decline in North America was the biggest contributor to flat sales as volume was affected by the sales pull forward into Q4 of 2018 that we discussed last quarter and lower demand earlier in the quarter. While plumbing sales worldwide were flat, we did see continued strong performance with our high end Brizzle brand in the wholesale showroom channel and good growth in Hansgrohe in both China and Germany, its largest markets. Watkins, our leading spa business continued to see good demand for its products and achieved record 1st quarter sales. In our Decorative Architectural Products segments, paint volumes were lower in the Q1 due to the $20,000,000 of sales pull forward into the Q4 of 2018 that we mentioned on our last call, inventory rebalancing and lower end market demand. Paint volumes did accelerate in March and this has continued into April. We also continued to invest in our Pro Paint initiative in the Q1 by hiring additional employees to sell and service the professional painter. And we expect to gain to continue to gain share in the propane market in 2019. Our lighting business was also softer than expected, notably in Landscape Lighting, which was impacted by weather in the quarter. Turning to Cabinetry, sales grew 9% in the Q1 with growth in both our repair and remodel business and strong growth in our new construction business. Our repair and remodel growth was led by our new program with Menards, which we anniversaried in the Q1 of 2019. We're very pleased with this new business and it is meeting our expectations. In our Windows segment, sales were down in the Q1 as we went live with an ERP system at our largest window manufacturing facility, which caused us to stop taking orders for about a 2 week period as planned. This implementation has gone very well. Additionally, our U. K. Business continued to be challenged by softer market conditions for its products. Turning back to Masco overall, we continued our disciplined capital allocation by repurchasing 3,500,000 shares for $122,000,000 during the quarter. Before turning the call over to John, let me give you a brief on our review of strategic alternatives for our Cabinetry and Windows businesses. We have engaged outside advisors to help us with this evaluation and we are close to completing carve out audits of the business units. We have made good progress and are on track to complete this review as planned by the end of June, and we will update you accordingly. Now, I'll turn the call over to John to go over our Q1 results in more detail. John? Thank you, Keith, and good morning, everyone. As Dave mentioned, most of my comments will focus on adjusted performance. Excluding the impact of rationalization and impairment charges, inventory step up related to purchase accounting for the Kichler acquisition and other one time items. Turning to Slide 6, sales decreased 1% on a reported basis, but grew 1% in local currency. Excluding the acquisition of Kichler, sales decreased 4% or 2% in local currency. Foreign currency translation unfavorably impacted our Q1 revenue by approximately $33,000,000 In local currency, North American sales increased 2% in the quarter, but decreased 3% excluding the Kitchell acquisition. This performance was due to lower volume in all segments except cabinetry as we experienced sales pull forward into Q4 2018, inventory rebalancing at certain customers and overall softer demand in January February. In local currency, international sales decreased 1% in the quarter, driven by solid growth in China and Germany, which was more than offset by softness in other smaller regions. Gross margins were 31.4%, down 120 basis points, largely due to lower sales volume and the impact of a full quarter of Kichler. We expect gross margins to expand in the remaining three quarters of 2019. Our SG and A as a percent of sales decreased 20 basis points to 19.3%, reflecting continued cost control. We reported operating profit of $230,000,000 with operating margins of 12.1%. In the quarter, we booked 2 impairment charges. The first charge was a write down of Kichler's trade name for approximately $9,000,000 This was driven by a revised look at our long term growth forecast revenue growth forecast incorporating market softness we experienced late last year and in the Q1 of this year. The second charge was a write off of the U. K. Window Group's goodwill balance for approximately $7,000,000 Our EPS was $0.44 in the quarter, a decline of 2% compared to the Q1 of 2018 due to decreased operating profit, partially offset by the benefit of a lower share count. Finally, we are reaffirming our annual EPS estimate of $2.60 to $2.80 This guidance assumes that tariffs remain at the 10% level for the remainder of the year and a normalized tax rate of 25%. Turning to Slide 7, our Plumbing segment sales decreased 3% on a reported basis. Excluding the impact of currency, sales matched prior year. Foreign currency translation unfavorably impacted this segment sales by approximately $29,000,000 in the quarter. Our North American sales decreased 1% in the 1st quarter as this segment sales comparisons were impacted by approximately $20,000,000 of one time items. On our Q4 call, we discussed that approximately $10,000,000 of sales were pulled forward into Q4 2018 from Q1 2019. Additionally, as you may recall, last year's Q1 sales benefited from approximately $10,000,000 of sales that were pulled out of Q2 and into Q1 ahead of Delta's ERP implementation in 2018. North American performance was also impacted by inventory rebalancing in the wholesale channel, softness in our Rough Plumbing business and overall lower demand early in the quarter. Our international plumbing sales increased 1% in local currency as Hansgrohe experienced solid growth in both China and Germany. The segment's operating profit decline was due to lower volume, which also resulted in inefficiencies. Mix negatively impacted the quarter due to lower inventory levels in the wholesale channel in North America and a mix shift down in our international markets. Segment results were also impacted by trade show expense, which we discussed on our Q4 earnings call. These were partially offset by favorable pricing actions. For 2019, we continue to expect the Plumbing segment sales growth to be in the 3% to 5% range with margins similar to 2018. Turning to Slide 8, the Decorative Architectural Products segment grew 5%. This performance was driven by low single digit growth in Behr's Pro Paint initiative and our acquisition of Kichler. Excluding the acquisition, sales declined 7%. As we discussed on our last earnings call, the Decorative segment results were impacted by approximately $20,000,000 of sales pulled forward into the Q4 of 2018 to increased year end customer purchases to achieve incentives. In addition, 1st quarter results were lower than expected due to inventory rebalancing and softer demand earlier in the quarter. Despite a slow start to the year, Baird did see improved sales trends in March, which have continued into April. In addition, Liberty Hardware experienced growth in the quarter with strength in both its retail and e commerce channels. Operating income in the Q1 declined versus the prior year due to lower volume, the full quarter impact of Kitchener and the addition of employees servicing propane customers, partially offset by reduced spending. For the full year 2019, we expect the Decorative Architectural segment sales growth will be toward the lower end of the 4% to 6% range, including the benefit of the Kichler acquisition and margins to be in the range of 17% to 18%. Turning to Slide 9. In the Cabinetry segment, sales increased 9% in the quarter. The strong performance was driven by solid growth in both our repair, remodel and new home construction businesses through increased volume and favorable price. Additionally, our performance was supported by our program win at Menards, which anniversaried in the Q1 of this year. Segment profitability increased in the quarter by $16,000,000 principally driven by lower spending due to the ramp up costs related to the Menards win in the Q1 of 2018, favorable pricing actions and increased volume. This increase was partially offset by unfavorable mix resulting from our growth at Menards and the double digit growth in our new home construction business. While the growth was strong in the Q1, we continue to expect sales growth will be between 0% 3% and segment margins to be similar to 2018 as comps get tougher now than we have anniversaried the Menards win, particularly in the second quarter due to the significant ramp up at Menards in Q2 of 2018. Turning to Slide 10, our Windows segment sales decreased 16% and excluding the impact of currency decreased 14% in the quarter. Foreign currency translation unfavorably impacted this segment sales by approximately $2,000,000 This performance was driven by lower volume offset by favorable pricing. As we discussed on our 4th quarter earnings call, Milgard executed on the implementation of an ERP system in its largest facility during the quarter. As expected, the plant did not take orders for approximately 2 weeks, which impacted Milgard's volume. The implementation went very well and that facility has returned to normal production levels. The segment's performance was also impacted by continued market softness at our U. K. Window operation. Segment profitability in the quarter decreased $7,000,000 driven by lower volume and inefficiencies, partially offset by favorable pricing actions. For 2019, we continue to expect sales growth for this segment to be in the 1% to 3% range, excluding currency with modest margin improvement. And turning to Slide 11, our balance sheet remains strong with net debt to EBITDA at 2 times and we ended the quarter with approximately $1,200,000,000 of balance sheet liquidity. In the quarter, we further improved our liquidity and flexibility by entering into a new 5 year credit agreement, which increased availability from $750,000,000 to $1,000,000,000 Working capital as a percent of sales improved 150 basis points versus prior year to 16.5%. For the full year, we expect working capital as a percent of sales to be approximately 14%, which is similar to where we ended 2018. Lastly, during the quarter we continued our focus on shareholder value creation by repurchasing 3,500,000 shares valued at approximately $122,000,000 And with that, I'll now turn the call back over to Keith. Thank you, John. The fundamentals of our business and our core repair and remodel market are healthy. Consumers remain confident and wagers are growing. This increases the consumers' willingness to invest in their home. Home prices continue to appreciate. This is highly correlated with repair and remodel spending. The age of the housing stock is increasing with 50,000,000 owned homes greater than 30 years old. This drives increased remodel spending. And household formations have steadily increased throughout 2018, driven by the millennial demographic. This trend is projected to fuel housing demand for the next decade. We believe these fundamentals are supportive of good long term growth. We are also positive on our current markets. While we had a slow start to the year, we are encouraged by our recent trends and the acceleration of demand we saw coming out of the quarter and continuing into April. Given the strong fundamentals, improving market conditions and our ability to execute our plans for 2019, we reaffirm our expectation to achieve 2019 adjusted earnings per share in the range of $2.60 to $2.80 With our strong balance sheet and expected full year 2019 cash flow conversion of over 100%, we intend to deploy approximately $600,000,000 towards share repurchases for the full year of 2019, consistent with our balanced capital allocation strategy. With our focus on executing our strategy, coupled with our strong balance sheet and liquidity, we will continue to create shareholder value. Lastly, please save the date for our planned Investor Day on September 17th in New York City, where we will update you on our progress towards our previous goals and our long term strategy. With that, we'll open the call for Q and A. At this time, we will be conducting our question and answer session. Your first question comes from the line of Nishu Sood with Deutsche Bank. Nishu, your line is open. Hi, this is actually Maris in for Nishu. A quick question about rough plumbing. I think over the last 6 years when you called out Rough Plumbing, it was always a driver of growth. And this time around, you're saying there were soft software in our Plumbing. And I was just wondering if you could give us a little bit more insight into that. When you look at our Plumbing segment and you compare where we have particular concentration in new construction, rough plumbing tends to be a little bit more skewed towards new construction than repair and remodeling. And that really is a primary driver of some of the softness that we've seen. All right. Thank you. And then given the combination of a slow start and the fact that you're maintaining your full year guidance, does that imply that you expect to come in the lower end or do you anticipate that the second half of the year will make up for the slow start? We did expect a slower Q1 due to the pull ahead that we mentioned in a couple of segments. But I would say that the quarter was a little softer than we expected. We didn't expect the inventory rebalancing and I would say that the weather is probably a little worse than expected, but we did see things pick up in the back part of the quarter and into early April here. And it looks like the 25% tariff is coming off the table, so that could help us with volume a bit. So all in, we feel good about our ability to execute and achieve our plans and that's why we're reaffirming our range of 260 to 280. Thank you. Your next question comes from the line of Stephen Kim with Evercore ISI. Stephen, your line is open. Yes. Thanks very much, guys. Appreciate it. So just want to clarify on the tariff guide. You are now assuming 10% and you said that could provide a little bit of a lift, but just wanted to make sure that in your guidance you are incorporating a 10% is maintained and doesn't go to 25%. Just want to clarify if that is different from what you were assuming last quarter? Yes. So if you may recall that we assume that it was 25% for the year as we started out the year. So that's correct, Stephen, that we're assuming that it's 10% and that 10% stays throughout the year. Okay. And you had also assumed, I think, that you were going to recover the bulk of that through pricing actions. So, the EPS impact probably wouldn't be that meaningful, I assume. And Stephen, I should just also point out, when we assume that we're going to recover in price, we also assumed because of those pricing actions that we may have some reduced volume as a result of those pricing actions. So just make sure you're clear on that. Yes, thanks for that clarification. On Kichler, you talked about landscaping, lighting being impacted by weather in the quarter. We also know there are obviously some other issues there at Kichler. So my question overall is, can you give us a sense for how much of the Kichler sales decline you thought was impacted by weather? And how much was related to other issues? And when do we think we can see sales grow on a year over year basis in Kitchener? And when you we're off plan a little bit on the revenue side with Kichler. We've took a fresh look at our long term revenue forecast and we have seen some softness in the lighting market overall going back to, let's say, the last quarter, quarter and a half of twenty eighteen and that softness has continued into the early part here in 2019. As I mentioned, probably some weather related due to landscaping, but also we believe that the industry is digesting the impact of tariff pricing and we need to get through that. This industry has more of an impact from tariff as a proportion than most of our other segments for sure. We're also applying more discipline to our pricing as it relates to retail and wholesale programs. This is consistent with how we run our other businesses and we think that has an impact on the overall revenue in this business. In terms, Stephen, specifically of growth in 2019, we'll be challenged to achieve growth in 2019 at Kichler due to the slow start to the year and as I mentioned our discipline around pricing in both retail and wholesale programs. And with that impact on tariff, that will be a factor as well. We are confident that as we get through this rough start to 2019 that lighting will grow in a similar trajectory to repair and remodel over the long term. And we're working on some exciting new programs to get after that. But in terms of specific of 2019, growth is going to be challenged in Kichler. Yes, Steve, what I would supplement Keith's comments with is, on the operational side, I think we made some good improvement there and there are some further opportunities for us to go after by implementing our Masco operating system. So from a bottom line perspective, we are we see good opportunity there to continue to improve that business. Your next question comes from the line of Matthew Bouley with Barclays. Matthew, your line is open. Hi. Thank you for taking my questions. I wanted to ask about the strategic review kind of understanding there's different potential outcomes there. How would you guys think about capital deployment upon completion of these transactions? Is the expectation that you may buy back additional stock or are there, I guess acquisitions that might be closer to the vest in paint or plumbing, just kind of any thoughts there? Thank you. Yes. In terms of use of proceeds, if we go in that direction, we really do not see a change in the capital allocation strategy that we've articulated and consistently executed against. That being consistent with regards to funding our business, we would use we've talked about the $600,000,000 of share buyback in 2019. We certainly are continuing to look at acquisitions. We have a solid and strong pipeline that we're continuing to evaluate. But as I've said consistently, we'll be patient as it relates to acquisitions to ensure that we're deploying capital to businesses that have the right strategic fit and can give us the right return. So no real change to our capital allocation strategy. Stephen or Matthew, I'm sorry, maybe to give you a little bit more clarity. We're probably focused a little bit more on share repurchase activity if we were to go to the sale route, acknowledging the fact that we our balance sheet is in good shape now. So if an acquisition were to come along, we could use our balance sheet to help fund any acquisition that were to come along. So we wouldn't be afraid to deploy a little bit of those fair amount of those proceeds if that's the way it goes to share repurchase activity. Okay. I appreciate that detail. And then secondly, just back to decorative, you mentioned the trends around sales pace accelerating in March April in paint, but you changed the revenue guidance slightly. So is that simply just as you mentioned the slower expectations around Kichler or is that just a reflection of the 1Q results? I guess, ultimately, is the expectation that sales growth 2Q to 4Q is going to be a bit slower than what we had previously envisioned? Thank you. Yes. In terms of the segment growth, I would say that probably it comes down to the 2 factors that you mentioned. 1, the Kichler revenue was a little bit softer here in the 1st part of the year. And then also, we had a little bit softer 1st part of the year in our other businesses in that segment. And so that's why we're kind of guiding down to that the lower end of that range here is for 2019. All right. Thank you very much. Your next question comes from the line of Michael Rehaut with JPMorgan. Michael, your line is open. Hi, good morning. First question I had was on the improvement in trends that you saw during the year. You said that you started off the year a little softer due to weather. I was and then March kind of more met your expectations. I was wondering if you could give us a sense specifically by month how the sales progressed on a growth basis? How bad was it in January, February and what type of rate did you finish the last month of the quarter and so far in April, are you seeing similar to March or perhaps a little stronger? Any color on the progression would be helpful. Mike, first to reset, just keep in mind, as you know, that Q1 is our smallest and most volatile quarter often impacted by weather and sometimes the timing of purchasing from the prior year end, etcetera. So we were encouraged by the turn in the trends that we saw in March. Volumes picked up noticeably for many of our products, including plumbing and paint. We're seeing a strong backlog and reports from the field, for example, in our spa business, which we think is a great barometer for consumer spending. So that's going very well. So along with the macro fundamentals and what we're actually seeing in terms of orders and backlogs, we're also hearing anecdotal evidence from our customers and channel partners that the consumer is healthy, that there's spots of very good traffic in fact. And we're positive for the remainder of the year and feel that we're well set up for the 260 to 280 guidance that we're given. And in terms of specific month by month breakdowns, I'll steer away from that, but just tell you that we've seen at the end of the quarter, nice pickup. That's helpful, Keith. I appreciate that color. I guess, secondly, appreciate the transparency on Kichler and obviously there's sometimes growing pains and it seems like you're doing a few things that are impacting the performance this year. I just wanted to get a sense and kind of recognize perhaps you'll have a greater more detailed review at the Analyst Day. But ahead of that, just trying to get a sense of what landscape lighting represents as a percent of the overall sales, number 1? And number 2, in terms of some of the proactive actions that you're taking from a pricing discipline standpoint, and I assume that's perhaps also you're reducing lower margin skews or customers perhaps. What that might do to the overall margin profile of the business over the next year or 2 to the extent that you're able to fully implement that shift? So when you look at the mix of Kichler's business, decorative interior fixtures is an important large chunk of it. But landscape lighting is also a big portion of the business and important to us and one that we do very well when you go out and do channel checks and talk to the market. Kichler landscape lighting specifically is very strong with regards to the product and the service and durability, etcetera. So it's an important part of the business and we do well with it. And when you have some tough weather that can affect it. In terms of what we're doing and how we're driving this business, it's pretty consistent with how we've driven other businesses with regards to the Masco operating system where we focus on quality of earnings and getting businesses better and aligned from a process and execution perspective before we focus on getting them bigger. So that get better before we get bigger is a common mantra that we drive and that involves applying eightytwenty disciplines to our product assortment and to our customers, etcetera. So I think that coupled with, as John mentioned, we're exceeding our expectations as it relates to some of the cost out and productivity and synergies that we're driving. So this is more of a top line issue than a cash flow or a bottom line and return issue. So we would expect as we drive both cost improvement on the procurement and on the logistics and some of those basics as well as sharpening our pencil on programs that we would expect ultimately that we'd continue to drive margin improvement in the business. Great. Thank you. Your next question comes from the line of Michael Wood with Nomura Instinet. Michael, your line is open. Hi, good morning. First, just wanted to ask about with the decorative sales being pointed to the low end of the range, does that have an impact on where within the profit guidance 17%, 18% range we'd fall? No, Mike. It doesn't really have an impact at all on that. Okay. And then I wanted to ask about the inventory rebalancing that was unanticipated. Can you quantify that at all in Paint and Plumbing? And is the March April strength being helped by restocking or has that not occurred? So Mike, in terms of the destocking, we probably won't go into the details of quantifying those measures on either segment. In terms of are we seeing changes going prospectively? As you might imagine, going into the spring selling season, things are starting to pick up. Keith alluded to the fact that we saw things get better in the tail end of the quarter. And so, we may see a little bit of that coming back here as we start off Q2 and we're still working our way through all that. I would tell you, Mike, that our sell through to the consumer, if you will, the POS is stronger than our sell in to our customers. Yes. And I would also point out, Mike, I think an element of our destocking, particularly in plumbing is due to our exceptional service levels with our customers. I think that they're able to perhaps hold a little bit less inventory. So this might be a little bit of a one time item in terms of that because of the strength of our service capability. Got it. Thank you. Your next question comes from the line of Susan Maklari with Credit Suisse. Susan, your line is open. Thank you. My first question is just around the raw material side of things. Can you give us some color on what you've seen in terms of inflation? And any thoughts on how that may trend as we look to the remainder of the year? Susan, some of our commodities have moderated year over year, but are up sequentially, if you will. So if we kind of take it walk through a couple of the commodities, the big ones, copper and zinc and plumbing, that started to moderate, I would say, in the back half of 2018 and are down, call it, 10% to 20% year over year in Q1, but zinc in particular has bounced back. So probably a modest net benefit for the full year on those commodities. In terms of TiO2 and resin, they're both still up year over year. TiO2 seems to have stabilized. However, we're still seeing pressure on resins and obviously oil prices are very volatile. So we're continuing to keep an eye on that. So not really a benefit for the year. In cabinets, plywood distribution and logistics, they remain elevated, but I would say they've moderated a bit. So while some inputs have moderated, others remain elevated and increasing on a year over year basis. So we're really not anticipating much of a net benefit or tailwind from deflation in 2019. Okay. And then within the Plumbing segment, you noted that there was some impact from a negative mix shift. And that's actually an area of the business where we've been seeing more of a positive mix come through over the last few quarters. Can you just talk to that shift and I guess how have you seen things as we've exited the quarter with the demand improving? Yes. I think the large driver for sure of the mix shift was inventory rebalancing at 1 of our wholesale customers. So when that happens and we have an influx, if you will, of wholesale orders excuse me, when the wholesale orders reduce, then that as a mix makes the retail orders a greater percentage and wholesale tends to be a better mix for us. So that's a real driver for us. So we see that improving as we go forward. Okay. Thank you. Your next question comes from the line of Mike Dahl with RBC Capital Markets. Mike, your line is open. Hi. Thanks for taking my questions. Keith and John, just a follow-up on decorative. If I look at the kind of implied sales progression to get to the lower end of the range for the full year, particularly given Kichler is a bit weak, it implies that the core paint business ramps up to back up to more mid single digit growth potentially a bit better. So I just wanted to ask kind of is that the level of rebound that you've seen already occur into April? Or is there more wood to chop in terms of getting that acceleration? And anything specific in terms of programs we should be thinking about there? I think it's I'd say it's a little bit of a combination, but you've got the numbers down. You're right on how we're thinking about it. Okay. I guess as my follow-up, in terms of the split between pro and DIY, it seems obviously DIY may be more impacted by the inventory issue, but just any color you can give us on expected relative growth rates for pro and DIY implied by your full year guidance? Well, I think we're expecting the DIY market to be flattish, maybe even just slightly down in 2019 and that's the majority of our sales. There's a little bit of, as we talked about, softer market conditions that we're experiencing that will have an impact on the full year. The inventory rebalancing certainly is a piece of that. We continue to be bullish on our DI excuse me, on our Pro business. We're continuing to invest in that. We talked about the accelerated investments that we have in this quarter and the fact that we're not going to really anniversary our incremental investments in 2018 until Q3. So we continue to think that that growth will be. Yes, the pro side, yes, it should be kind of high single digits. It's kind of the way we're viewing it here in 2019, Mike, and or yes, kind of low single digits for the DIY side of the business. Great. That's helpful. Thank you. Your next question comes from the line of Stephen East with Wells Fargo. Stephen, your line is open. Hi, good morning guys. This is actually Truman Patterson on for Stephen. Just want to touch on the architectural paint side of the business. A couple of your competitors produced up 1st quarter revenues, which might imply a little bit of at least near term share loss at Bayer. I guess, do you guys think that this is actually happening? And if not, could you guys just elaborate a little bit on it? I think you have to pull out the pull forward when you do that. I think we're hanging right in there to holding our share to maybe gain a little Yes. And the inventory balancing that was affecting the paint business as well in the Q1 is too many. If you could take a look at those two factors, we don't think we're looking at we're losing any share. Okay. Okay. Thanks guys. And then And I would tell you, Truman, that sell through is probably better than sell in in the quarter. Okay. Okay. And no SKU loss or anything within the retailer? No. Okay. Okay. Also on the decorative architectural side, op margins declined and missed your guidance by a little bit. Was this more driven by paint decrementals from the weak volumes or from Kichler and the tariff impact on the margins? I'd say it was headwind more with the volumes lower volumes on the paint side of the business. As well as this was our Q1 of Kichler, the full quarter of Kichler and it's a seasonally weaker quarter for them. So that was a pretty significant impact on lower margins here in Q1 as well. Also we had incremental investment for the Pro. That's a good point. So that's a factor. So I think if you look at, I won't specifically quantify, but I think the volume was a main driver simply, certainly a full quarter of Kichler and the fact that this is a lower quarter for Kichler and then incremental investments. D and A was up a little bit with the full year acquisition amortization, but I think those first three are the main drivers. Okay. Thank you. Your next question comes from the line of Keith Hughes with SunTrust. Keith, your line is open. Thank you. I guess two questions. 1, on the inventory rebalancing, do you feel like here in April that that's completed for both Fleming and Paint? I think so, yes. Okay. And then second question within Paint, is the DIY market for you as affected excuse me, is the pro market for you as affected by weather as we see on some of your other competitors that serve the pro? I think it's I don't want to talk about our competitors, but I think it's pretty similar. Our pro volume tends to be skewed a little bit more towards exterior and so that would be affected by the weather. Okay. Thank you. I'd say it's Bob's day. Your next question comes from the line of Ken Zener with KeyBanc. Ken, your line is open. Good morning, gentlemen. Good morning. Good morning. John, could you talk about the earnings weighting in the first half of the year versus the second half just to give us kind of a sense of how much momentum we could expect compared to prior years? Sure, Ken. I mean, as we said in our Q4 call, we thought the Q1 is going to be a little bit softer, partially due to the sales pull forward that we called out on the earnings call and partially due to the we knew the Q1 of Kichler was a seasonally weaker quarter. So we kind of had expected that going into the beginning of the year. Keith mentioned a couple of things that were unanticipated. That said, as we see the progression for the next three quarters, I'd say it's going to be just a steady progression from here. I think, the second quarter, we had, you recall, we had some good strength in a couple of our businesses, partially due to the fact that we launched the Menards program really in earnest in Q2 of last year. So we saw some good growth in that business. And so I think it would be a steady ramp from here with arguably the second half being better than the first half of the year is the way we're seeing things play out here. If you take a look at the comps that we have against 2018, I think that is probably a good indicator of how you should see the balance of the year play out. So that's kind of the way we're thinking about it now, Ken. Thank you. And if you could comment on the I know it's small, but the U. K. Window business? Thank you very much. Sure. As you might expect, the UK window business to your point is relatively small and no surprise that is pockets of weakness and softness over in the U. K. In advance of Brexit. What we are seeing there is that new home construction over there, which we play a little bit in, was up very low single digits, but the remodeling market was down fairly significantly, call it, mid single digits in Q1. And so that really impacted our business there pretty significantly, no surprise. But as Keith mentioned, the progress we're making on evaluating this business is continuing We look forward to talking to everyone or making everyone aware once our decision is complete. Thank you very much. Your next question comes from the line of Phil Ng with Jefferies. Phil, your line is open. Hey guys. Our strength or our importance to our customers is really driven by what we bring with brand service and innovation primarily across that core part of our business in paint and plumbing. So we don't anticipate any significant change in our customer relationships across our paint, plumbing, hardware businesses should we choose to go a divestiture route with these businesses. I think our relationship, as I said, is driven by the things we do well and it's something that we earn. It's not we don't anticipate any degradation of that based on a potential sale. Okay. That's really helpful color. And then on Plumbing, it was a little weaker. You obviously had some noise with pull forward. But with new construction still pretty soft to start the year from a start perspective and potentially impacting your rough plumbing business, will that be potentially a bigger drag in 2Q or you've seen enough in terms of orders and trends where you feel pretty good that orders, I mean volumes in that plumbing business will kind of bounce back in that mid single digit range? Thanks. Yes. We don't anticipate it being a bigger drag going forward. Your next question comes from the line of Scott Schrier with Citi. Scott, your line is open. Hi, good morning. I wanted to ask if there's any updates to how you're thinking about tariffs and I know you were kind of reevaluating whether or not you're going to look into supply chain changes or anything. So I know it's kind of a moving target, but any color you can give from that front will be helpful. I think probably the most relevant update is how we're thinking about it in terms of the probability of the 25 percent. So we, as I mentioned, came into the year with our base plan assuming that the 25% was going to go into effect and our assessment now is that it won't. We believe that the 10% will stick, but it's variable. In terms of update of what we've been able to accomplish, it's a combination in some cases of moving product out of China into a different supply chain. In other cases, it's working with our Chinese suppliers on value engineering and cost reduction and some cost sharing. And what we haven't been able to recover, we've been effective in going out and getting price. So I think the update is, we don't believe that 25 percent we don't think that 25% is going to happen and we do think that 10% is going to stick. We believe that it is extremely variable and we need to be fleet of foot with regards to supply chain, cost out and pricing. And we the other part of the update would be that we've been pretty successful, from my assessment in doing those strengths those three things up to this point. Thanks for that. For my follow-up, I wanted to ask a little bit about for the strategic review, if that does go to the divestment route and you're talking about, well, buybacks seem to be the priority for capital allocation or internal investment. But if you were to look in the external opportunities, you talked about your pipeline, how attractive are these opportunities? Are seller expectations or multiples elevated? Does it make sense when we're arguably later in the cycle? So just wanted to see how things are looking from the M and A perspective? Yes. I think when we think about these strategic alternatives, I think it's good to reset the key drivers of why we're doing this. And I've been in the seat here as CEO for 5 years. And when we came in with the new team, we really committed to doing 3 things. 1 was driving the full potential of our business through the installation of a common operating system. 2 was to drive leverage across our businesses, of course, in supply chain and procurement, but more importantly from my perspective in processes and people. And then thirdly, to improve our portfolio to make it more R and R focused, less cyclical, higher margin, more dependable because we felt that was good for the shareholders and would add value. And we began in earnest right away when I came on board to do that with the spin off of our services business. And that has been very successful for the shareholders. If you look at their market cap now and our total, it's that was good for the shareholders. We also said with regards to the portfolio that we felt the best avenue for creating shareholder value was to fix our cabinet and windows businesses and we've done that. So this is a natural progression of what we've set out as our strategy to continually improve our portfolio to drive shareholder value as it relates to reduced cyclicality and more repeatability and higher margin. So while it's I know your question was directly related at use of proceeds. I think more fundamentally, this strategic and alternative assessment is really focused on creating shareholder value and continuing with the track record that we have of doing that. Now with regards to the attractiveness in our pipeline, we really haven't seen too much of a significant change in valuation and expectations on the sellers. And that doesn't slow us down. We continue to cultivate. We continue to work for opportunities and we have a very robust pipeline and some exciting opportunities. But we're going to be patient and we're going to ensure that the targets we're looking at are strategically right for us and that we believe fully that we can earn the return that we expect to earn when we make an investment. It doesn't feel to me that valuations have as of yet really loosened up. It's the sellers, it's a bit of a slow start in the quarter and they're not particularly interested in selling off of a bad quarter. They want to sell off a momentum. So it's a volatile period, if you put yourself in the seat of a seller and we really haven't seen that much change in terms of expected valuations. And Scott, maybe just one other piece of information because we get this question quite a bit, much more tactical than Keith's answer, is the tax basis of these businesses. And just for everyone's benefit, the tax basis of this group, the 3 businesses collectively is about $300,000,000 So I think that helps frame things for people as they think about, if we go to the sale route, the expected net proceeds from those businesses. Your next question comes from the line of John Lovallo with Bank of America. John, your line is open. Hey, guys. It's actually Pete Galbo on for John. Thanks for taking the questions. John, maybe you can just elaborate a little bit on the double digit growth in cabinets, new construction that you guys saw in the quarter. I mean, is that mostly just loading on the Menards side or what kind of drove that given the flattish new construction environment in 1Q? Yes. So I think it doesn't necessarily relate to the Menards business because that's not that's R and R. It has to do with the fact that you may recall over the course of really 2015 through 2017, we pulled back on a lot of our new construction business because it was less than profitable. So we saw some growth here in the Q1. It's really off of a relatively easy comp compared to the Q1 of 2018. Got it. Okay. And maybe just one more on the strategic review and if you're willing to comment at all. I mean, kind of what level of inbound interest have you guys received since kind of putting these two businesses out there as potential divestiture candidates? Anything you're willing to comment on there? Very good. These are attractive businesses that have leading brands in their categories, good strong cash flow. We've done a good job with putting in good teams of leaders in these businesses and we've improved them tremendously, but there's still improvements to go. So these are good businesses, real solid market share, brands, innovation pipelines, etcetera. So we're seeing very healthy interest. Got it. Great. Thank you, guys. Your next question comes from the line of Adam Bob Gardner with Macquarie. Adam, your line is open. Hey, thanks, guys. Just quickly on Plumbing, you guys mentioned wholesale destocking. Can you talk about the trends you saw in U. S. Retail? In terms of destocking? No. In plumbing, what kind of sales trends you saw in U. S. Retail? Yes. Our retail business was okay kind of January February were a little soft, but again similar to the trends we saw in the overall market, saw a little some pickup as we went into March 1st part of April. So it's not inconsistent with what we saw across our broader portfolio of businesses. Got it. And then just on cabinets, I mean, you haven't changed the guide there given even with the kind of strong start to the Q1. I know that kind of Expinars, you're kind of implying slightly down volumes. And I think part of that, at least last quarter, was handicapping for some of the tariffs that were potentially going to come through. Is it safe to assume, given your more benign look on tariffs that the kind of underlying Expenard's Cabinets growth outlook is a little bit better? Yes, I'd say it might be just slightly better, Adam. I wouldn't say it's materially better than what we were thinking about in the beginning of the year. Got it. Thanks. Your next question comes from the line of Justin Speer with Zelman and Associates. Justin, your line is open. Thank you, guys. Appreciate it. I wanted to take the question back to Kichler and thinking about just if you could take us back down memory lane on what if you can remind us what you were thinking about the opportunity with that business when you bought it versus maybe the reality of what it is today now that you're expressing this, I guess, more negative tone with the impairment, the weakness in the underlying markets. But I want to understand what the right annualized revenue and margin profile for that business is now going forward, now that you have it in your hands for over a year? The underlying thesis when we looked at it and ultimately ended up acquiring it was that it was a large market with fragmented competition that had demonstrated growth at the slightly above the base R and R market and it demonstrated an ability to get price commensurate with commodities. So what we saw in this business was an opportunity to apply some of our operating system techniques to take cost out that if we could go in and apply and work with them as it relates to demand generation through influencer advocacy and that we could learn from them on how to more quickly identify consumer trends. There's also an opportunity that we saw and we are taking advantage of as it relates to supply chain and new product development processes to shorten that cycle. So as we get in here and look what those fundamental underlying premises and as we know the business better have not changed. What's changed and what we didn't anticipate was tariffs. And this business is, for the most part procured in China. And so there's issues associated with the pricing and elasticity that we're working to better understand. But fundamentally, what we've learned about their presence in the market, their presence in the channels and how they're appreciated with the distribution is unchanged and we're going to continue to drive it. We still feel good about it. Yes. Justin, what I want to make certain, we've got greater clarity for everyone on is, the sensitivity of that trade name calculation to small movements in top line. I'll get into some granularity here, but because it's the trade name is based off of the projected revenue of the business. So when you value assets during purchase price allocation, you don't have a lot of room to move, particularly on the trade name before you may be in an impaired situation. And so slight movements in top line projections can put you in such a position. So I don't want you to walk away from the conversation that we are particularly troubled by what's taken place at Kishore. It's just the very sensitive nature of the calculation that's caused this impairment. So I guess a follow-up on that. Number 1, was there any lost market share associated with this? Because it was my understanding that most of your competitors were also kind of similarly sourced or at least the supply chains were similarly arranged? And then secondly, with the tariff, potentially the prospect of that coming off, does that potentially just flip the script back to what you're originally thinking? Or is there something maybe larger underneath or maybe a share lost share or something that took place or maybe more difficult to get back even with tariffs potentially being removed? Yes. So we don't it's probably a little bit too early to tell whether we lost share. We don't think we've lost any share, but we're still when you are up against a bunch of private competitors, it's always tough to determine share positions on a short term basis. And so but at this stage, we don't think we've lost any meaningful share any place. So that debt does not impact. In terms of the tariffs coming off, does that change our thinking longer term? Yes, it could. We got to see that come through. But in terms of what we've done, we had to go with kind of the facts and circumstances as we know them today. Thank you. And gentlemen, your final question comes from the line of Eric Bosshard with Cleveland Research. Eric, your line is open. Good morning. Just a follow-up on Kichler. I understand the disruption of the tariffs and of weather. But in terms of the ultimate destination with this business, the targets that you bought it in terms of your market share and the margin opportunity, do you feel different now than you did a year ago when you bought the business? No, we don't. We think that this business is going to grow at or slightly above the overall repair and remodel market and we're driving towards continued margin improvements. We're over performing our plan and we're doing better than I expected as it relates to some of the cost outs that we're driving. So as John mentioned, with the accounting calculations for Tradename, it's hypersensitive to revenue. There wasn't a goodwill write down that we took here or write downs associated with the cash flow. So that's more of the issue. Okay. That's helpful. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.